Question

There are many potential goals of a corporation, such as: minimize costs, maximize sales, maximize employment, maximize earnings, maximize shareholder wealth, maximize dividend payments, etc. Which one is the best for the long-term health of the company and society?

Answer 1

'Maximizing shareholder wealth', is the best goal for the long term health of the company.

Maximizing shareholder wealth is the maximization of the net present value of any financial decision taken by a firm.

When an investment is proposed, the firm should see that the net present value of the investment is positive.

When an investment has a positive net present value, it means that the cash flows from the project are more than sufficient to pay the returns to the debt suppliers and shareholders, and also to repay their principal investment. What is left after that is surplus present-value which, is to be paid to the shareholders. In the happens it can be said that the shareholders' wealth is maximized as they are getting something more than their normal return and return of principal. This is after payment of the dues to the debt holders.

When there are more projects than one, the projects with higher NPV are selected so that shareholders' wealth is maximized. It will ensure that resources are channelled to those projects that return more value. Hence, the objective is the best goal in the long run.

In fact, all the other alternative goals listed, such as minimize costs, maximize sales, maximize employment, maximize earnings, maximize dividend payments are all components of 'maximizing shareholder wealth'.