Every firms focus is shareholder wealth maximization

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Upon in-depth research conducted by Elena F Perez Carrillo (2007), shareholder value is created through stakeholder's movement along with Corporation's activities. Customers and clients are the stakeholders whose satisfaction is the most important to the corporations. No company can maintain their operation and produce great wealth for its shareholders without stable and rising revenue which comes from customers. The more do the customers satisfy with the companies' products and services the higher economic return can they earn. Similarly, suppliers are crucial factors deciding the companies' business strategies. In the short term, the companies may attempt to achieve low prices from the suppliers to get greater profit. However, it's likely that the companies meet supply disruption or quality problems. Company management is based on cooperation with suppliers to enhance quality, delivery-production schedule and inventory. Those exercises bring mutual benefit and value for both suppliers and the company's shareholders. In addition, the companies only grow and compete well with their competitors when they possess enlightened staffs that are always willing to devote their competencies and knowledge for the company development. In order to keep those staff, it's necessary for the companies to have good human resource policies. Otherwise, they are losing valuable assets and are not able to achieve long-term profitability. Promoting the community interest is seen as a way for the corporate to build and consolidate their strength and prestige. Once corporation's prestige in the communities where they are operating and interacting deteriorates, they themselves break a good ground for their long-term cooperative relationship and wealth maximization.

It is certain that the customers never buy the products from the companies which they do not trust on, the suppliers never want to cooperate with the partners which they do not rely on, the employees are never willing to work for the companies that they do not respect and NGOs never deploy investment projects with the companies ignoring the community interest.

Failures within big multinational corporations such as Enron or Parmalat in the 21st century proved that corporation governance based on maximization of shareholder's interest couldn't ensure sustainable growth for corporation activities. (Elena F Perez Carrillo 2007)

The case of Vedan Vietnam Company is a typical example for the behavior of deteriorating the relationship with local community and causing environmental effects on the surroundings. Vedan is a Taiwan-invested company producing monosodium glutamate. This company discharged untreated sewage directly into Thi Vai River in a long time, which has destroyed the living things on the river as well as the environment of local people. As a result, they have to suffer a sanction and shoulder a big penalty. Worse, their prestige is poorly damaged and their products are boycotted in the Vietnam market. (Xuan Nghi 2008)

As mentioned above, a skilled and devoted labor force is vital factor for the business operation. Once the enterprises meet the constant change in labor forces, their cost for recruitment and training increase, hence they cannot earn expected return, even in the worst case; their operation can be delayed in a long time if the human resource crisis cannot be addressed. Specifically, in early 2008, more than ten thousands of workers from a shoe manufacturing factory - a subsidiary of Taiwanese-based Pou Chen Group in Bien Hoa City, Dong Nai province, Vietnam protested low salaries and lousy meals. Although Pou Chen Vietnam Enterprise Limited agreed to raise the wages up to 5%, the workers still rejected the offer, quitting the job. From this case, it is wondered whether Pou Chen Vietnam Enterprise Limited can gain their goal of getting long-term value maximization and maintaining stable development while they are faced with massive job resignation of workers. (Stephen 2010)

It appears that customer is decisive factor towards the corporate value. Corporate cannot create profit and maximize interests for their shareholders when the customers lose the trust and loyalty on the corporate products. Only a tiny negative behavior of corporate affecting the customers may threaten its reputation and lead to great market-share loss. For example, recently, almost big supermarkets in Vietnam such as Big C, Co-op Mart, and City Mart halted selling the beverage products manufactured by Tan Hiep Phat Company when this company was suspected of using out-dated condiments in production process. While waiting for the formal response from Tan Hiep Phat Company and inspection result from relevant authorities determining whether Tan Hiep Phat processed out-dated condiments or not, the consumers felt cautious with the company's products. This fact made the company's sales regarding soft drinks namely Dr Thanh Tea, O degree Tea, Belley Tea…in the market decreased sharply. (Thanh Nhat 2009). Another empirical evidence is the close of some Chinese diary firms in the recent time when it is revealed that those companies produced milk powder contaminated with melamine. They used melamine as an industrial chemical added to milk to give misleading high protein level, causing serious effect on the public health. (David 2010)

From above practical examples, we can see that the final destination of corporations disregarding important constituencies is shut-down and corporate governance models based on maximization of shareholder' interest are not able to ensure sustainable development for corporate. Vedan Company could not maintain its activities as it violated social and environmental law. Pou Chen must delay its operation under the pressure of workers' strikes. Tan Hiep Phat Company's beverage products are under the risk of losing their position and competitiveness in the market. Some Chinese diary companies namely Shanghai Panda Diary Company, Tiantian Dairy Co, Ltd were criticized badly for their behavior and permanently disappeared in the market.

Besides the enterprises following the goal of maximizing shareholder' revenue at any cost, there are companies prioritizing corporate accountability to fulfill their long-term strategies. Notably, chocolate manufactures in Europe devised ethics codes and built model factories to benefit their workers, supply health and adult facilities and reduce working hours. (Elena F Perez Carrillo, 2007, p96). Besides, most Fortune 500 companies make public their social practices via their websites and media and have applied policies and acted to ensure good sustainable governance (Elena F Perez Carrillo, 2007, p97). In the USA, pharmaceutical companies such as Merck issued Code of conduct highlighting the corporate aim to serve public health. (Elena F Perez Carrillo 2007, cited in Dodd, 1932, p.1145). Many Corporate have adopted policies and performed with the goal of sustainable good operation. Specifically, the Body shop is "against animal testing, support community trade, protect the environment". (The Body shop, our value, http://www.thebodyshop-usa.com/beauty/values?cm_re=Tyra_HolidayPh3-_-Navigation-_-values). Ford and General Motors have set up green procurement guidelines and expected their suppliers to comply with the ISO 14001 EMS standard (Elena F Perez Carrillo 2007). Even many companies are eager to extract one part of their revenue to establish funds for charities and donations. Bill Gate, the chairman of Microsoft Corporation, also the founder of Bill and Melinda Foundation, was granted the 2006 principle de Asturias Price for the contribution and efforts in the areas of global health, education and culture (Elena F Perez Carrillo 2007). In the United Kingdom, big companies such as Virgin or British Sky Broadcasting announced that they are conducting socially responsible activities. Virgin has spent profit from Virgin rail and air business to find alternative fuel and they set the target of becoming the first media company in the world to be carbon neutral. (Elena F Perez Carrillo 2007 cited in Warner E, 2006, p.B6) The recent studies conducted by Foundation Empresa y Sociedad with regards to Corporate Social Responsibility practices of big Spanish Companies shows that most of them - Altadis, BBVA, Endesa, and Ferrovial….mentioned social practices in their annual report. (Elena F Perez Carrillo 2007)

Above analysis and empirical evidences show us the benefits from stakeholders' theories of corporate management and adverse effects of only following shareholder wealth maximization goal on corporate activities. Corporate management through the protection of a wide range of interest is considered an efficient way of governing the company. However, we cannot absolutely deny the shareholder wealth maximization theory as shareholders deserve to receive a fair return for their investment. Importantly, corporate managers need to balance the shareholder's interest with the other relevant parties' interests. A company well-known for its social accountabilities makes it highly possible to create the long-term interest for the shareholders. Additionally, a debating issue is that taking other constituencies into consideration may lead to the position of wasting the corporate asset and the act of abusing corporate asset is usually disguised by the terms such as Corporate citizenship, Corporate Social Responsibility…Therefore, the actions in favor of consumers, employees and communities must be controlled and executed in accordance with Corporate Charter and internal regulations for long term benefit of the company. (Elena F Perez Carrillo 2007)