Acting in the Shareholders' best interest - and how marketing intersects with that critical goal

The next goal common to many financial managers is related closely to the first goal of acting in the shareholders’ best interest – they want to maximize the stock value of a public company.  A similar concept to maximizing stock value in a public company would be to have a goal of maximizing the owners’ equity in a private company.  Its fairly intuitive that maximizing the stock value of a company is congruous with acting in the shareholders best interests.  But they are distinct goals that are achieved by different means. 

Stock value is determined by the stock market.  The stock market theoretical valuation of a company’s stock is based (loosely) on the future value of the company divided by the number of outstanding shares.  So when a stock price goes up in value, the stock market and all those people and institutions that participate in it’s existence, have collectively voted with their money that the future value of the company has risen.  Conversely, if the stock price goes down, they have voted that the future value of the company has risen. 

Let’s examine a simple case of an airline company.  One of the major factors in determining profitability in the airline industry is the cost of fuel for the planes.  If fuel prices go up, profitability goes down – at least theoretically and in the short-term – as the airline doesn’t have the ability to approach the customer that has already bought a fare and ask for more money to stay on the flight.  Thus, airlines have significant “hedging” operations that work to offset this exposure to fuel costs by buying and selling future contracts for fuel at a pre-determined price.  If they buy a future contract for fuel at $x per gallon and the price goes up to $2x, they are protected (at least for the term or quantity of fuel in the contract) from paying that new, higher price.  If the market price of fuel drops, they have the problem of agreeing to pay a higher price than the market rate due to their obligations.  This is a major risk operation in an airline.

So if the price of fuel goes up and the airline has bet on it going down, the stock market will recognize the future pressure on margins due to greater than market prices for the fuel.  If the price of fuel goes down however, the stock market will recognize the wisdom of the airline and reward it with a greater value.

The financial manager with at least tangential responsibility (ultimately this lies with the CEO and the Board of Directors) for the stock market will be highly motivated to keep this stock price rising.  They may accomplish this by hedging the future fuel costs in an aggressive manner that may expose the long-term interests of the shareholders to more risk than would be otherwise prudent.

What this means for the marketer.  There are many examples where the stock market value goal can be in contradiction to the shareholders value goals.  Be aware that your marketing programs can affect both these goals in inverse ways and make sure you are focusing on the impression that supports the direction of senior management.