The Advantages of the Maximization of Shareholder Wealth
- Increased Returns The most overt advantage of a wealth maximization goal is that you make money for all owners of the business. ...
- Strategic Consistency Whatever your goal, a clear focus on an overall strategic objective helps you create consistency in business decisions. ...
- Avoids Emotion or Impulse ...
- Common Concerns ...
How do companies maximize shareholder wealth?
- To sustain an optimum return on investment for stockholders
- To be perceived by customers as a provider of quality service
- To demonstrate that employees are our most valuable resource
- To provide corporate leadership to the community
Why is maximizing shareholders wealth a good philosophy?
Why is Maximizing Shareholder Wealth a Better goal. The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm. These returns can take the form of periodic dividend payments or proceeds from the sale of the common stock. Present value is defined as the value today of some future payment or stream of payments, evaluated at an appropriate discount rate.
Why is shareholder wealth maximization despite other objectives?
Wealth increase is equal to what gross present worth in needed for raising profits in the future. This value needs to be discounted as per the time frame to found out the annualized rate of return for the shareholder. In Shareholder Wealth Maximization, it places priority before any other objective for the organization.
How shareholders wealth can be maximized?
Shareholder wealth maximization holds key functions in generating profits for an organization. During the time of business supervisors putting efforts to boost the wealth of their organization, they are actually attempting to raise the firm’s stock price. When the stock price increases, the shareholder’s wealth is eventually maximized.
Why is wealth Maximisation important?
Wealth maximization is one of the main objectives of a company. An organization must maximize its wealth in order to survive and grow. Hence, it is important to make intelligent decisions with regard to the maximization of shareholder wealth, to help it flourish in the long run.
What does it mean to maximize shareholders wealth?
The principle of shareholder wealth maximization (SWM) holds that a maximum return to shareholders is and ought to be the objective of all corporate activity. From a financial management perspective, this means maximizing the price of a firm's common stock.
Why is maximizing shareholder wealth a better goal than maximizing profits?
While profit maximization aims at increasing the profit of a firm, wealth maximization has a larger role to play and it deals with the wellbeing of the stakeholders as a whole.
What are the advantages of profit maximization?
Benefits from aiming to maximise profits: Employees may gain if some part of their pay is linked to the profitability of the business. Higher profits may lead to increased capital investment spending which will benefit other businesses in industries such as engineering and construction.
Is maximizing shareholder value a thing of the past?
Liberti: Yes. If a firm maximizes profits by doing crappy things, it can harm shareholders. The concept of “maximum shareholder value” also assumes that one single shareholder value exists! But there are different shareholders and they hold different values.
Which is more important maximizing shareholders wealth or corporate social responsibility?
Abstract. Organizations should be more concerned with corporate social responsibility rather than focusing on wealth maximization only. The objectives of an organization are the leading justifications for its existence.
How do you maximize owner's wealth?
The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm. These returns can take the form of periodic dividend payments or proceeds from the sale of the common stock.
How managers maximize the wealth of shareholders?
Wealth of Shareholders This increases by increasing company earnings which will in turn drive up the price of the stock, all other factors being equal. Earnings are based on revenues from selling products and services less expenses. Anything that maximizes profits maximizes shareholder wealth as it increases equity.
Why is shareholder wealth maximization important?
Why Shareholder Wealth Maximization is Important in Business? In modern finance, it is proven that shareholder wealth maximization is the superior goal of a firm and shareholders are the residual claimants ; therefore maximizing shareholder returns usually implies that firms must also satisfy stakeholders such as customers, employees, suppliers, ...
Why is it important to focus on the interests of stakeholders?
So, focusing on the interests of stakeholders is the most important objective of the company to maximize shareholder wealth. Also, a firm cannot maximize value if it ignores the interests of its stakeholders. Firstly, customers can be seen at the top of the hierarchy of stakeholders. They are one of the most important factors ...
Why is customer important?
It is undebatable that no company can create great wealth for its shareholders without a stable and growing revenue base, which can be only reached by having very satisfied and loyal customers. So, a company wants to have an increasingly growing number of customers who are willing to pay money to have its products and services, it forces to meet their satisfaction of product quality, reasonable prices, and good services. In other words, the product or service must be meet or exceeds expectations and is acquired at a price no higher than its perceived value.
What factors will generate unforeseeably great value for a firm?
Furthermore, one factor which will generate unforeseeably great value for a firm is the interests of society as a whole . When businesses take a long-term view, the interests of the owners and society often coincide. Thus, it is absolutely indisputable that social responsibility with local communities and the environment in which the company operating are become an important consideration for the boards of companies, especially large companies, such as the source of supplies, for example, rubber, wood, paper from managed forests as well as protecting the consumers and following the local business legislation. Therefore, the more a firm contributes to social interests, the more value of trademark it generates.
Why are employees important to shareholders?
Secondly, employees also are of vital importance in the stakeholder objectives of the shareholders. They are the primary workforce and the potential source of a significant competitive advantage that can create superior value directly. Pursuing the objective of maximizing value for shareholders also maximizes the economic interests of all employees over time, even when management is forced to downsize the company. Thus, they will be faithful and devote all their skills and talent if the company’s management board appreciates their crucial role as well as give the best policies for employees including paying fair wages, maintaining fair hiring practices and safe working conditions, supporting education. In other words, the keys to company success are that it must be the motivation for staff to devote the cream of them.
Why does the growth in sales increase the stock price?
Therefore, the more volume of products distributed, the more shareholder value increased because of vast profits after selling products and services.
What are the factors that affect a company's business activity?
Another important factor that affects directly the company’s business activity is suppliers . Suppliers and supply chain management are both crucial to developing and implementing strategies that generate the highest long-term cash flow. It is clearly acknowledged that suppliers will be stable and reliable partners if the management board has a fair, reasonable treat to them. This is shown in implementing all provisions of contracts as well as pay the bills on time. Furthermore, if a firm depends mostly on imported materials, it is necessary to have a sustainable vendor in order to keep its operation stable.
Why is shareholder wealth maximization important?
My opinion is that the shareholder wealth maximization should be a superior objective over stakeholder interest because that is a common trend of firm’s development in a comparative market. However, in the reality companies do not just focus on the shareholders.
Why is maximizing EPS not a good goal?
Even maximizing profit per share, but, is not a completely suitable goal, firstly because it does not show the time factor or period of expected interest. Secondly, next mistake of maximizing EPS is that it does not take interest in the risk or uncertainty of the future return flow. So, there are several investment projects will more risky than others. Consequently, the prospective flow of EPS would not be more ensured if these projects were undertaken. Besides, a firm will be more or less risky to be conditional on the total of debt relevant to equity in its capital structure. This risk is considered as financial risk and it contributes to the uncertainty of the future flow of earnings per share too. For instance, there are two companies A and B with the same of the expected future EPS. However, the earnings flow of the company A depends significantly more uncertainty than the earnings flow of the company B, so the market price per share of the company A’s stock may be lower. For the mentioned-above reasons, a maximization objective of EPS may not be the same as those maximizing market price per share.
What is the role of management in a corporation?
Management bears a fiduciary relationship to stakeholders and to the corporation as an abstract entity. It must act in the interests of the shareholders as their agent, and it must act in the interests of the corporation to ensure the survival of the firm, safeguarding the long-term stakes of each group”. Also, according to H. Jeff Smith stakeholder theory asserts that managers have a duty to both the corporation’s shareholder and “individuals and constituencies that contribute, either voluntarily or involuntarily, to [a company’s] wealth-creating capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers.” Managers are agents of all stakeholders and have two responsibilities: to ensure that the ethical rights of no stakeholder are violated and to balance the legitimate interests of the stakeholders when making decisions.
What happens to shareholders in bankruptcy?
In cases of bankruptcy, shareholders generally lose the entire value of their holdings”.
What are the key stakeholders in a business?
Key stakeholders in a business organization include creditors, customers, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources”. Form the financial point view, the objective of a firm is to maximize the wealth to the shareholders. ...
What is shareholder theory?
Jeff Smith (2003), Shareholder theory asserts that shareholder advances capital to a company’s managers, who are supposed to spend corporate funds only in ways that have been authorized by the shareholders. Furthermore, Milton Friedman (1970) is the man supporting this theory very much. He made the most well-known version of the shareholder theory in the following passage in “Capitalism and Freedom”: “In such an economy [“a free economy”], there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game without deception or fraud”. In his essay “The Social Responsibility of Business Is To Increase Its Profits” Friedman gives a somewhat different statement of the theory: In a free-enterprise, private property system, a corporate executive is an employee of the owners of the business.
What is the duty of loyalty?
The duty of loyalty self evidently requires board members to put the interests of the corporation ahead of their own personal interest. And, Dodge v. Ford Motor Co., (1919) supposed corporations are organized and acted for carrying on primarily profit of the stockholders. Directors are employed on behalf of owners, has responsibility to bring more profit into strongbox of employers. They are simultaneously assigned power and duty for making decision so as to reach purpose of proprietors. Different with the above mentioned views, the stakeholder theory says that corporations should be run for the benefit of all “stakeholders”, not just the shareholders (Thomas L. Carson -2003). Also, R. Edward Freeman (2004) is the most prominent defender of the stakeholder theory. In his paper “A Stakeholder Theory of the Modern Corporation” Freeman writes: “Corporations shall be managed in the interests of its stakeholder, defined as employees, financiers, customers and commodities”. Moreover, in an earlier paper written together with William Evan, Freeman states as follows: “The corporation should be managed for the benefit of its stakeholder: its customers, suppliers, owners, employees, and local communities.
Why is shareholder wealth maximization important?
In addition, a very important point to explain why shareholder wealth maximization is superior objective is that shareholders are the real owners of the firm , of course, they desire the company’s operation will create their returns as much as possible; therefore, management board should make investment and financing decisions with the target of maximizing long-term sharholder wealth. “This assumption is made mainly on practical grounds, but there are respectalble theoretical justifications too” (Corporate Financial Management, 4th, P. 7).
What is shareholder wealth?
13), maximizing shareholder wealth is defined as maximizing purchasing power as well as the flow of dividends to shareholders through time and it is a long-term perspective.
What is the goal of shareholder wealth maximization?
In modern finance, it is proven that shareholder wealth maximization is the superior goal of a firm and shareholders are the residual claimants ; therefore maximizing shareholder returns usually implies that firms must also satisfy stakeholders such as customers, employees, suppliers, local communities and the environment first (Courses Work, Corporate Finance Module, Leeds Metropolitan University). Also, Michael C.Jensen argued that “a firm’s value can not be maximized if the management board or shareholders ignores the interest of its stakeholders” (Michael C.Jensen, 2001). Thus, I agree with the argument that the main goal of a firm is to maximize shareholder wealth but it does not mean that management should disregard stakeholders.
What factors will generate unforeseeably great value of a firm?
Furthermore, one factor which will generate unforeseeably great value of a firm is the interests of society as a whole. When businesses take a long-term view, the interests of the owners and society often coincide. (Timothy J. Gallagher and Josehp D. Andrew, Financial Management: Pricnciple and Practice, fouth edition, publishied by Freeload Press, 2007, P.11). Thus, it is absolutely indisputable that social responsibility with local communities and the environment in which the company operating are become an important consideration for the boards of companies, especially large companies, such as the source of supplies, for expamle rubber, wood, paper from managed forests as well as protecting the consumers and following the local business legislation. Therefore, the more a firm contributes social interests, the more value of trademark it generates.
What happens when a company and its suppliers are positive?
On in other hand, the positive relation between a company and suppliers wiil be cause great damage if it always attempts to get very cheap prices, even below market levels as well as detaining payments as much as possible. Consequently, the company will receive poor quality materials in term of cheap prices and suppliers will stop supplying if they see company’s fraudulent actions such as postpone payments in many times or the firm’s financial resource is limited
What happens if a company does not give its mind to improving the employees' lives and spirits?
Conversely, if the company does not give its mind to improving the employees’ lives and spirits, they will not try their best to produce quality products, resulting in failure in satisfying customers. Consequently, the amount of cash flow is poor, therefore, poor stockholder returns is indisputable.
Why is the shareholder value increased?
Therefore, the more volume of products distributed, the more shareholder value increased because of a vast profits after selling products and services. Secondly, employees also are of vital important in stakeholder objectives of the shareholders. They are the primary workforce and the potential source of significant competitive advantage which can ...
