Other People’s Money: How CEOs Create Value for Shareholders During Good Times or Bad
The chief executive officer (CEO) of any enterprise has a tremendous role to play in determining the direction of the organization. His choice of funding pattern for the business could determine the level of profitability and robustness of the enterprise. Whether the business should be funded with debt (i.e., other people’s money) or equity is a decision the CEO has to repeatedly make in the course of piloting the ship of the organization. This paper looks at the various ways the CEO can create value for the shareholders in good times or bad, and what risks he must confront squarely in order to ensure that his efforts yield the desired results. The paper takes a critical look at funding with debts in the light of the Modigliani & Miller Theory, and concludes that the CEO does constantly explore ways by which to increase the profi tability of the business, and employs other people’s money to maximize wealth for the shareholders. His key approaches include constant improvement of the annual returns and taking appropriate risks aimed at attaining the enterprise’s set growth goals. This paper will be beneficial to corporate fi nance managers and entrepreneurs who repeatedly face decision-making on what fi nancial portfolios to engage in order to attain maximum wealth for the shareholders.
Key words: Chief Executive Officer; Shareholders; CEO’s role
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