The only legitimate objective of any firm is Maximization of Shareholder Wealth
1. Introduction
“Corporate finance theory, teaching and the typically recommended practice at least in the US are all built on the premise that the primary goal of a corporation should be the maximization of shareholder value.”
(Krishnan, 2009)
One often stumbles upon such statements while reading about shareholders value or maximization of shareholders wealth. This is also a typical answer to questions such as “what is the best and primary objective of a company in a competitive market”. But should it be the only and most important objective in a firm? Must it be fulfilled first and foremost, or is there the possibility of generating more wealth for company, shareholders and stakeholders with other, different approaches? It has to be kept in mind that there are multiple strategies to running a business. One of the strongest opponents of the maximization of shareholder wealth paradigm are the supporters of the so-called stakeholder theory, which claims corporate social responsibility (CSR) and the satisfaction of stakeholders should be the most important objectives for any company.
On the one hand, there is the accepted, popular and traditional paradigm of maximization of shareholder wealth which tries to reach maximization of shareholders wealth with certain management strategies as their main objective.
On the other hand there is the stakeholder theory which expresses the worries that the mere focus on shareholders is “often misplaced” (Krishnan, 2008) and that social responsibility and, more importantly, the interests of stakeholders should be the leading objective for a company.
Beyond that there are also approaches, introduced by experts of the field that mixes features of both concepts; nevertheless, the majority of the companies prefer either the maximization of shareholder wealth or stakeholder theory as their primary strategy.
This research paper aims to figure out if maximization of shareholder wealth is the only legitimate strategy for
“Corporate finance theory, teaching and the typically recommended practice at least in the US are all built on the premise that the primary goal of a corporation should be the maximization of shareholder value.”
(Krishnan, 2009)
One often stumbles upon such statements while reading about shareholders value or maximization of shareholders wealth. This is also a typical answer to questions such as “what is the best and primary objective of a company in a competitive market”. But should it be the only and most important objective in a firm? Must it be fulfilled first and foremost, or is there the possibility of generating more wealth for company, shareholders and stakeholders with other, different approaches? It has to be kept in mind that there are multiple strategies to running a business. One of the strongest opponents of the maximization of shareholder wealth paradigm are the supporters of the so-called stakeholder theory, which claims corporate social responsibility (CSR) and the satisfaction of stakeholders should be the most important objectives for any company.
On the one hand, there is the accepted, popular and traditional paradigm of maximization of shareholder wealth which tries to reach maximization of shareholders wealth with certain management strategies as their main objective.
On the other hand there is the stakeholder theory which expresses the worries that the mere focus on shareholders is “often misplaced” (Krishnan, 2008) and that social responsibility and, more importantly, the interests of stakeholders should be the leading objective for a company.
Beyond that there are also approaches, introduced by experts of the field that mixes features of both concepts; nevertheless, the majority of the companies prefer either the maximization of shareholder wealth or stakeholder theory as their primary strategy.
This research paper aims to figure out if maximization of shareholder wealth is the only legitimate strategy for