Scenario: You are speaking for the executive board of a small oil company, Futur

Question

Scenario:

You are speaking for the executive board of a small oil company, Future Fuel, in Colorado.

Your CEO and founder, Tom Bennet, is very avid supporter of sustainability and innovation. He insists that money invested now will pay off in big dividends down the road. You all have a legitimate concern for the environment and share and support Bennet in his personal and business philosophy. You are all also very aware of the momentum of the growing “green” movement. Your R&D (research and development) budget for seeking new renewable and viable alternative sources of energy has traditionally been between 22-24% of your operations revenue. You have decided to increase that budget line item to 35% for the next fiscal year on the strong recommendation of Bennet.

Additionally, you have also decided to equip your headquarters and other 8 sites in the west with active solar energy systems and wind power generators. You are a publicly held company and your stock has been less than stellar in its last 3 quarters’ performance. Your third quarter just ended, and you are about to hold your earnings meeting. Your earnings after operating costs are modest. You are announcing your numbers and your plans to increase the R&D budget and installation of renewable energy systems.

This is not a speech. This is an academic essay, so please stay in third person. If you use first person, do so sparingly and only when appropriate. Remember, using "this author" or "this writer," is not third person. Never use second person.

See http://owll.massey.ac.nz/academic-writing/1st-vs-3rd-person.php

What return on investment does your activity/enterprise require? Is this a strategic driver in itself, or simply the means by which you maintain your activities in support of your goal(s) from question 1?

How do you (the Board) balance the needs of the shareholders and the need to innovate?

Explanation / Answer

Return on investment (ROI) should be at par or better than the industry standards. In a given scenario, ROI needs to be progressive in years to come as the nature of the project creates a profit making scenario in the long term. There are no any fixed criteria that set an appropriate ROI. But, present value of all net cash inflows should be better than or equal to the present value of all investment. Here, discount rate to be used for the quantitative analysis should be higher than the rates offered by risk free investments. It will decide the ROI achieved by the enterprise.

Strategic driver in the wealth maximization of stakeholders that is achieved through ROI as a means. Thus, ROI acts as means to support the rational of activities endeavored to achieve the goal.

The needs of the shareholders focus on profitability and return on investment whereas need to innovate demand funds, time and management support. Both the ends can be balanced by following initiatives:
1.   Application of Innovation to bring in efficiency, improving productivity and reducing cost of operation
2.   Use of suitable depreciation techniques to spread the cost of the whole life to reflect positive cash inflows
3.   Commercialization of innovation to build streams of revenue
4.   Building goodwill and reputation in the market
5.   Making suitable projections of financial performance in the coming years

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