Corporate Goal of Maximizing Shareholder Value - Essay Example

Enhancing shareholder value cannot be stretched beyond the limits that start breaching the fundamental requirements of corporate governance. Ireland (1996. pp289) established an empirical generalization that the legal existence of the company and the shareholders is entirely separate. Although acts like Sarbanes Oxley in United States have made the leadership of the organization (CEO or CFO!!) legally responsible for the accuracy in accounting statements, many countries around the world still lacks such acts.

Moreover, the act does not make shareholders responsible always because in many companies the shareholders do not sign on accounting statements or manage the company operations. Sundaram and Inkpen (2004. pp353) argue that the shareholder value maximization should be considered after all the liabilities of the corporate has been fulfilled - including incentives of managers, contractual liabilities, payments of dividends, principal & interest payments to bond holders, supplier dues, wages, salaries, etc.

The net value addition in shareholder wealth needs to be taken care of after all such liabilities have been fulfilled that can be effectively managed through corporate governance. . ffective corporate governance are conflicting objectives and hence need to be managed by different individuals to reduce the risk of conflict of interest. The non shareholding stakeholders should be engaged in corporate governance whereas the shareholders should be engaged in wealth maximization and the both parties should have a congenial environment to resolve conflicting situations.

These roles should be normally fixed in support of the argument by Sundaram and Inkpen (2004. pp355) that the transition from non-shareholding stakeholders to shareholders is easy but vice versa is very difficult. Example, a CEO practicing effective corporate governance should be kept out of shareholding otherwise the conflict of interest scenarios will happen. Non shareholding CEOs will not indulge into high risk taking attitudes in the attempt to maximize shareholder wealth that may lead to the corporate failing miserably in meeting their obligations and the backfiring on shareholder wealth leading to complete crash.

The meltdown of organizations like Lehman Brothers is an ideal example of failure of control procedures on risk taking attitudes.To what extent the objective of shareholder maximization is constrained by agency theoryAgency theory is an important aspect of corporate balancing acts given that individuals will divulge into those actions that maximize their personal utility. This forms an excellent baseline for creating a balance between shareholder wealth maximization and corporate governance. The current financial crisis that we are witnessing is the result of stretched risk appetite in the attempt to maximize shareholder wealth to the largest possible extent.

Denis & Denis (1999. pp1072) presents the influence of agency theory on risk taking attitudes of corporate