Difference between Profit Maximization and Shareholder Wealth Maximization

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Business being the most pragmatic of all social organizational forms has historically focused narrowly on its economic activity without being distracted by the demands of political affiliations, societal and communal needs, environmental concerns, individual aspirations or civic pursuits, except for those which have been legislated or decreed by regulatory agencies, or the occasional token donation to a cultural charity such as the opera. In fact, it is believed that a business can best serve its societal purpose by focusing on doing what it does best, the efficient production and distribution of goods and services (Yau and Brutoco, 2012). However, businesses all over the world are struggling in one aspect or the other. This is due to the economic recessing which has resulted in some organization folding up; some organizations cannot even break even let alone making profit; others are busily downsizing in order to minimize cost. For example; the recession in the United State has caused many people jobless and organizations have lost profits. But in all these happenings in the world there are several organizations who are still booming and gaining profit as well as increasing the shareholder earnings. This paper therefore seeks to discuss the difference between Profit Maximization (PM) and Shareholder Wealth Maximization (SWM) and to fish out which of it is more comprehensive. Here, we will look at what profit maximization (PM) and shareholder wealth maximization (SWM) are all about, we will also consider their differences, look for which is more comprehensive, evaluate and conclude. What is profit maximization (PM)?

“Profit maximization is the process of identifying the most efficient manner of obtaining the highest rate of return from its production model” (http://www.wisegeek.com/what-is-profit-maximization.htm, 2012). It can also be basically referred to as the interpretation of profit in it absolute manner within a short period of time. It can be considered as a short term goal to be achieved, for example a year. It is therefore very vital to be more particular with the process of profit maximization because it is not simply about modifying an existing system to gain some more amount of profit increase. Hence, the aim of profit maximization is not focused on achieving some type of profit, but at gaining the highest profit margins as much as possible regarding a given current situation. The first thing that should come in mind regarding the effort of profit maximization; is to critically look at the operating costs to be incurred as far as production and sale of goods and services are concerned. This exercise mostly involves considering both the fixed costs and the variable costs related to the production (ibid). The unavoidable fixed cost for instance will not change even when variable cost changes. But unlike the fixed cost, the variable costs are related to the production process and have the tendency to change over time. However, to achieve the optimum level of profit, the organization can identify the procedure to manage the fixed cost to its utmost advantage while examining the variable cost to determine whether they are still vital for production. What is shareholder wealth maximization (SWM)?

This is mostly equated with the view that the main objective of the organization is to gain profit as well as increase the wealth of the shareholders. On the other hand, shareholder Wealth Maximization can be defined as a financial management technique that focus on increasing the net worth of a company or firm. It must therefore be emphasized that, people who follow wealth maximization also look out for profits, but their concentration is on the cash flow, values per share of shareholders, and the social recognition they may gain by investing in social issues. According to Friedman, "there is one and only one social responsibility of business is to increase its profits so long as it stays...
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