Shareholder’s Wealth Maximization Essay Examples

Can there be a difference between maximizing profits and maximizing shareholder’s wealth? If so, what could cause the difference? Which of the two should be the goal of the firm and its management.
Yes, there is a difference between profit maximization and shareholder’s wealth maximization as can be seen from the objective of each. Profit maximization focuses on increasing the profit that a firm realizes from its operations by producing maximum output with a limited input; while wealth maximization is geared towards increase in value of a company’s stock in the market over a given period. Essentially from this definitions, we get that profit maximization is used by firms as short term objective while increase in market value is observed for long term objective. Another difference is that maximization of profit does not include the impact of uncertainty and risk like in the case of wealth maximization which takes into consideration both cases. Further, when firm focus on profit maximization they usually ignore the time value of money ,indifferent to the latter where it is recognized. The importance of the two to the firms also insinuates a difference; whereby profit maximization is essential for a firm’s growth and survival while wealth maximization produce increase in firm’s growth rate and purposes to present maximum market share (Baker & Powell, 2005).
As depicted in the above differences, it comes out that wealth maximization should be the major goal of the firm’s management rather than profit maximization. The importance of maximizing wealth is far much important to any organization than the total profits they make. This is because profit maximization does not consider key factors like risk of uncertainty associate with the future earnings. In addition, wealth maximization is a gateway for the firm to maximize value of share capital of the owners as depicted by the market price of shares. This makes us conclude that operative objective of management can only be made effective through maximization of share market price.

Importance of ethics in wealth maximization

Business ethics refers to following the accepted codes of behavior in managing the business so that business goals are met. Maximizing shareholder’s wealth at the expense of customer’s satisfaction can put the business in jeopardy. Business ethics and aspects of shareholder wealth are therefore related. Meeting the customer needs and requirement requires that the business adheres to the accepted code of ethics. Besides, for the business to be relevant in the society and locality, it should participate in activities that uphold its reputation (Gaspar, 2006).
Households will only transact with those entities that engage in fair practices. Shareholder wealth maximization should also look at aspects of ethics in the locality where the business operates. Customers who have a negative perception about a company will not purchase its products. A reduction in sale of the products will mean that the profits reduce. Shareholder wealth will not be maximized when the customers are dissatisfied. On the other hand, a company should not focus on satisfying its customers and it does not make wealth.
In essence, the points above illustrates the outcoming fact that ethical decisions are necessary for maximization of shareholder’s wealth. In a case of focusing on employee well-being, it might not be as much important for shareholder’s wealth maximization. This is because the management may decide to increase the minimum wage for the satisfaction of the employee but this would negatively affect the ability of customer’s to buy the product. The decision made will serve in increasing the price of the products in order to cover the costs associated with increasing the salaries.

References

Baker, H. K., & Powell, G. E. (2005). Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub.
Gaspar, J. E. (2006). Introduction to business. Boston, MA: Houghton Mifflin Co.