Question

shareholder maximization is when a corporation focuses on mostly short-term success in order to please the shareholders. As well as their executives who have stock ownership and stock options as incentives for their stocks to do well. Ultimately, maximizing shareholder value is achieved by increasing the stock’s price over time and increasing dividends. While it’s important to have positive results of a company’s stock price but it’s important for the company to consider the employees and their customers. “According to the stakeholder theory, managers are agents of all stakeholders and have two responsibilities: to ensure that the ethical rights of no stakeholder are violated and to balance the legitimate interests of the stakeholders when making decisions” (Smith, 2003).

“Scandals at Enron, Global Crossing, ImClone, Tyco International and WorldCom, concerns about the independence of accountants who are charged with auditing financial statements, and questions about the incentive schema and investor ... have all provided rich fodder for those who question the premise of shareholder supremacy” (Smith, 2003). In some cases, businesses partake in illegal or unethical activities, such as falsifying financial information in order to improve shareholder value. There can be negative consequences for the consumer when a corporation only focuses on maximizing the shareholder value. For instance, a corporation may choose to cut production costs by using lower-quality materials. While this may increase profits in the short-term, it may reduce profits in the long-term because the consumers are not satisfied with the quality of the products.

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 peers can derive additional knowledge.

Answer 1

While the basic objective of any corporation is to earn profits and maximize shareholder's wealth, it should in no way resort to unethical measures to achieve these objectives. The personal interests of the managers/management shouldn't conflict with the overall objectives of the corporation. Simply inflating profits in the short-run through unethical steps is not going to help the management in the long run. While the managers may be able to earn their incentives in the short term, their performance in the long run may get adversely affected which may get reflected in declining profitability, increase in debts or non-repayment of financial obligations on time. Additionally, lawsuits may be filed against the company if unethical actions/activities on the part of the management get detected. In some cases, the companies may be forced to shut their operations which will lead to complete erosion of the shareholder's wealth.

The management of any organization should ensure that employees comply with all the established business policies, procedures and practices. The financial statements should be free from any defects and material misstatements. It is important to establish investor confidence and trust in the company's business operations. Investors prefer to invest in corporations that follow high standards of corporate governance even if they exhibit short term financial instability or non-profitability. The management should concentrate on protecting the interests of the shareholders. Therefore, the management should focus on the long term financial stability and building good reputation for the company. The overall objective of maximizing shareholder wealth can be achieved only if the management takes decisions in the best interests of the organization and stop focussing on their own personal goals/benefits.