Question

Shareholder wealth maximation is defined as “increasing the value of a business in order to increase the value of the shares held by stockholders” (Bragg, 2018). The company’s value is dependent upon the company’s ability to create free cash flows. As a shareholder in a company I would want to maximize my wealth. I would analyze the financial history of a company and confirm the stock price has also increased over the years. The better a company is doing financially, the better my return should be.

There are many advantages of shareholder wealth maximization. One main advantage is increased returns. In other words, make as much money as possible for the business shareholders. Another advantage is maximizing wealth is an objective and unemotional business goal (Kokemuller, 2018).   Lastly, it is a consistent goal. If the goal of the company is to maximize shareholder wealth, management will weigh both cost vs revenue-generation in all decision.

A disadvantage of maximizing shareholder wealth is that the CFO can become so focused cash flows at the expense of the employees and consumers. For instance, some companies downsize or outsource the workforce in order to save money. Another disadvantage is a company may cut production costs by using lower quality materials. While this can maximize profits and increase stock value in the beginning, as consumers complain the stock value will suffer. Lastly, in the pursuit of shareholder wealth maximization some companies may resort to falsifying financial records, making the company “look good on paper.”

Required

compare and contrast the above view on shareholder maximization with your own. Support your position by offering a counterpoint or resources from which your peer can derive additional knowledge.

Answer 1

The shareholder wealth maximization is one of the most important aspect of any business because shareholders provide capital to the company and financial resources are important if the company wants to remain in the business. The important thing to note here is that the company should focus on creating values for all its stakeholders be it shareholders, employees, suppliers and Government. The idea behind creating values for all its stakeholders is that in the short-term the company might be able to create values for shareholders at the expense of employees or other stakeholders but then in the long-term it would not be able to sustain in the business for the long term because it needs the support of all its stakeholders to sustainably grow, it needs its employees to perform, it needs raw material from supplier and it needs support from local government in terms of its rules and regulation. It is very important that the company is taking care of all its stakeholder that it is not exploiting it one stakeholder so that the other can benefit because then it will not be able to sustain in the business for the long term. For every company when they focus on creating sustainable values for all its stakeholder, it would be easier for them to remain in the industry and grow for a long period of time.