The role and responsibility of the senior financial advisor
1.1 The principal financial objective of a company
The principal role of the senior financial executive when setting financial goals is the
maximisation of shareholders' wealth.
A company is financed by ordinary shareholders, preference shareholders, loan stock holders
and other long-term and short-term payables. All surplus funds, however, belong to the legal
owners of the company, its ordinary (equity) shareholders. Any retained profits are
undistributed wealth of these equity shareholders.
It is a common misconception that profit maximization is the key objective of most publicly
owned companies. Give reasons why this objective would be insufficient for investors.
There are several reasons why profit maximisation is not a sufficient objective for investors.
(a) Risk and uncertainty. This objective fails to recognize the risk and uncertainty associated
with certain projects. Shareholders tend to be very interested in the level of risk and
maximizing profits may be achieved by raising risk to unacceptable levels.
(b) Dividend policy. Shareholders want to know how much money they will get as dividends.
A company can increase retained profits by paying smaller dividends or no dividends at
all. But this might not be good for shareholders, especially if they prefer getting a steady
cash return on their investment.
(c) Future profits. Which profits should management be maximising? Shareholders may not
want current profits to be maximised at the expense of future profits.
(d) Manipulation of profits. Profits are not the same as actual cash and can be changed
quite easily. For example, a company can adjust its depreciation policy or change the
percentage set aside for doubtful debts. This means a company can make it look like
profits are growing, even when its real financial position hasn’t improved.
Case Study 1.2: In February 2014 the US electric car maker Tesla announced record sales and
higher than expected profit figures. It also confirmed its plans for rapid expansion into China.
China is the world's largest auto market which has a growing demand for low emission vehicles.
Finally, it announced a new prototype model for a crossover vehicle. Following these
announcements Tesla's share price rose by 12% in one day. Management should set targets for
factors that are likely to generate attractive returns for shareholders in the future in order to
increase shareholder returns.
1. What happened in the case?
Record sales and higher than expected profits → Positive performance signal.
Expansion plans into China → Growth potential in the world’s largest car market.
New prototype model → Product innovation, could capture new market segments.
Result: Share price jumped 12% in one day → Investors believe these actions will boost
future profits and shareholder wealth.
2. Why did the share price rise?
Because the announcements increased investor confidence about:
Higher future earnings (due to record sales and profit trend)
Market expansion (China’s demand for low-emission vehicles)
Product diversification (new crossover model)
First-mover advantage in the electric vehicle (EV) market in China
3. What should management do to keep increasing shareholder returns?
Management should set SMART targets in the following areas:
a) Sales Growth Targets
Expand dealership and charging infrastructure in China to capture EV demand.
Target annual sales growth of, for example, 20–25% in the new market.
b) Profitability Targets
Maintain or improve gross margins through cost control, economies of scale, and
technology efficiency.
Set a target for operating profit margin improvement year-on-year.
c) Innovation Targets
Launch new vehicle models regularly (e.g., every 2–3 years) to maintain excitement and
capture different market segments.
Invest in battery technology to reduce production costs and improve performance.
d) Market Share Targets
Achieve a defined percentage share of the Chinese EV market within a certain number of
years.
e) Shareholder Return Targets
Aim for consistent Total Shareholder Return (TSR) growth via:
1. Capital gains (increasing share price)
2. Potential dividends or share buybacks in the long term
4. Conclusion
Tesla’s announcements boosted investor confidence, leading to a sharp share price increase. To
sustain and grow shareholder returns, management must focus on measurable growth,
profitability, innovation, and market penetration targets—especially in the rapidly expanding
Chinese EV market.