Question

"I try to increase the market share of the company's products, I am doing the best
interest of my shareholders" says Tom, a fresh graduate who recently joined the finance
team of a public listed company. Do you agree? Please advise Tom.

What are the most important questions (decision financial managers try to answer
(make) for the best interest of the company's shareholders? Please give examples.

Answer 1

While increasing market share is good for the company and it does increase the revenues, but this may not translate into actions in the best interest of the shareholders. This is because increase in market share may come at the cost of profitability and any loss in profitability or return on capital employed would normally be bad for the shareholders as dividends would get reduced and growth in price of the stock would also be subdued.

The most important decisions that needs to be made in the interest of the shareholders is whether to invest in any project or initiative and that evaluation needs to be done objectively only and using the metric of net present value. For example, if increase in market share results in a positive net present value, then this is a good decision else, the initiative should not be undertaken. Thus, all initiatives need to be evaluated only from the perspective of whether it is adding value to the firm and its shareholders or not.