The Importance of Maximizing Shareholder Wealth in Business
Along with general trend of development, firm should concentrate on increasing profit and expanding of efficient business. In my opinion, maximization of shareholder wealth should be a preference responsibility for managers of firms over stakeholder interest in comparative market.
Frankly, raising shareholder value is considered fundamental point and is very important duty to business, because it ensures the survival and development of business in aggressive environment. Milton Friedman (1970) asserted that managers should only focus on serving shareholder interest. In addition, another viewpoint has implied that stakeholder interest should be recognized as prominence of business.
Thus, who are shareholders? Some of writers defined that shareholders are the owners of corporation who execute their business activities through keeping firm’s stocks as well as investing capital into the corporate for expecting return of interest in the future. Milton Friedman (1962) wrote that there is one and only one social responsibility of business that it uses its resource and brings its profits as much as in opening and free competition circumstance, without deception or fraud. Purpose of firm is to serve the needs and interests of the company’s owners.
With regards to stakeholders, Glen Arnold (2008) defined stakeholders as parties that have rights of interest in organization, including employees, suppliers, customers, surrounding environment and the local communities, etc. Rights of stakeholders directly relates to business activities and shareholders.
According to Milton Friedman (1970), in a free or private enterprise, corporate leader is one of staffs of the business. His responsibility is to manage the business with priority purpose and make as much money as possible while complying with the basic rules and ethics of the society. It proves the role and duty of managers. H. Jeff Smith (2003), stated that shareholder theory should encourage to change the behavior of the executives, in which correspond with the real situation as long as period. Simultaneously, executives should be blamed about their activities in maximizing shareholder value. Todd Henderson (2010) described in Truth on the market commentary, the shareholder wealth maximization myth about maximizing of shareholder value, which is considered a basic duty to managers. Board of directors has to be required a pair of duties, which is duty of loyalty and duty of care. The duty of loyalty evidently requires members of business have to put the interests of the corporation ahead of their own individual interests. Board of managers, representative for business has plausible reason for executing maximization of owners’ equity value, protect the core rules of business and the legal rights of owners. In particular situation, firm can have their decisions to match the existing marketplace. While paper of Defense of the Shareholder Wealth Maximization Norm written by Stephen M. Bainbridge (1993) exposed that shareholder wealth maximization has been the fundamental norm which guides United State corporate in making decision. We have known that it again heightens the more reality and the truth of philosophy of business, in which profit seems top target for each firm. Dodge v. Ford Motor Co., (1919) supposed corporations are organized and acted for carrying on primarily profit of the stockholders. Directors are employed on behalf of owners, has responsibility to bring more profit into strongbox of employers. They are simultaneously assigned power and duty for making decision so as to reach purpose of proprietors. Moreover, Glen Arnold (2008) defined shareholders wealth maximization as maximizing purchasing power. In an efficient competitive market, maximize the current share price is also maximize shareholder wealth, it equilibrates with maximization of the dividend-flow in taken-away much profit for shareholders. Maximizing of the productive resources enables highly growth economy and advance higher standards of living in community and society. In addition, business should be examine factors in which manifest the prospects of business in circumstance of business and stock value will increase and shows the greater outlook o future growth, risk of shareholders when share price of business impacted by information and floated in the market, accounting problems due to mistakes or dislocation significantly in financial statement, communication and additional capital.
Nevertheless, Thomas L. Carson (2003) mentioned his opinion about the stakeholder theory in Journal of Business, in which he exposed defect and lacking of restriction against business about responsibility in case of fraud and deception. One of the most prominent defenders of the stakeholder theory is R. Edward Freeman (1993), dealt with “A Stakeholder Theory of the Modern Corporation” that corporations should take interest in the benefit of all stakeholders and the shareholders together. The task of managers has to balance appropriately interest between shareholders and stakeholders by their wise decision. The corporation shall be managed in the interests of its stakeholders, such as employees, financiers, customers, suppliers, partners and local communities in Ethical Theory and Business (1997). As a result, the rights of relevant groups and individuals will be secured. It is obviously that business has duty not only increase the interests of the shareholders as their priority, but it must also ensure its survival and safeguard of each group for the long-term. R. Edward Freeman, Andrew C. Wicks, Bidhan Parmar were also wrote in stakeholder theory and “The Corporate Objective Revisited” (2004), that business value is created by staffs who voluntarily work concomitantly and cooperate to improve the circumstance. Leaders of business must develop relationship, inspire their shareholders, promise and deliver the best value to all of the people who create worth. The best deal for all in case managers attempt to create much value for stakeholders. Expressing of the same point, Sundaram and Inkpen (2004) said that business is required purposeful governance and goals. They should aware that the goal of maximization for shareholder value is the only appropriate objective for managers in the modern business. Business has an important responsibility is to balance the interest of relevant individuals and organizations in circumstances. Trading activities of business in reality indicate that business produces commodities and sells them to buyers, e.g. customers, employees, others. These activities impact mutually to the relevant beneficiaries. As regards to Venkataraman (2002), he suggested that creating the real value and bringing it to every stakeholder is thoughtful idea. Its importance drive the community will become more equitable in which people will be received their achievements. Business should have duty to ensure the proper rights of suppliers, customers, employees, local communities, managers and shareholders.
Base on the above theoretical viewpoints, maximization of shareholder value is a very important duty for managers which manifested through circumstances, such as
It is reckoned that owners, who spend their money for investment of business in order to bring back as much as money for themselves. They seemly expect profit before income tax (PBIT), earning per share (EPS) will be better for years. Eventually, shareholders use the outcome as executing responsibility for stakeholders and reinvesting for development of business. Therefore, profit is considered an indispensable factor for shareholders and stakeholders in business. In order to achieve desirable gain, managers suffered pressure for increasing stably and consistently dividend policy, establish suitable gearing includes equity and debt, efficient structure of capital, control overhead expense for making reducing cost of capital and enhance profit for business.
Moreover, responsibility of managers has to maintain and develop capital in common with growing benefit from activities. Development of business is also contributed to solve problem in society and authority together. There is no any doubt or trouble about firm’s contribution into developing society. Purpose of business should maximize the stable profit of shareholders as a top-ranking preference for long-term. Thus, supporting of business for raising and expanding due to general develop of community and society is proper working. It has been proven through the historical stages of development.
In the particular period, board of directors of business has priority strategies as breaking turning-point for the next step of developing, such as firm opens market share rather than the current size, policy of price for competing as well as survival, strategy for stable development, new opportunities for investment, increasing and remaining value of trade mark, advantage time for issuing shares is considered for maximization of share price in the stock exchange market; reducing the productive cost e.g. labor expense material expense, overhead expense,… for rival of competitors or avoiding loss outcome. In the global financial crisis (2008), many companies in the world have had to struggle with difficulties of finance due to market share has been narrowed, consumers only spent money for necessary commodities, they limited buying luxurious goods, spending for shopping,… due to redundant of employment; some of firms have fallen heavy debt situation and their determined duty have had to solve liability, survive and following development. Consequently, business had to sacrifice short-term target for the longer target of stable development. In these circumstances, importance of priority of shareholder maximization should be acknowledged judiciously over relevant interest according to social viewpoint because it was demonstrated in the reality.
However, in modern age with multiform communication which impact opinion and behavior. Once the benefit of relevant stakeholders can be threatened, they will have reaction for security their own interest as fast as they can. Another recent example, some strikes have been led by Unions against the governors, such as general strikes had taken place spread in France (2009, 2010), in Greek (2010), Spain (2010), the strike was joined by some classes in society in Belgium (2010), the strike of employees in China (2010) and other nations. These have required authorities and governors, especially in corporations have to give back and balance the rights of every relevant person in their organizations. Maximization of profit for shareholders is proper target in role business managers, but they have also to ensure the stakeholder interest which is delivered to participants fairly. Solving the circumstance will create harmony in communities and society. In the process of its business activities, governance of firm has to balance the benefits of relevant stakeholders. Firms have to perform their duties to the communities, especially the places where their business activities take place. They also have to carry out their responsibilities of protection the living environment where the companies are operating and complying with current regulations of the Government. These can be conduct the result of reducing profit, the thing that business considers the very important interest in its business. But, business also has to awareness of business responsibility since it is also a part in stable and successful development for long-term. For instance, several frauds of financial statements were been found in corporations such as Enron (2002), Imclone, Tyco International, Worldcom, etc., impacted many individuals and organizations. Come back to the global financial crisis (2008), there were many business organizations must be bankrupted or on the brink of bankruptcy. From the beginning failure of America's fourth largest investment bank, Lehman Brothers (2008), next to the case of Irwin Union Bank (2009), General Motors Company submitted an application for protection (2009), etc. It is claimed that board of directors and prominent shareholders have had to blame for these related defeats. The deceptive actions of managers should be find out and infer seriously in order to become the experienced lessons for people in harmony of relevant stakeholders.
Concurrently, it would be said that shareholder benefit and stakeholders interest are the two concepts related in which business should perform social responsibility as its obligation to stakeholders. Social duty of business towards owners, administered by managers who have to ensure maximizing return on investment, towards suppliers pay on time and rational process, supply safe products to customers with reasonable price, towards employees pay fair salary and comfortable working environments, employ labor force to solve pressure of local community and contribute for fostering development of society.
Consequently, business should has main responsibility to focus approach of shareholder’s interest on earning and maximizing the profits return of shareholders, its duty also should fulfill social responsibility, ensure for sharing the benefit to stakeholders fairly well. Addition, firm should increase the power, prestige of shareholders, trading mark of business through committing of promotion for relevant people in the local community. It is required managing of business has to attempt very much for social harmony and the stability of surrounding environment, because there are different opinions between shareholders and stakeholders in generally.
In conclusion, based on finding of these standpoints, supporting governance of business performs the maximizing shareholder value as a prior responsibility, but it is aware of making sure that stakeholders related to business also receive interest and reward equal to their deserts.
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