Question

A major tenet of financial management is to maximize shareholder value.

Explain the concept of maximizing shareholder value.

What is meant by that phrase and how is it measured? Maximizing shareholders' wealth/value is (Select one: supremely important, very important, important, somewhat important, not important) to a financial manager? Explain. Why isn't maximizing profits an equally significant objective?

Answer 1

Shareholders value maximization is an idea which reflects that the overall potential benefits accruing from an investment to the shareholders must be maximised by the management of the company.

Shareholders maximization of wealth is wider concept than profit maximization as it focuses on, apart from the profits, also gives equal significance to the long-term earning capability of the company and sustainable growth of the company.

it is not about the value creation for the existing shareholders but it is also about the value creation for the potential shareholders in a future. So it is a wider concept and it must be laid emphasis on, for company to succeed in the long run.

maximizing shareholders wealth is the prime focus of the management and hence, it is SUPREMELY IMPORTANT for the management of the company.

profit maximization is not the primary goal, because profits can be very delusional at it will not reflect the true value which will be created to the shareholders as profit maximization can be done through window dressing and manipulation of books of accounts but the shareholders wealth maximization is the primary focus as this is not related to value creation but this is related to creation of long term wealth.