Question

Does the paradigm of shareholder wealth maximization, still hold true today or should companies replace the shareholder with stakeholder wealth maximization leads to shareholder wealth maximization in the long run?

Answer 1

SHAREHOLDERS VS STAKEHOLDERS

A company that implements shareholder wealth maximization indicates that its goal of management is strive to maximize the return in term of capital gain and dividend paid to its shareholders.

The ultimate objective of all activity within the firm is the maximization of shareholder wealth. However, financial economists should be increasingly aware of growing dissent from, or at least equivocation on, that standard finance definition of corporate objectives.

The idea in shareholder wealth maximization model is that shareholders are the group that take the greatest risks and thus deserves special treatment is a fiction.

In shareholder wealth maximization model, managers make decision on the basis of stock price maximization. The first myth is that making decisions on the basis of stock price maximization is amoral, that is morally value neutral. The second myth is one commonly held by business ethicists, namely, that decisions premised on shareholder wealth maximization are strictly immoral.

The myth that making decision on the basis of stock price maximization is morally value neutral held by financial economists because belief in it can exempt them from any moral self-examination. Shareholder wealth maximization serves as a conduit of ethics rather than a net determinant of ethical behaviour.

Besides, every firm strive to pursue shareholder wealth maximization leads to maximum aggregate economic benefit, they think that it’s not just benefit to the shareholder but also the society. This will come about as scarce resources are directed to their most productive use by businesses competing to create wealth. The implication of such a defense is that shareholder wealth maximization is morally neutral. In addition, a manager acting in accordance with shareholder wealth maximization is not exercising any particular moral judgment. For example, the manager makes decision that act in the interests of whoever has the greatest economic influence on the company’s stock price.

On the other hand, the business ethics literature clearly rejects shareholder wealth maximization as an ultimate justification for decisions in business, and they apparently proffer some more ethereal, less material ultimate justification as an alternative.

Besides, as a justification for behavior, shareholder wealth maximization is rarely sanctioned by business ethicists because this model just emphasis on the interests of shareholders. This model focuses on the equity market value which is revealed in the company’s stock price. A manager pursuing shareholder wealth maximization is concerned with anything that affects the company value. In fact, stock price is increasingly being determined by a series of intangible factors such as employee relations, credit quality, environment sensitivity, product reliability, cultural sensitivity and whatever society values.

A management group that is insensitive to the needs and concerns of stakeholders will not flourish financially and, of course, a company that does not flourish financially will not be able to help stakeholders. So, shareholder wealth maximization is not morally neutral and not simply immoral. It neither favors strictly material objectives, nor does it unfairly favour stockholder over other stakeholders.

In accepting shareholder wealth maximization as the objectives, business professional should not abrogate all moral common sense when making any decisions. Only through sound moral judgment on the part of individual managers can the organizational premise of shareholder wealth maximization be morally justified.