Page 2: The interests of shareholders
Having made an investment in a business, shareholders are concerned with assessing the profitability of their investment. The decisions made by managers determine what they can expect both in terms of dividends, or profits, and capital growth, both of which are reflected through the share price.
Therefore, when shareholders look at the Annual Report of a company in which they have invested, they will be mainly concerned with measures, for example, historically, earnings per share, price/earnings ratio, intangible and tangible assets and dividend yield. A basic method of evaluating investments and making a judgement about the competence of the organisation in which they have invested is simply to make comparisons across similar companies.
Cadbury Schweppes, for example, has more than two billion shares. Though individuals and employees hold many of these, more than 85 per cent are owned by UK and USA institutions, such as insurance companies, banks and pension funds. It is important that the shareholders trust managers at Cadbury Schweppes to make decisions and manage the company to create value on their behalf.
It is also important for the company's stability that shareholders continue to hold shares. Investors have a number of different companies and investment options to choose from and, if a company in which they have invested is not producing returns for them, they may sell their shares and invest elsewhere. Sales by large institutional shareholders can create uncertainty about the company's performance and future and cause the share price to fall. This can limit the company's ability to grow and develop. Continued confidence and stability are important.