Question

A commonly cited business goal is profit maximization. Why is this not the most precise goal of financial management? Referencing a real-life example, why should a corporation not do anything and everything to maximize owners’ wealth?

Answer 1

A commonly cited business goal is profit maximization. It is not the most precise goal of financial management because there are other stakeholders too which may get affected in an adverse way. These parties include creditors, government, environment. Compromising ethics, laws regulation and laws just for profit maximization can not only affect the organization in the lung run but also put the organization in legal disputes.

For example - if an organization is making excessive amounts of profits than it's sustainable limit and for that it is involved in any kinds of thefts, not legally abiding by the rules, destroying environment, not abiding by the ethics or is involved in cheating the clients that business won't last in the long run facing issues from all the above stakeholders.

A real life example is a company called ENRON which had failed legal disputes because of being involved in cheating, thefts, misrepresentation of accounting information. It was one of the biggest firms in the world and its top management had asked the employees to only concentrate on profit maximization even being not ethical. The organization was later dissolved.

I hope this makes sense and helps you.

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