Question

The founder of warehouse retailer Costco, James Sinegal, once said, ”Paying your employees well is not only
the right thing to do but it makes for good business.” Costco has offered employees above industrial-average
salaries and health benefits. On the other hand, Wal-Mart, the largest retailer in the world, pays its cashiers
slightly above minimum wages and declines to offer health insurance to every employee. Can both Costco and
Wal-Mart be maximizing shareholder value?

Answer 1

Shareholder value is based on the ability of the firm to generate profits. Higher the profits, higher is the shareholder value as the share price increases. Thus shareholder value is maximized when there is stable revenue growth, lower operating margins and capital efficiency.

Thus even if Costco pays employees above industrial average, shareholder value will be maximised when the firm sells more units because of it.

While Wal-mart will maximise shareholder value by increasing the per unit price by reducing the per unit cost. This will help it generate more profit.

Thus both maximise shareholder value in a different way by increasing the value of the stock and thus the future trajectory of the business. As a firm has to constantly maximise shareholder value in some way or another through higher sales and profitability, which proves better for the future of the business and the management.

If the shareholder value does not increase than businesses opt for some other strategy to increase business by doing strategic mergers and acquisitions. Thus maximizing shareholder value ultimately means that the company gets to increase profitability which is always the main motto of the company.