Question

Next, discuss the topic of maximizing shareholder wealth. This topic has been researched and studied for many years, with mixed results. For example; Irving Fisher, a prominent American Economist, argued that maximizing shareholders wealth should be management’s primary goal (Cardao-Pito, 2016). Conversely, Sollars and Tuluca (2016) suggested that shareholders should only be rewarded with returns that are “commensurate with the risk they take”. (p. 203).

After reading the required textbook chapters for this module, briefly share your thoughts about shareholder wealth maximization. Then, explain the advantages and disadvantages of wealth maximization from the perspective of a company’s Chief Financial Officer. Include the effect on company stakeholders – internal (managers, employees) and external (suppliers, shareholders). Make sure that you include the effect on company stakeholders – internal (managers, employees) and external (suppliers, shareholders).

Answer 1

Shareholder wealth maximisation: Financial officers of a company try to enhance and increase profits and wealth of the company and this in turn increases the stock price of the company in the stock markets. Increase in value of a stock in the market increases shareholders' wealth.

Advantages of wealth maximisation (CFO's perspective):

• A high stock price ensures satisfied shareholders which in turn allows the company to receive more investments and capital at lower rates from the open market.
• A high stock price increases brand value of a company.
• A famous company gives managers an external sense of satisfaction, glory and pride in representing their company

Disadvantages of wealth maximisation (CFO's perspective):

• Sharehlders may sometimes want the company to adopt fraudulent practises to increase or inflate value of the stock so as to inncrease their profits.
• Sometimes, loss making companies experience surge in stock prices while regularly profitable companies experience drastic cuts in stock prices. This has nothing to do with company health and is determined by technical analysis and demand and supply in the market. Thus, such movements can give prospective stakeholders a wrong view of the company.