Question

Why should maximization of shareholder wealth NOT be the primary goal?

Hint – A common mistake is to address a “strawman” instead of the true goal of maximizing shareholder wealth. This is done in some of the articles referenced above. An example of a “strawman” in this case is saying that maximizing shareholder wealth is focusing on the short-term AT THE EXPENSE of the long-term. Since firm value is the present value of ALL EXPECTED FUTURE CASH FLOWS, strategies that hurt the long-term would also lower value in the short term UNLESS shareholders held inaccurate expectations

Answer 1

Traditionally managers were taught that maximization of shareholders wealth is the primary goal of their organisation. While some agree with keeping profit maximization as the primary goal many do not agree with valid reason. Risk is a major aspect that a manager must keep in mind before performing his duties. If maximization of shareholder wealth is the primary goal the volatility and risk of operations may be ignored. This will be detrimental to the business in the long run and can in fact reduce the shareholder wealth. The organisation should also focus on the interest of other stakeholders such as customers, employees and the society at large. Another aspect that is ignored if wealth maximization of shareholders is kept at priority is that of distribution of dividends. Organisations may distribute more dividends initially to maximise shareholders satisfaction but this will mean lower retained earnings within the firm which again will be harmful in the long run to the business as a whole.