Shareholder Wealth Maximization - Coursework Example

Introduction: In the current business environment, the choice of a corporate objective is a very important issue, and it determines whether the company would achieve success or failure in controlling the market. In creating the corporate objective of a company, two important concepts must be factored in, or put into consideration. These factors are the interests of stakeholders, and shareholder value maximization (Crane, 2008). For instance, the company has to carefully analyze the governance objective that it has to follow, that is, maximizing the values of the shareholder, or satisfying the interests of its stakeholders, or even balancing the interests of these two parties. The shareholder and the stakeholder are two important people in the organization. The shareholder is the owner and financier of the organization. It is therefore a noble objective, that any policy initiated by the organization, should aim at benefiting the shareholder. This is always depicted through a rise in their share prices, and periodic payment of dividends. This is the concept which is referred to as maximization of the wealth of the shareholder (Roe and Law, 2001). Another important constituency that contributes to the value of a company is the stakeholder. This is an individual who has the capability of affecting or being affected by the policies of an organization. These people include customers, the community where the company is operating, the government, suppliers, creditors, etc. This paper provides a discussion on whether maximization of shareholders wealth is a realistic objective by the company. Critique of Maximization of Shareholders Wealth: After the financial crisis of the late 2000, and the emergence of the Enron scandal, there has been a critique of shareholder wealth maximization by experts of business and management. In as much as focusing on the value of the shareholder has the capability of benefiting the owners of a corporation, it is unable to provide a clear guidance that can be used for purposes of measuring social issues such as environmental, employment and ethical business practices (Kolb, 2008). For instance, the management can be involved in the maximization of the value of a shareholder, consequently lowering the welfare programs of third parties. For instance, in a bid to maximize the wealth of shareholders, the company may be forced to pay low salaries to its employees. A company such as Wal-Mart is constantly accused of underpaying its employees, for purposes of generating more profits to its owners. In fact, as of the year 2014, Wal-Mart is the company that had the highest revenue, in terms of sales in the world. This is despite the company initiating a cost leadership strategy, where its products are sold at an extremely lower price. It is the employees of the organization who suffer from this policy, because the company would underpay them, for purposes of recovering the losses they incur while selling their products (Moon, 2001). Furthermore, shareholder maximization has also been accused of promoting unethical behavior in management, and financial reporting. A good example is Enron Company, which was accused of using complex accounting practices for purposes of misleading it shareholders on the true value of the company (May, 2007). This was in a bid to attract more investments, and please shareholders, that the value of the company was increasing. Furthermore, because dividends are constantly paid, maximization of shareholders wealth is accused of holding economic growth. This is because companies won’t have enough money to invest and expand their operations. Furthermore, maximization of the shareholders wealth normally makes the company to focus on short term benefits, as opposed to the long run benefits (Schreck, 2009). This would make the management of the company to engage in high risk investment initiatives which may not be conducive for the company, since chances are high that it may make losses. New Approaches: Corporate Social Responsibility An alternative to maximization of the shareholders wealth is the catering for the interests of the stakeholder. As mentioned earlier, a stakeholder is an individual who can affect or be affected by the operations of the company. Due to the changing needs of the business environment and globalization, there have emerged a number of stakeholders. One important stakeholder is the customer (Ellsworth, 2002). Customers normally want to be associated with a company that has a positive brand name. It is virtually impossible for a company to be able to have a positive brand name, when it is not ethical in its activities. This means that the company has to be honest while dealing with its customers, and initiate activities aimed at catering for their interests. For example, environmental conservation is an important issue that affects the globe. Customers would always want to know what a company is doing, for purposes of conserving and protecting the environment (Gavai, 2010). This is the major reason why companies such as Apples, Samsung, and Microsoft have initiated environmental conservation programs, as part of their social responsibility initiatives. Apples produces sleek phones, for purposes of conserving energy, while Microsoft has a policy of sponsoring environmental conservation initiatives within communities that it operates (Zu, 2009). Furthermore, through corporate social responsibility, a company won’t misuse its employees. It would provide resources, and pay these employees well, for purposes of motivating them, to work hard for the organization (Hunnicutt, 2009). Based on these facts, it is important to explain that a company would make more money, when it carters for the interests of its stakeholders, as opposed to engaging in the aspect of shareholder wealth maximization. Conclusion: The emergence of the financial crisis played a role in the development of criticisms, on the concepts of shareholders wealth. This is because managers were involved in unethical business practices, just with the intention of making more money, to satisfy the shareholders, or to maximize their wealth. It is because of these factors, that a company such as Enron collapsed, because of unethical; accounting procedures, which helped it to hide its liabilities and losses. This was with the intention of proving to its shareholders that the company was making profits. Corporate social responsibility emerged, with the aim of catering for all the needs of the stakeholders of an organization. It is only through this method, that the company would imp rove its brand image, hence making some profits. Bibliography: Crane, A. (2008). The Oxford handbook of corporate social responsibility. Oxford: Oxford University Press. Top of Form Bottom of Form Ellsworth, R. (2002). Leading with purpose: The new corporate realities. Stanford: Stanford Business Books. Top of Form Bottom of Form Gavai, A. (2010). Business ethics (Rev. ed.). Mumbai [India: Himalaya Pub. House. Top of Form Bottom of Form Hunnicutt, S. (2009). Corporate social responsibility. Detroit, MI: Greenhaven Press. Top of Form Bottom of Form Kolb, R. (2008). Encyclopedia of business ethics and society. Thousand Oaks: Sage Publications. Top of Form Bottom of Form May, S. (2007). The debate over corporate social responsibility. Oxford: Oxford University Press. Top of Form Bottom of Form Moon, C. (2001). Business ethics. London: Economist. Top of Form Bottom of Form Roe, M., & Law, E. (2001). The shareholder wealth maximization norm and industrial organization. Cambridge, MA: Harvard Law School, John M. Olin Center for Law, Economics, and Business. Top of Form Bottom of Form Schreck, P. (2009). The business case for corporate social responsibility understanding and measuring economic impacts of corporate social responsibility. Heidelberg: Physica-Verlag. Top of Form Bottom of Form Zu, L. (2009). Corporate social responsibility, corporate restructuring and firms performance empirical evidence from Chinese enterprises. Berlin: Springer. Read More