Question

It has long been held in traditional finance that the primary objective of a corporation is to maximize shareholder wealth. However, there has been considerable debate on if that is only what corporations should focus on. For this question, pick one side of the debate. Defend that either corporations should only focus on maximizing shareholder value, or that they should focus on total shareholder interests. Try to pick an opposite side in your discussion group or at least attempt to make it balanced to hear sufficient arguments from both sides!

Should corporations maximize shareholder wealth or stakeholder value?

Answer 1

The primary objective of a corporation is wealth maximization. Shareholders are persons or institutions who have invested in the shares of the company . Market value of the shares is an indicator of efficiency and effectiveness of firm.So the business concern should give importance to those decisions that maximize the market value of shareholders wealth.

A company may have different goals like increasing customer satisfaction, achieve high growth rate, larger market share, etc. However,the primary goal remains to be wealth maximization,as it is critical for the very existence of the business enterprise. If this goal is not met , public/institutions would lose confidence in the enterprise and will not invest further in the growth of the organization.

The advantages are :

1. Emphasis the long term gains.

2.Recognises risk or uncertainty.

3.Recognises the timing of returns.

4.Considers shareholders return.

However, focusing only on maximization of shareholders wealth brings in disadvantages to an organization. Some of them are :

1. Offers no ckear relationship between financial decisions and share price.

2. Can lead to management anxiety and frustration.

3. Affects the interest of other stakeholders.

Stakeholders are persons, organizations or groups having an active interest on company and may vary from employees, customers,suppliers and so on.Even a shareholder is a stakeholder.

Stakeholders can affect or be affected by the policies , decisions or actions of an organization. Having a good relationship with stakeholders and protecting their interest is very important as they influences the achievement of organizational goals.For example, if the interest of employees are not protected, their loyalty towards the organization gets affected and thus the productivity also gets negatively affected.

Focusing more on interest of stakeholders without giving importance to wealth maximization can affect the growth of the organization. Some disadvantages are:

1. Some stakeholders only give importance to their own interest and not of organization.

2. They can sometimes block the progress of the organization.

So from the analysis, we can conclude that wealth maximization should be the primary objective of an organization. However consideration of the stakeholders interest which has an impact on organization, is also required.