SWM and SCM Business Models
The Anglo-American markets have a philosophy that a firm’s objective should follow the shareholder wealth maximization (SWM) model. More specifically, the firm should strive to maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a given level of risk. Alternatively, the firm should maximize the risk to shareholders for a given rate of return (Moffett, Stonehill, & Eiteman, (2012), pg. 31). Basically the SWM model says that markets are efficient. The reasoning is that it assumes that the share price is what ultimately captures a true face value for all risks as well as gains; which in return is what is seen by investors. The SWM model treats risk as the added risk that the firm’s shares bring to a diversified portfolio (Moffett).
In the non-Anglo-American markets, controlling shareholders also strive to maximize long-term returns to equity. However, they are more constrained by powerful other stakeholders. In particular, labor unions are more powerful than in Anglo-American markets. Governments interfere more in the marketplace to protect important stakeholder groups, such as local communities, the environment, and employment. Banks and other financial institutions are more important creditors than securities markets. This model has been labeled the stakeholder capitalism model (SCM) (Moffett, pg. 32). The SCM model weighs more in the favor of the long-term investor than those investors that are transient. The SCM model assumes that total risk, that is, operating and financial risk, does count. It is a specific-corporate objective to generate growing earnings and dividends over the long run with as much certainty as possible, given the firm’s mission statement and goals. Risk is measured more by product market variability than by short-term variation in earnings and share price (Moffett).
In contrast to the SCM model, the SWM model requires a single goal of value maximization with a well-defined score
In the non-Anglo-American markets, controlling shareholders also strive to maximize long-term returns to equity. However, they are more constrained by powerful other stakeholders. In particular, labor unions are more powerful than in Anglo-American markets. Governments interfere more in the marketplace to protect important stakeholder groups, such as local communities, the environment, and employment. Banks and other financial institutions are more important creditors than securities markets. This model has been labeled the stakeholder capitalism model (SCM) (Moffett, pg. 32). The SCM model weighs more in the favor of the long-term investor than those investors that are transient. The SCM model assumes that total risk, that is, operating and financial risk, does count. It is a specific-corporate objective to generate growing earnings and dividends over the long run with as much certainty as possible, given the firm’s mission statement and goals. Risk is measured more by product market variability than by short-term variation in earnings and share price (Moffett).
In contrast to the SCM model, the SWM model requires a single goal of value maximization with a well-defined score