APA is critical for this paper and the writer must pay attention to that , also the writer must
clearly respond to all the 4 points mentioned in the questions . the writer must clearly indicate each point
before responding.
The primary goal of for-profit firms is to maximize shareholder wealth. It is extremely important in the
study of finance and business administration to help ensure that managers at all levels of the
organization understand the significance of this goal. Some problems, including conflicts between
managers and shareholders, risks in the financial markets, and other agency conflicts can negatively
impact the financial success of a company and obstruct the attainment of the primary goal.
Corporate Governance
One of the most significant debates about corporate governance centers on whether the organization
owes a greater responsibility to the shareholder who has invested in the company or to the stakeholders
and those who can most be affected by its actions, namely the employees, suppliers, creditors, and
customers.
After reviewing the resources for this week, respond to the following:
� Use the Internet to research alternative goals for shareholder wealth maximization.
� Identify countries with goals that differ from the U.S. or countries that are home to firms that have
differing goals from those based in the U.S.
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� Compare and contrast the difference between stakeholder focus goals versus shareholder focus
goals.
� What are potential problems with both?
Corporate Governance
Corporate governance
The primary objective of business entity is to a make profit and maximize generation of
wealth. Managers are often faced with the challenge of maximizing shareholder wealth.
Conversely, it is quite imperative that the corporation engage in corporate social responsibility
and ensure that conflicts of interest are well addressed to bring financial success for the
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company (Adams, 2008). By and large, Corporate governance plays a critical role in
appropriating organization responsibility towards the shareholders, stakeholders, employees,
suppliers, creditors and as well as customers.
However, this paper addresses corporate governance with special reference to
shareholder wealth maximization. On the same note, identify countries in which firms have
differing goals from the U.S. Finally, the paper brings out the difference between stakeholder
focus versus shareholder focus goals.
Paradigms regarding corporate finance in the US are built upon the notion that a
corporation should maximize shareholders value (Brigham & Houston, 2011). However, there
are other objectives that organizations pursue apart from wealth maximization. For instance,
Organizations rationale for licensing by the government is the generation of social benefits.
Most organizations formulate business strategies that aim at benefiting the shareholders and at
the same time maximize the social benefits. Thus the financial performance and social
performance should be optimistic. Organizations will, therefore, engage in Corporate Social
Responsibility to justify company contribution of social goods in addition to the primary
objective of wealth maximization (Shleifer & Vishny, 1997).
Another alternative goal for companies is business sustainability. Managers in most
organizations focus on corporate sustainability. They develop strategies and objectives that aim
at enhancing the organizations reputation and, therefore, promote sustainability and perpetual
existence of such firms (Deng et al., 2013). Finally, corporations across the globe focus on
business ethics and good customer relation, in order to obtain an edge over their competitors in
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the market. Firms often engage in ethical business practices and keep treating their clients well
to enable them increase their customer loyalty and also win new customers.
However, Firms in Less Developed Countries such as India, Kenya, Congo have
differing views as compared to the U.S. Firms in such countries have different objectives apart
from those developed on the finance theory, which perceives that the primary objective is
wealth maximization and the stakeholder’s theory that primarily focuses on business ethics and
social responsibility.
Firms situated in such areas focuses on business sustainability and in diversification of
business activities as there exists numerous opportunity in such countries. Such firms also focus
in eradicating poverty by helping solve some of the problems in less developed countries. For
instance, firms in such areas employ a labor intensive method of production rather than capital
intensive method. Such strategies help solve unemployment problem in their countries.
There exist some similarities between stakeholder focus goals and shareholder focus
goals. In both stakeholder and shareholder focus goals, they paradigms perceives that value
creation is not only good for shareholders but also the society (Stakeholders). Since company
revenue can only be valued after compensating each and every individual involved as well as
the society where resources used were obtained.
However, shareholders focus goals differ from stakeholder focus goals since
shareholder focus goals are built upon competitive market assumption. That is, all parties
having a transaction with the firm are willing and are compensated fairly by market prices for
the products or services they provide (Jones & Felps, 2013). On the other hand, stakeholder
focus goals are built based on business ethics, business transaction as well as the society.
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Stakeholder focus goals look beyond the shareholders of the organization and propose that
managing a firm should be based on stakeholder’s perspective.
Shareholders focus goals may have the problem of moral hazard (Deng et al., 2013).
This arises from the fact that, shareholder focus goals main objective is wealth maximization.
Therefore, the firm may engage in unethical behavior as long as they obtain wealth and create
shareholders value by maximizing the market value of all financial claims such as warrants,
debt, and preferred stock etc.
Stakeholder focus goals, on the other hand, may experience problems of less
maximization of wealth as the company is not only concerned with wealth maximization but
also stakeholders and the society at large.
In conclusion, management should merge both shareholder focus goals as well as
stakeholder focus goals. This ideology will enable a company to create value through wealth
maximization as well as develop a good reputation by engaging in corporate social
responsibility and appreciate all the stakeholders of the organization.
References
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Adams, S. (2008, February). Fundamentals of business economics. Financial Management
(UK), 46–48. Retrieved from Business Source Premier database.
Jones, T. M., & Felps, W. (2013). Shareholder Wealth Maximization and Social Welfare.
Business Ethics Quarterly, 23(2), 207-238.
Deng, X., Kang, J. K., & Low, B. S. (2013). Corporate social responsibility and stakeholder
value maximization: Evidence from mergers. Journal of Financial Economics, 110(1),
87-109.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2),
737–783. Retrieved from Business Source Premier database.
Brigham, E., & Houston, J. (2011). Fundamentals of financial management. Cengage Learning.
