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Maximization of Shareholder Wealth Essay

Question:

Firms often involve themselves in projects that do not result directly in profits, for example by sponsorship of sporting events of the opera or other entertainment. Do these projects contradict the goal of maximization of shareholder wealth? Why or why not?

Answer:

Participating in programs that are socially responsible does not contradict the goal of maximization of shareholder wealth. Having a good reputation from your local community is very important for sustaining a business. Although it remains true that spending on social programs could cost a major business millions of dollars, it is the goodwill that is formed through that community that can offer an essential guarantee for the continuation of that firm.

For an example, if the Australian Company ‘Energex’ stopped spending some of their money on alternative energy initiatives or programs, that can be seen as being environmentally concerned, some of Energex’s customers could decide to do business with other energy companies who are engaging with programs that are seen as being more socially responsible. Failing to engage in socially responsible programs, thus potentially losing many customers, goes against maximizing shareholder wealth.

When all is said and done, there is far more meaning to business and shareholder wealth than just dollars and cents. An investment in the greater good of the human race pays dividends to the company many more times than penny pinching.

By participating in socially responsible programs, this can ensure that a company keep a positive reputation and goodwill, which in turn creates loyalty from their customers which leads to a maximization of shareholder wealth. It is then imperative for businesses to invest in a few respectable social initiatives that may not always generate profits in order to sustain maximizing shareholder wealth.


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