Financial Efficiency - Is the stockholders' money (capital) working in forms most suitable to their interest.

Concept of Financial Efficiency

A company's management may run the business well and yet not give the outside stockholders the right results for them, because its efficiency is confined to operations and does not extend to the best use of the capital.

The objective of efficient operation is to produce at low cost and to find the most profitable articles to sell.

Efficient finance requires that the stockholders' money be working in forms most suitable to their interest.  

This is a question in which management, as such, has little interest.


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Actually, it almost always wants as much capital from the owners as it can possibly get, in order to minimize its own financial problems.

Thus the typical management will operate with more capital than is necessary, if the stockholders permit it - which they often do.

It is not to be expected that public owners of a large business will strive as hard to get the maximum use and profit from their capital as will a young and energetic entrepreneur.

We are not offering any counsels of perfection or suggesting that stockholders should make exacting demands upon their superintendents.

We do suggest, however, that failure of the existing capital to earn enough to support its full value in the marketplace is sufficient justification for a critical spirit on the part of the stockholders.

Their inquiry should then extend to the question of whether the amount of capital used is suited to the results and to the reasonable needs of the business.


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For the controlling stockholders, the retention of excessive capital is not a detriment, especially since they have the power to draw it out when they wish.

As pointed out above, this is one of the major factors that give insiders important and unwarranted benefits over outsiders.

If the ordinary public stockholders hold a majority of the stock, they have the power - buy use of their votes - to enforce appropriate standards of capital efficiency in their own interest.

To bring this about they will need more knowledge and gumption than they now exhibit.

Where the insiders have sufficient stock to constitute effective voting control, the outside stockholders have no power even if they do have the urge to protect themselves.

To meet this fairly frequent situations there is need, we believe, for a further development of the existing body of law defining the trusteeship responsibilities of those in control of a business toward those owners who are without an effective voice in its affairs.


Benjamin Graham
The Intelligent Investor