“The primary role of management is to maximize the wealth of the shareholder.” “Financial management should include not only a concern for profit maximization but also for maximization of societal value.”
The stakeholder theory defines the main objective of each and every organization. It is to be able to maximize the wealth of the firm by increasing its stock price. By defining the wealth of the firm, it is also defining the stockholder who own shares of the company. The parallelism of the stock price’s value and the stockholder can be seen in this theory. As the stock price goes up, so does the individual owner’s net worth.
It is advantageous for an organization to direct its financial management toward maximizing stakeholder wealth because of several reasons. The first one is that the goal of shareholder wealth maximization is long-term. It is a function of all future returns to the shareholders. This drives management to always take in to consideration the long-run cost and benefit of each decision being made and how it will affect and maximize shareholder wealth.
Second, management will always align decisions based on what will maximize shareholder value. This will guide all management activities to maximize not only shareholder value, but the value of the firm itself as well. However, maximizing stakeholder value should not only be the sole driver of a firm’s financial management. It has several advantages that could drive a company’s financial management success but it should also be able to strike a balance between stakeholder wealth and other stakeholders’ interests.
It has also been criticized that while shareholder wealth is being maximized, other stakeholders’ welfare are sacrificed. What may be for the higher value of the company might cause other stakeholders. For example, environmental issues may simply be foregone if the returns from a certain product (which causes environmental problems) are too high to sacrifice. Another may be...
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