Question

Is it reasonable to set the goal of the firms to be maximizing shareholder wealth? What are the pros and cons with that goal. Please discuss. You will receive participation points.

Answer 1

It may be reasonable to set the goal of the firm for maximization of the shareholders wealth if the company is profit oriented and its main aim is of satisfaction of its shareholders.

There has been a stark controversy between maximisation of the stakeholders worth and shareholders worth and there are always a debate between the two but it is dependent upon the nature of the company and the nature of the shareholder but eventually the financial goal of the company's always to maximize the earnings and it is in line with the shareholders wealth maximization.

Benefits related to to shareholders wealth maximization would be that the company will be trying to maximize its earning in the long run and it will be helping it maximizing the share price of the company also because if the company is able to maximize the earning it will be attracting a higher valuation in the market and it will increase the market capitalisation and it will also mean that the company will have a better business reputation as the shareholders will be more likely to stay with the company for the longer period of time and it will also help in fulfillment of the financial goals of the company and financial goals of the managers so it is in synchronisation of the overall employees and shareholders wealth and it will be leading to lesser of the problems related to agency conflicts.

Cons related to shareholders wealth maximization is that it is a narrow approach of maximization of the profit and just looking upon one stakeholder of the organisation and there are many stakeholders of the organisation so the company should be trying to look upon each of its stakeholders rather than just be looking at shareholders, so it will also avoid the the ethical prospect of serving the society and remaining socially responsible so the company will be having lower value maximization quotient in the long run and it will not be attracting a good review from the society.