Dividend Policy- Don't Rock the Boat

Dividend wealth is an interesting topic for conversation when it comes to rewarding shareholder investment.  My original thoughts on dividends were that such insignificant figures would make little difference regarding fluctuations.  This was before I was made to realise the scale of investment made in companies from insurance and pension funds.  It’s a crazy concept that the future of our retirement is massively dependent on the dividend policy of these huge companies.

There are arguments, when considering NPV that would recommend company profits would be better investing in ventures with a positive rating.  Such ventures would be claimed to raise the value of a company, thus boosting shareholder wealth.  Only residual cash left from profitable ventures would be repaid as dividends using this concept.

Modigliani & Miller echo such sentiments, claiming that dividend policy has no effect on company value.

In reality however, it can rarely be seen that dividend policy has no effect on company value.  Of course, in a ideal world where humans are rational, the understanding that dividends may be low due to a high level of invest activity which would boost their wealth.

Unfortunately, humans are very irrational and such fluctuations would likely lead to a mass exodus.  If several shareholder looked to sell their shares at the same time, the share price would fall.  Although M&M’s idea is theoretically true, in the real world dividends play a huge role.

Looking at the BP Gulf of Mexico oil spill, the announcement that BP would be halving their dividend payment resulted in panic from UK pension funds, fearing such a decrease could cost the UK millions in the long run.  Although not the only factor, BP’s share price suffered badly as a result of this announcement.

It can therefore be seen that shareholders, being the irrational, over-emotional being that they are crave stability.  A constant, un-fluctuating dividend yield is met favourably, thus companies have reacted to this by attempting to maintain a steady dividend payout, regardless of good or poor performance. 

Although investors may look on such a decision favourably, I would consider it a bit of a shame that shareholders are so insistent at focussing on their short term gains, that they cannot see the bigger picture- that maybe a company’s surplus cash could be put to better use, which would eventually lead to an increase in their own wealth.  To ask shareholder to think long term is quite possibly too much of a revolutionary step I fear. 

Captial Structure: Is there an optimal level?

Optimal capital structures are an interesting (and complicated) area of research.  Personally, I’m quite a fan of the traditional view.  At the risk of sounding like a grumpy old man; back in the day, people seemed to be more sensible.  What happened to the days of companies having a concern for their levels of debt?  Of course, debt is cheap but debt is also constant.  What the good times are here, having a cheap source of capital is great... but what about the bad times?

The traditional approach considered the idea that although debt was cheap, WACC would only decrease to a certain point, where the financial risk was considered to be too high, thus seeing WACC decrease as equity was used as a source of capital.  The optimal capital structure was seen as a delicate balancing act.  ‘Was’ being the key word...

It seems in current times, or at least before 2007, shareholders were content with the risk involved in taking on massive amounts of debt because of the returns they were seeing.  Satisfied that they were maximising shareholder wealth, companies were happy to take on more and more debt.  Then came the point when the ‘credit crunch’ sunk its teeth into a bloated and unsuspecting world.  Suddenly debt finance became impossible as banks collectively panicked over their enormous shortfalls from carelessly loaning out money to any person that could ‘walk and chew gum at the same time’.  Companies like PC World that based their short term cash flow forecasts under the assumption of acquiring cheap debt struggled for survival, and shareholder wealth was obliterated.  Oh for the good old days.

A reason for this blasé attitude appears to stem from the research of Modigliani & Millar (1958), who suggested there was no optimal capital structure, and company value is based on business risk.  The assumptions made in this study were rightfully torn apart by academics, who found the idea of assuming no tax to be laughable.  With nothing being ‘certain but death and taxes’, I’m inclined to agree with the academics.  After a rethink, which included tax, it was found that debt was a significantly cheaper source of capital which would lead to company value being improved if this emphasis on debt was used.

Of course, humans seem to crave an excuse to do something if they can justify it, thus the loading on of debt became almost commonplace.  After the deregulation, which stems from the 1980’s, banks took this opportunity to greater levels which has finally resulted in the chaos we see today.  Only after such a major failure has any action been taken to rectify this, with the introduction of Basel III as an attempt to rectify this problem. 

Personally, although you cannot deny the benefits of debt, the level we have allowed our businesses, governments and ourselves to become reliant on debt is ridiculous.  It is a damning assessment to look at our inability to be sensible and level headed.  As soon as the banks were deregulated, greed seemed to override common sense.  Is there an optimal capital structure?  Most definitely.  Are we anywhere near it?  Looking at the mess we’re in after our love affair with debt, probably not.  Oh for the good old days...

Investment Appraisal

Investment appraisal appears to merge two of the most important issues in the world of business finance; planning and shareholder wealth. An interesting thing about investment appraisal is the reliance on figures that are at best speculative. Can there be any real value to a practise that relies on estimation and assumption? Can the reliance on these tools actually create risk?

Some techniques used, such as payback period and accounting rate of return may provide insight into if/when the project can be profitable. The assumptions however compromise the techniques in their simplistic nature; rarely will a business' cashflow be so constant as to make payback period a reliable tool. The same issue can be said regarding accounting rate of return, with the use of profitability being far too easy to manipulate.

Despite it's obvious flaws, the considerations that are made involving time value of money are of great use to anyone considering an investment. If a business could be deemed to be marginally successful based on the current value of money, the risk of inflation diminishing any potential profits is far too significant not to consider.

Net present value (NPV) is also to analyse which objectives will generate shareholder wealth through goal congruence. If the calculated NPV figure is positive, it is recommended that investment should be made. The calculation of NPV has been criticised as being too complicated. As much as this may be the case, the evidence of it's use over many decades suggests that the benefits that can be reaped from this tool is such that the complications are justified.

The big debate revolves around whether people can deem the estimates made in investment appraisal to be accurate enough to trust. Personally, I would suggest that estimations in their very definition should not be trusted as absolute fact. Of course the estimation is, in successful investments, based on a great deal of market research which adds far more value and reliability to this tool. Based on the amount of research, and the fact that the people making these appraisals for multinational companies are making obscene amounts of money, the world of investment appraisal is a tool that companies would be foolish not to use. As always, it's a case of 'fail to plan, plan to fail'.

The Global Financial Crisis- A warning of things to come?

The start of my university life back in September 2007 coincided almost perfectly with the emergence of the dreaded credit crunch.  Walking down Northumberland Street to see countless people queuing outside of Northern Rock provided me with a great source of entertainment.  I saw it as a massive overreaction made by people that consider the scaremongering of the media to be gospel truth.  To an extent, I was correct; government policy protected the first £75,000 in a person’s bank account.  To actually learn the extent of the problems the economy faced on a global scale is quite terrifying, and utterly infuriating.

The level of confidence in the marketplace before the financial crisis was incredible.  The house market was booming, credit was cheap, and everything was rosy.  Collateralised debt obligations were a big source of this increased liquidity in the market, which promised a source of cash depending on the rating assigned by the credit rating agencies.  The rate of return in the AAA rated assets were so high, even banks were utilising these options.

Incredibly, these banks that were supplying long term mortgages were investing in assets that depended on the success of the mortgages they were issuing.  Confidence was so high in these assets, banks built up assets around these CDOs.  The problem arose when the house market began to decline, which saw the increase on defaults on mortgage payments.  All of a sudden, these ‘safe’ assets became far less secure. 

The cash shortages created a chain reaction that went on to cripple the banking sector, leading to panic amongst the public that their hard earned saving were at serious risk.  Suddenly cash became a rare commodity and successful businesses were finding it increasingly difficult to fund their operations as a result of this shortage.  The decision made by the UK government to offer a bailout option to the banks illustrates how severe the situation became, with the bailout dwarfing the annual cost of running the NHS.

The use of the word ‘confidence’ in this blog to describe the mood towards the marketplace is perhaps a poor choice.  Confidence implies a belief in the ability to succeed, yet the banks ability to succeed was so heavily hinged on the housing market and CDO’s, that the word ‘arrogance’ seems more appropriate.  The importance of planning, spreading risk and assuring cash is always available has been emphasised at every aspect of my business education.  How is it that bankers were so blind to this? 

The arrogance in assuming the bubble could never burst, that market value will continue to increase is beyond belief.  To not consider the possibility of a problem emerging in the future as a result of ‘putting all your eggs in one basket’ is madness.  To find a source of this particular financial crisis and focus on avoiding that particular mistake again is to miss to the point in my opinion however.

Maybe there will be greater regulation in future regarding the assumed security of investment assets, but in 10 years time, house prices will still demand staggering mortgages, banks will still take out loans to fund these mortgages and the world will run on the assumption that credit will be available to them to get by.

It is frustrating to think that we, the taxpayer are the victims in this financial crisis and I sincerely doubt we will ever get so much as a ‘thank you’ from Northern Rock or RBS.  It is scary to think that we appear to have applied a band aid to a broken leg in making no drastic changes to the regulations surrounding business.  Maybe we will learn from our mistakes and prosper from a more restrained credit system.  I worry however that we will continue to make the same fundamental mistakes in future.  Maybe the next time we see a credit crunch, the ramifications could be far more serious than public spending cuts and increases in tax.

Mergers and Acquisitions: Shareholders Worst Nightmare?

Mergers and acquisitions are an interesting concept when linked to shareholder wealth.  With much of the emphasis on businesses based around maximising the wealth of shareholders, you have to ask how exactly mergers and acquisitions achieve this for the bidding company.  Looking at Jensen and Ruback’s study, rarely do you observe any significant gain for the bidding shareholder’s company.  If the bid fails, it can be expected that both sets of shareholders will see a loss.

Looking at the recent case of JD looking to takeover JJB, the initial announcement from JD stating their intentions was met with JJB’s shares rising over 30%, whereas JD’s shares rose a modest 1.5%.  Evidently, JJB’s shareholders saw this as a far more exciting prospect than that of JD’s. 

 As a shareholder, Warren Buffet seems to meet mergers and acquisitions with a degree of hostility, citing the loss of wealth on the acquiring shareholders to be a key reason.  It seems JD’s shareholders have a similar opinion.  Why would they wish for their company to shell out for a target company’s shares at a massive premium rate? 

Mergers and acquisitions seem to display an area of business where the objectives of shareholders and management differ.  Some of the pro-M&A arguments revolve around the cliché lines of ‘increased efficiencies’ and ‘synergy benefits’, but looking into quotes from John Kay, there seem to be a degree of egoism from management.  “The thrill of the chase” is an irresponsible mentality from managers tasked with the duty of maximising the wealth of the shareholders.  With Buffet’s analogy of ‘frogs to princes’, the cynicism shareholders can hold towards M&A’s to be evident.

Of course there can be genuine advantages involved for businesses if made correctly.  For companies looking to expand their operations to other countries, investing in an already established framework can save a considerable amount of time and money that starting from scratch.  Wallmart’s takeover of Asda is a great example of how to expand to other countries, and with Tesco’s faltering attempting to start from scratch in America; it shows that M&A’s are not always a bad thing.

Coopers and Lybrand saw the significant causes of merger failure to be based around the differing cultures of organisations- with possible hostility being created between the two companies, and a lack of planning post-acquisition.  Astonishing to think that some companies can be so blasé when it comes to assuming the chase is the difficult part.  A lack of planning causing failure is inexcusable and egotistical.

With it coming to light just a few days ago that JD have pulled out of the JJB takeover, and JJB quoted as saying that JD’s bid plan “lacked certainty”, perhaps the takeover would have been met with the exact problems that have been observed in the past.  Maybe JD have dodged a bullet here, and looking at their share price rising by 5.3% compared to JJB’s fall of 10% after this announcement, it looks like JD’s shareholders are breathing a sigh of relief that they won’t have to be ‘kissing any frogs’ any time soon.

A favour to ask

Hello

I'm just posting this to ask a favour of you in regards to my dissertation research. 

If you could spare a minute of your time to fill in a survey I have created, it would be hugely appreciated!

The link to the survey is:

http://www.surveymonkey.com/s/RTSRJBW

Thank you!

Also, seeing how this is a business blog, I thought I might draw your attention to the Forbes rich list article from the BBC website:

http://www.bbc.co.uk/news/business-12691377

The richest man on the planet, Carlos Slim saw his personal wealth rise £12.65bn this year.  To think that any one person is deserving of that amount of wealth is a tough pill to swallow.  Surely this amount of money is doomed to be hoarded, generating little benefit to the rest of society.  Hats off to the man, he has divulged in philanthropic activities and has been quoted as having little care for rich lists, it just amazes me that he has gained this amount of wealth in a country where per capita income is less than $15,000 a year.  How have we let the world get to a state where rich are allowed to prosper to such an extent?  From this article that dates back to 2006, the UN highlights that 1% of the global population holds 40% of its wealth.

 Personally I think it has become out of control.  I don’t want to come across as a raving Socialist, but how can this be right?  To quote The Wire, “F**k "right," it ain't about "right," it's about money”.  How depressingly accurate...

Foreign Direct Investment

FDI- Foreign Direct Investment.

A long term investment that ideally acts as a mutually beneficial venture between the involved parties. In my eyes, FDI is the perfect concept of how capitalism should work. You go into a country and provide them with jobs, improve the standard of living of potentially thousands of people and boost the country's economy; in return you are given a benefits that could only be dreamed of in your home country. Sounds perfect.

Yet looking at the real life examples, this 'win/win' concept rarely seems to happen. On either side, there are examples of people taking advantage of each other. When you look at companies like Nike, the sweatshops that have been discovered show a capitalisation on a workforce that are treated hugely unethically. There is a fine line between co-operation and taking advantage of each other. Far too often, we see this being the case. Nike being one a a long, long list of companies that have been exposed as to treating this foreign workforce as slaves.

On the other hand, there are examples that can be seen from the World Investment Report that shows an ever increasing investment in developing countries. When you the the benefits that China and India have experienced, and in turn, the positive impact that companies and consumers all over the world have experienced as a result of effective FDI, you can see that it is a brilliant concept.

The reasonable cost of the goods that we can purchase in this country are a direct result of these companies taking advantage of these clear and obvious benefits of things such as transport costs, avoiding export constraints in the case of the European Union, the 'win/win' can be massive.

The shame is when you see the countries that are in such dire need of trade, such as Africa that are being ignored. In a perfect world, I would love to see these countries utilised more in future. The capitalist dream needs to be expanded to benefit more areas to capitalise on more trade opportunities and improve the standard of living of people that are struggling to survive. FDI in these areas could be the key to this.

Multinational Tax Management- The Illegitimate Way to Boost Profits

Amazingly, I briefly covered the issue of corporation tax a few weeks ago.  Although this highlights the fact that I hadn’t read the TLP, I’m quite proud of my brilliant proactive background research.  All jokes aside though, this link does highlight a great worry for the average, honest, hard working British taxpayer.

In the case of Barclays, although they saved the taxpayer money by refusing the government bailout, that does not excuse the corporation tax, or lack of that they were reported to have paid earlier this month .  Does this mean that in the future if I choose not to apply for benefits when I am in trouble, I will only have to pay a 3% tax rate?  If only...

It’s easy to see why people are so angry about this issue.  As individuals, we are all victims of a financial structure that has failed, yet we are the ones that have been lumped with increased VAT rates, rising levels of unemployment, freezing of public sector pay; the list goes on and on...  Barclays of course will argue that they are abiding by the laws set in place, and they are right.  With businesses looking to maximise their profits, why would you not capitalise on the opportunity to look abroad, where tax rates can be far more attractive? 

Whilst on my work placement, I had a discussion with a colleague about my plans to move abroad and work somewhere with a lower income tax rate than in the UK; he raised the issue that it was unfair to want to do that.  After everything this country has given me in having an excellent healthcare system and free education etc, what right do I have to not repay that debt through paying taxes to the country that has given me the opportunity I have? 

It goes to show the huge gulf there is between what is ‘right’, and what is good business. 

For all the talk of legitimacy and corporate social responsibility, the more I look into it; the more I question its relevance.  If a business were to genuinely claim that they were legitimate, would they utilise the tax havens of this world through outsourcing operations?  There has to be a point where you draw the line between making money to improve shareholder wealth, and just being plain greedy.  This isn’t a business being innovative by developing new ways to improve efficiency; it is cheating countries out of money through loopholes.  With academics like Suchman suggesting that businesses needing to conform to the sets of rules and values held by a society to have a right to exist, there is very little evidence of some of these companies adhering to any of the rules and values I hold.

Yet the power that they hold puts governments in the situation where  they can not afford to lose these companies by closing up these loopholes.  It’s not right.  It’s not fair.  It’s also not going to change any time soon, and until the day it does, it’s people like us that are going to feel the effects whilst companies like Barclays get to report £4.6 billion profits that we will never see.

It’s a shame, but it’s something I suppose we have to live with.  In this case, maybe ignorance is bliss..

It’s amazing just how difficult it is for large companies to raise capital for future projects.  An outsider would assume that this would be fairly straightforward, and yet when you look into it, the different methods and factors that need to be considered makes it far more complicated.

A phrase I have always carried with me is ‘Fail to plan, plan to fail’.  It’s incredible how relevant it is to this topic.

Before you even consider raising capital, you have to determine what your rate of return will be.  If the rate of return is too close to that of the cost of capital, you risk the profitability of the project if any unforeseen circumstances arise.  Looking at the example of Sky when they released their broadband package in 2006, they predicted a post tax return of 10.5% by 2011.  It would be expected that to ensure profitability, Sky would have aimed for an extremely low cost of capital.  With the estimated cost of capital being 9%, you have to wonder why they even considered opting into such a venture.

There are of course plenty of examples of ‘loss leader’ products, such as Sony with their PS3.  As seen in this link http://www.engadget.com/2010/02/05/playstation-3-still-a-loss-leader-six-cents-for-every-dollar/ , Sony was still yet to see a profit on their consoles in 2010!  Instead the money was clawed back through games and other add-ons.

Evidently, there are times when you need to look at the bigger picture when planning, as what could seem like a foolish venture that would see no profitability could see high returns that are directly influences from a ‘loss leader’ product.

After considering the rate of return, it is then necessary to find the best method to fund these returns.  Businesses can either choose to exchange equity or debt for finance.  Both options have distinct advantages and disadvantages, and both are far more complicated than I had anticipated.

Provided you can live with giving up an amount of ownership in the business, raising finance through equity seems like the way to go: no contractual agreement on dividend levels, no need to repay the investment and the ability to trade on brilliantly liquid and international market seems fantastic.  After looking at the timeline of raising equity finance being around 2 years, and the cost of listing shares on the stock market, you have to plan a hell of a long way in advance. 

Financing through debt is of course the other option.  The world of bonds is in my opinion overly complicated, and in some cases it seem to blur the lines of legality.  They offer ‘investors’ the comfort of knowing that they have a guaranteed repayment with a fixed percentage of interest.  The business gets a source of income and the benefit of having this debt tax deductable. 

There are other forms of debt finance including a variety of loans, I am however very conflicted with the whole concept of debt.  It seems every aspect of this capitalist world we have created has been built on money we do not have.  Through poor planning, arrogance or just plain stupidity, we have seen countries brought to their knees from this culture we have developed of spending more than they can afford.  When the bubble bursts, we see banks, bailed out with taxpayer money and governments put into situations where they are forced to negatively affect the livelihoods of millions of people.

For me, raising finance is something that should never be taken lightly and the restrictions imposed on the stock exchange are there to ensure a level of safety and security that is lacking in that of debt finance.  For business, debt can have huge advantages, but it seems as though eventually it will come at a cost that society has to deal with. 

Seems as though a collective failure to plan in the marketplace has resulted in the epic failure that is the 'credit crunch'.

The Stock Market- A Long Term Perspective

Whenever I think of the stock market and investment, I am reminded of my days as a GCSE business student.  We had a competition where we each had to choose companies on the FTSE100 to invest in.  Whoever made the best return on their investment was the winner.  With it being winter at the time, I decided to invest in gas companies- my logic being that it was cold so people would spend more money on heating.  Needless to say, I didn’t win.  Instead the winner was a student that (to put it politely) was a bit dense.  When our teacher asked him how he had decided to invest, he replied “I just picked the ones I liked the names of”. 

It’s quite amusing to see that there are plenty of examples similar to this.  To hear that monkeys and playmates have succeeded in embarrassing the ‘experts’ of the investment world does raise the question as to whether there is any way to accurately predict the performance of individual companies, or the market as a whole. 

If you were to consider Kendal’s idea of ‘Random Walks’, it would suggest that even trying to predict share price movements is difficult, if not impossible.  With there being an estimated (2002 figures) $60 trillion traded daily on global financial markets, for investors to accept this and allow their money to be left in the hands of luck would be suicidal. 

Fama has a sensible take on stock market efficiencies- that market efficiency can be defined as weak or semi strong depending on the reaction to new information.  Looking at the recent example of Shell, they saw their share price fall from 2,268 at the start of trading on February 3rd to 2,155 at the close of trading that very same day, purely from the fact that they released details of their annual profits.  This instant and fairly significant reaction to new information is evidence of the London Stock Exchange being a semi-strong form when it comes to market efficiency. 

The most surprising thing about Shell’s share price falling 3% in one day is that they actually reported a rise from $9.8bn to $18.6bn.  This is an anticipatory approach was taken towards Shell that hasn’t quite worked out.  Not quite the perfect market efficiency that is strived for, but in the real world, and considering the nature of our race, perfect efficiency could never happen.

In the Turner Report, one of the key criticisms of stock market pricing is individual behaviour is not entirely rational.  People tend to allow themselves to be ruled by their emotions which will not always be the rational decision to make.  In the case of Shell, this could quite possibly explain the over-anticipated profit levels.  Over the past year however, we are assured by Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers that shares have in fact risen by 27%.  Looking at the long term, it can be seen that it is usually the case that good performance is rewarded with a good share price.

With the level of uncertainty in returns, can the stock market be seen as anything more than speculative gambling?  From a short term perspective, it certainly seems like a daunting prospect.  When you start to look at the bigger picture however, it becomes evident that the stock market can provide returns that would dwarf any savings account you will ever find.  Looking at the graph in this link, you can see that even after an economic crisis, the performance of the FTSE 100 over the past 23 years is impressive. 

On http://www.coolinvesting.com/, there is a great quote that answers the question, ‘why invest?’.

“It really is nearly a rhetorical question. Investing is the best way to secure your future. In this world there are two ways to earn income; one is to exchange you labor for dollars and the other is to have your money earn money for you. The rich know this and the poor don’t. It’s as simple as that.”

With that in mind, and looking at the long term performance of stock markets, these pension and insurance funds seem to be invested in the most sensible place possible.  Forget roulette wheels, poker, accumulators or anything else- the stock market is the smart way to gamble!

Corporation Tax and its Effects on the UK

Before I go claiming any credit for this, I will hold my hands up and admit to directly taking this
link from Robert Peston's twitter.  With not everyone having twitter and at this moment in time, Peston not including it in his blog, I thought it might be worth sharing.

If this is article is true, it raises one glaringly obvious question for me: Why is there no outcry from Labour, or the media?  Does this not essentially mean that we, the UK public are being forced to deal with an ever increasing VAT with the reassurance from the government that "we're all in this together" when the large companies of this country are able to avoid corporation tax essentially?

The piece is very one sided and the author is clearly no Tory.  With that in mind, I certainly wouldn't take it as gospel truth.  What I will say though, is that if this is the case, and if this is really happening, you really have to question if the Conservatives are doing anywhere near enough to decrease the level of debt in this country.

Shareholder Wealth: As Value Adding as it Seems?

Creating shareholder wealth is seen almost as a holy grail for business to achieve.  If you can maximise the wealth of your shareholders, you are attaining one of, if not THE most important strategies of the business.  It can be difficult to argue against.  Albeit over two centuries ago, Smith’s idea of the ‘invisible hand’ guiding the marketplace in such a way that efficiencies are rewarded with investment can still be seen as relevant in modern times.  This success can then be seen to benefit the society as a whole.

Just look at BP- before the Gulf of Mexico oil spill, it was estimated that for every £8 paid into UK pension funds, £1 can be attributed to BP.  A perfect example of looking after the shareholders and also creating a positive outlook for millions in the UK, surely?

Looking at the picture after the oil spill however and we see a potential problem with focussing too much on shareholders.  BP halved their dividend paid from the figure before the disaster.  This will have a significant impact on both shareholders, and in extension, almost every member of the UK public that holds a pension.   In non-monetary terms, the environmental impact of the coastline has devastated livelihoods and sea life, and killed 11 people.

Is it too harsh to hold BP so culpable for this?  It could be chalked down to misfortune, maybe it was completely unavoidable.  Looking at BP’s track record; namely the Texas City disaster, the history of budget cuts forcing cutbacks on safety and training cannot, and should not be ignored.  These budget cuts will have undoubtedly resulted in improved profit margins and will most likely have had a positive impact on the shareholder, and yet now BP are in a situation where a relentless pursuance of maximising shareholder wealth has come back to bite shareholders where it hurts the most- their wallets.  With an estimated £40bn loss for shareholders in dividends over the next 10 years, every shareholder and almost every UK citizen with a pension will see a huge loss. Maximising shareholder wealth?  Perhaps not...

The use of performance indicators as tools to measure shareholder wealth can also be brought into question.  Domino’s Pizza are considered to be one of the best performers on the stock exchange since the economic downturn.  This can be seen by an ever improving EPS figure.  Are these the be all and end all indicators to highlight good business performance though?

Writer and producer of The Wire, David Simon has an interesting take the use of statistics when reporting, “as soon as you invent that statistical category, 50 people in that institution will be at work trying to figure out a way to make it look as if progress is actually occurring when actually no progress is”.  A perfect example of this in the real world is the use of a share buyback shame- something Domino’s and several other FTSE companies frequently take part in.  By spending surplus cash to buy shares and take them out of circulation, businesses are able to artificially increase the earnings of each individual share without actually improving the share price.

The emphasis of improving shareholder wealth is stressed to managers so much that they are put under immense pressure to meet these figures.  When it comes to self preservation, why wouldn’t management do anything they could to make the figures appear more attractive than they actually are?

Should shareholder wealth be held in such high regard even with the clear and obvious flaws?  Maybe not, but with the power shareholders wield, nothing is going to change any time soon.

The word 'blog' has lost all meaning

Hello

My first blog... I feel as though I have opened my life to a brand new medium of venting my feelings and opinions.  Exciting times!
For the next few months I will be exploring the real-life examples of business and giving you, my lovely followers my interpretation of the issues and events.

So what's in the news today?  Obama wants U.S to freeze some spending I see...Time to get reading then!

Hope you enjoy,

J.C