Don M. Chance
Financial Management Principle 2

Companies exist because of their shareholders, and they should be managed for their shareholders, not other groups.

Shareholders are the owners of companies.  They invest their money with the expectation of receiving a return.  For a company that has no debt, their investment is exposed to some risk, which is determined strictly from the risk of the assets.  If the assets generate insufficient cash flows, the shareholders will be disappointed, but without debt, bankruptcy is not possible.  If the company borrows, the shareholders assume some additional risk because the creditors have first claim on the cash flows and assets.  Because of these risks, the shareholders expect a return that makes them willing to take the risk. 

The company should act in such a manner that it places the shareholders first.  Otherwise, the shareholders will either not want to invest in the company or would be willing to pay less for a share of stock.  Some companies, particularly in certain other countries, place a high priority on the needs of stakeholders, such as employees, suppliers, government, etc.  These constituencies could be important but they are secondary to the shareholders.  Without shareholders, there are no companies.  Companies that place their shareholders on an equal or inferior level to stakeholders will have a harder time performing to the greatest potential.  When companies perform at their greatest potential, they generate jobs, opportunities for suppliers, and pay high taxes, thereby meeting the needs of many of these stakeholder groups.

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Last updated:  March 23, 2006