Question

Your textbook states that the goal of financial management in a corporation is to maximize the current stock price. Initially, this seems very short-sighted and could cause managers to violate ethical principles in pursuit of that goal.

Is the textbook's definition of financial management flawed? How do we ensure that managers will act responsibly as stewards of the stockholder's resources?

Answer 1

The textbook definition says that goal of financial management is to maximize the stock price. Though this can be one of the goals, other goals of financial management can include maximizing the profits of the company, minimizing their expenses, maximizing their share in the market etc. though increased stock price is the aim of any organization, we cant consider that alone as the goal as the company needs to focus on its other things as well for its sustainability.

Managers as stewards of shareholder’s resources:

These things can be ensured in the following ways:

• Disclosing all the information both financial & non financial information that are considered to be relevant to the stakeholders.
• Using annual report as an effective means of communication with the shareholders & other stakeholders.
• It is in the responsibility of the managers to act ethically on matters that involve the stakeholders.
• By conducting business effectively to gibe back a share to the stakeholders.
• Considering employees as one of the stakeholders, their primary expectation would be adequate compensation.
• Customers who are also the stakeholders of the company, their concern is timely supply of goods & services.