There are many possible objectives for a firm and the major one is maximizing the shareholders' wealth. Should managers of a company just focus on how to enrich the shareholders? I think the answer is "No." because this purpose cannot be achieved if it is separated from the stakeholders' interests, especially in the long-term consideration I totally agree with Michael Jensen's "Enlightened value maximization" viewpoint.
Arnold (2008) defines that maximising shareholder wealth means maximising the purchasing power or maximising the flow of dividends to shareholders through time - there is a long-term perspective.
Stakeholders include competitors, internal partners and external partners. External partners are company's suppliers, customers, governments, etc. and employees could be an example for internal partners. Phillips (2003) classifies two kind of stakeholders are normative stakeholders who have directly transactions with the company and derivative stakeholders referring to the other entities who might impact or impacted by the company. Firm's obligations are due only to the normative stakeholders, though the firm should be concerned with the derivative stakeholders. Kaler (2004) has the viewpoint that firm should be concerned only with those stakeholders who contribute.
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Corporate governance is the system by which companies are managed and controlled (Arnold,2008). A corporate is an organisation of many people whose objectives are not the same. Nowadays, there is separation of ownership and control so that it is necessary to have good corporate governance.
There are arguments about the superior objectives of corporate for years. One of the pro-capitalist economists, Milton Friedman (1970) said that "the social responsibility of business is to increase its profits." and in 2003, he noted that "The self-interest of employees in retaining their jobs will often conflict with this overriding objective".
In contrast, Freeman (1984) who regarded as the pioneer for the stakeholders theory believe that firm managers should be concerned with all stakeholders. Stakeholder theory has its base in academic research related to business ethics and society. The stakeholder value approach is beginning to be seen as the desirable and preferred decision making model in not only strategic management but also in other disciplines like marketing and management. According to the original definition of Freeman, a stakeholder is someone who can affect or be affected by the corporation.
Michael Jensen (2001) argued in his so-called "Enlightened value maximization" theory that the stakeholder theory does not point out a firm objective or give a solution to satisfy different stakeholders' interest. However, he thinks companies must have good relationships with stakeholders; this is a form of corporate social responsibility (CSR) within a framework of shareholders wealth maximisation. In addition, Jensen wrote that Freeman's stakeholders definition would make even negative stakeholders and suggested another definition that stakeholder is who contributes to the value creation by the firm.
In addition, the shareholders are not the only ones get profit from the business. Jensen believed that the society's wealth is maximised when the firm maximises the market value of all financial claims such as debt, preferred stock and other securities.
The traditional finance paradigm puts the shareholder wealth maximization as the superior goal of corporate governance. Krishnan (2009) wrote that this paradigm is built upon the classic competitive markets assumption. It means the stakeholders who have transactions with a company are willing partners in perfect markets in which the products or services will be at the fair price. On the other hand, the shareholders will have all that is left over, after the stakeholders have been satisfied.
The shareholders theory is not concerned with any harm or damage for the society or the environment. So that shareholder wealth maximization is a good purpose for not only the shareholders but also the society because the shareholders' wealth is surplus value created by the company after satisfied everyone involved and the society for all the resources used.
It seems that the most be concerned point of the stakeholder theorists is that the management of the firm may exclude the stakeholders, not the stakeholders' contribution in the future of the firm and their own future. In other words, would the stakeholders be willing to share the risk of the business with the shareholders? Because company is not a non-for-profit organisation so that the owners as shareholders desire and have legal right to get the surplus from the their investment when they are the only party willing to take all the risk of failure so that it is reasonable that they get the rewards.
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However, the shareholder's wealth would be damaged if the company does the "wrong" thing for the stakeholders. Vedan Enterprise Corp. Ltd. case in Vietnam is an example for a firm's action which damaged to environment and its punishment.
Vedan is a company produce MSG (monosodium glutamate) which located in Dong Nai province. It was found out in 20008 that Vedan has dumped its untreated wastewater to Thi Vai river for years. Hundreds of thousands of cubic meters of waste water caused huge losses to the local farmers in Hochiminh city, Baria-Vungtau and Dongnai province. These farmers are affected seriously by this pollution. Their health and earning which mainly come from fishing were damaged.
Vedan was forced to compensate 127 billion VND as environment fees and near 220 billion VND for the farmers. Before the judgment, there was a strong wave of boycotting this firm production. In general, the wrong action of Vedan leaded the shareholders' wealth lost more than 350 billion VND (about 20 million USD at that time exchange rate).
Share price reflects the corporate value in the investors' view. Dividend policy can impact to the company share price. It is easy to understand why the share price is as high as the dividend is. However, it should be mentioned here is to maximise shareholders wealth is not only to give them the large amount of dividends in the end of fiscal year but also to maximise the company's share price. An excellent director board or some potential projects can raise the shareholders wealth much more than the recent high dividend.
Sometimes, the separation between ownership and management can cause problems. Corporate governance is a difficult question to solve. There is a strong pressure for company managers because the shareholders want to maximise their profit.
To satisfy shareholders with some financial index such as returning over equity rate or earning per share in company financial statements in the end of fiscal year maybe the most important aim of some firms' managers. They try to raise the effects of capital using by increasing debt. In the near future, it may be a good choice because it leads to lower weighted average cost of capital and lower rate net cash flow (Arnold, 2008) but in the long-period consideration, it could be harmful. Gearing comes with risk of financial distress. If the debt over equity ratio is too high, the financial health of company would be decrease in creditors and the other stakeholders' view, then, the share price would decrease and as the final result, shareholders wealth would fall down.
The truth is firm's share price will be affected by not only the information in the financial statements but also the information about employee relations, product reliability and even environmental sensitivity. Once a company has the bad fame of credit quality or labour policy, its share price would fall down and as the result, the shareholders wealth would be affected negatively. That is the reason why the firm managers have to do the "right" thing with the employees, suppliers, customers, the community and of course, the environment if they aim to a sustainable growth.
On the other hand, the managers can take advantages of company resources to follow their private target and harm the shareholders benefits in long-term.
The United States Securities and Exchange Commission (SEC) charged Goldman, Sachs & Co. for defrauding investors in April 16th 2010. Goldman, Sachs & Co. and its vice president Fabric Tourre were accused for misstating and omitting key facts about a financial product tied to subprime mortgages which caused the investors lost more than 1 billion USD in 2007 when the US housing market crashed. Goldman has issued CDOs (collateralized debt obligations - debt obligations guaranteed) based on a debt package which the company knew that the price would fall. Even this company denied all the charges but its share price decreased 12.8% on the New York Stock exchange in the same day. Due to the charge of SEC, Goldman lost 14.2 billion USD of market value. As the result, the Goldman shareholders' wealth was affected terribly.
There is highlighted thing in this case is the conflict of interests between shareholders and stakeholders such as customers, government and of course, the company managers who are strong-powered employees.
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To conclude, every company's managers have to face to the conflict of interests between shareholders and stakeholders whose wealth maximisation is the main target of their job. A company cannot just focus on the shareholders in the present if it really wants to bring them the possible highest profit in the future. Shareholders are the legal owners and have rights to get the largest portion of the cake but they should not harm the stakeholders' interests. To maximise shareholders wealth and satisfy the customers, suppliers, employees, community and the environment at the same time is an obstacle for corporate governance.