Question1: Should company managers focus on “shareholder wealth maximization” as the primary goal of a firm?
To some extent, company managers should focus on shareholder wealth maximization as the firm’s primary goal because, for example in a capitalist society, goods and services are owned privately by individuals. Therefore, such individuals are in ownership of the production means to make money. The businesses’ profits therefore accrue to these individuals in the economy. Therefore, upon trial by business managers to maximize their firm’s wealth, their effort is aimed at increasing the price of their stock. An increase in the price of stock implies that the individual that holds the stock wealth increases. Going up of the stock price leads to an increase in the firm’s value as well as the individual’s net worth. There is also an increase in the value of individuals that contribute to stock increases. On the other side, in the case of a small business, the firm’s manager owns it. In this case, the one owner is the firm’s shareholder (Lupa, 2010).
Question2: What are the pros and cons of shareholder wealth maximum as the objective function of the firm?
In Lupa (2010),the advantages of shareholder wealth maximization as the objective function of the firm include; Increased returns as money is made for all business owners. Strategic consistency; as whatever the firm’s goal is, an overall strategic objective’s clear focus helps in the creation of business decisions’ consistency. Avoiding of Impulse or Emotion; Unlike goals that are general such as becoming the leader in the industry or even helping in making the world a better place, shareholder’s wealth maximization is quite objective and business goals that is quite unemotional. The disadvantages include; Bad business practices; the corporation’s tendency to focus on maximizing of shareholder value is capable of leading to business practices that are unsustainable or poor. Forgetting about the Customer; Firms can concentrate on shareholder’s wealth maximization, thus losing focus on what clients really want or even do non-optimal things for consumers. Employment and Outsourcing; this hurts workers (Peavler, 2016).
Question 3; what kinds of conflicts can arise because of this goal? Please explain.
Various kinds of conflicts that can arise due to the goal of shareholder wealth maximization include those between owners and manager as firm’s managers are usually directed by a Board of Directors, regarding how the business is run, and due to the fact that they do not get direct profits from the shareholder wealth maximization goal unless, they are the stock owners, sometimes conflict arises between managers and stockholders. This conflict is referred to as agency-problem and if such occurs, it needs to be resolved quickly as it can lead to business firm’ problems and performance impediment (Peavler, 2016).
Peavler, R. (2016). Should firms pursue shareholder wealth maximization? Retrieved from https://www.thebalance.com/shareholder-wealth-maximization-392844. Print.
Lupa, P. (2010). The BCE blunder: An argument in favour of shareholder wealth maximization in the change of control context. Print.