The maximization of shareholder wealth is the idea that the main goal of business management should be to increase the company’s stock price as much as possible.
How does shareholder wealth maximization work?
When business managers attempt to maximize their company’s wealth, they are actually trying to increase the company’s stock price. As the stock price rises, the value of the company increases, as does the wealth of the shareholders. Maximizing shareholder wealth is a corporate governance principle that sets a single primary goal for business managers.
Ethics of shareholder wealth maximization
There is a notion that companies focusing on money are greedy and indifferent to social issues, or that socially responsible companies cannot increase stock value. However, a company can be both profitable and socially responsible at the same time.
Advantages and disadvantages of shareholder wealth maximization
Advantages:
- Can create long-term value.
- Aligns the goals of shareholders with the goals of managers.
- Provides a clear framework for decision-making.
Disadvantages:
- Other business goals may be affected.
- May conflict with the public interest.
- May clash with managers’ objectives.
Frequently asked questions
How is shareholder wealth maximization measured?
Shareholder wealth maximization can be measured by determining the value of the company’s common stock. Progress can be measured on a per-share basis by knowing how much the company’s stock price has increased, although any stock splits need to be taken into account.
Why is shareholder wealth maximization important?
Shareholder wealth maximization is important because it provides a guiding objective for corporate managers that they can rely on when making decisions. This goal gives clear direction to managers in the face of competing interests and priorities.
Source: https://www.thebalancemoney.com/shareholder-wealth-maximization-392844
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