Shareholder Finance And Wealth Maximization
In a corporation, who do you think is the owner or the owners? Shareholders are, in fact, the owners of a corporation. They are institutions, businesses, and even individuals who have ownership of the company stocks. Stocks are issued to the market for sale and bought by the public who have the interest to improve their personal finance.
When an individual buys shares of stocks, the person becomes a shareholder of the company (the individual who purchased stocks have the ability to trade it in the market which works much like world oil trade).
Regardless if you are a solo shop owner, you’re the shareholder as a result of your invested affinity for your business. Since shareholders have ownership of the firm, they’re eligible to the earnings of the entire firm.
Shareholder wealth is a suitable target for commercial companies in capitalist societies. Within a capitalist society, individuals have private ownership of various goods and services. Those people have the means of production to generate cash. The profits of companies within the economy are attributed to these individuals.
Shareholder Wealth Maximization
If business managers want to increase the wealth of the company, they actually want to increase the company’s share price. As the share price rises, the company’s value and shareholders will increase.
People generally think that the manager of one company is the owner. This may be true for small businesses or partnerships. In larger businesses, there can be numerous managers and staff, and they really do not own the business. Do they benefit from the business apart from their salary and benefits? If employees are shareholders, they have a tendency to be more concerned about the company.
Therefore, numerous firms motivate employees to turn into shareholders. The fact is, a number of companies offer stocks to employees at discounted prices.
Disputes Involving Managers and Owners
Since the managers of a company are instructed and carefully guided by the BOD (Board of Directors), and for the reason that they don’t profit directly with the company’s target to increase shareholder wealth (unless of course, they’re also investors in the company), clash can occasionally occur between managers and stockholders. This clash is referred to as the agency problem.
Managers act as shareholders’ agents. When there is an agency problem, it’s crucial to resolve the issues as soon as it arises to prevent complications inside the company which could obstruct overall performance.
Responsibility Towards The Society
Could a company try to maximize the wealth of its shareholders and at the same time take on social responsibility? Yes! When they try to raise their stock prices, do they really care about social welfare? Yes again.
Take into account the Great Recession of 2008 and the subprime crisis. At that time, think of the huge banks that released these mortgages, were they socially responsible? Lots of people say no or not really. Whilst they seem to be worried about their portfolio, banks were not really accountable. This portfolio abounds with dangerous assets that ultimately result in the breakdown of many huge banking institutions, as they took the operating risk of numerous financial establishments.
Consequently, their share prices dropped with them. One could surmise to state that they weren’t socially accountable.
Conversely, give some thought to General Motors. Right after nearly failing the Great Recession, they transformed the company around, paid back debts and, manufactured better motor vehicles. Because of this, it eventually increased its share prices. The reason behind is that GM has taken full steps which includes social responsibility instead of taking advantage of for profit. Companies, corporations, or businesses cannot really exist and gain profit over time without becoming socially responsible.
One of the reasons that business firms are increasing their share price instead of seeking other means for profit is due to the concept of risks and rewards. Shareholder maximization takes into careful account risks and the return of investments while the focus of profit maximization is a short term goal in the lines of financial management.