Profit Maximization / Maximization of Shareholder Wealth Essay
Profit Maximization / Maximization of Shareholder Wealth
The primary goal of financial management regarding corporations should be to maximize shareholder wealth on the whole. If management was to only concentrate on profit maximization, they would more than likely run their corporations into the ground. The very existence and concept of a corporation is beneficial to business in numerous ways. First and foremost, corporate status helps release management from possible enourmous financial liability issues. Second, shareholders are the key of checks and balances in a corporation. Management is wise to heed the concerns and needs of shareholders.
The book uses a good example when referring to mergers. A merger in the future of a corporation could be viewed as a positive move – bringing more wealth, more talent and/or a larger consumer base. However, management could see the move as a negative one as they would have to possibly change roles and give up certain privledges they are accustomed to. Although the merger may bring the corporation positive growth, management could be reluctant to make the merge. This could be the case in a main goal of personal profit maximization. Without the merge, the company could lose steam and competitiveness and shareholder could lose in the end.
It is important to note that shareholders may be employees of the firm who would become more loyal and efficient when they are rewarded financially. Shareholders financially invest in the corporation and if rewarded with good returns, will continue to invest generously. The more shareholders find value in a given corporation, the more likely they are to financially invest, which in turn gives the corporation more positive funds to grow business.
Also, social responsibility may play a part in the maximization of shareholder wealth. If the public perceives a corporation as being socially responsible they may become more loyal customers. Knowing that a local corporation has taken steps toward pollution control would make me much more likely interested in consuming their goods as I would feel that I was aiding my community. More business from loyal consumers maximizes profits as well as shareholder wealth. Although the above example of pollution control may cost more for the corporation than not deploying the controls, it would create a more loyal customer base. I believe that a loyal customer base is more beneficial to have than a fly-by-night customer.
As shareholders are rewarded financially and P/E grows, corporations appear to be winning investments on the stock market. The more value customers perceive in a business, the more likely they are to financially support the institution.