"Governance helps us do the right thing, the right way - for our shareholders and our customers, employees, suppliers, local communities and the environment. Our governance is focused on how to get it right, not only in the board room but also across the businessâ€¦" (Mark & Spencer, 2010, p. 46)
"Our aim is to build a sustainable business through consistent, profitable growth and to make sure that our customers and wider stakeholders can always trust us to do the right thing. We recognise that creating shareholder value is the reward for taking acceptable risks." (Mark & Spencer, 2010, p. 54)
From the two statements above, we recognize the fact that: in reality, financial statement of a firm indicating its goal is to focus on various targets such as its customer, employees, supplier, etc. refutes the financial viewpoint's assertion which claims maximizing shareholder wealth is superior objective of any firm. Personally, I think a firm financial statement which seems to concentrate on many aspects cloaks the unchanged main objective of a firm for finance oriented towards shareholder benefit; Therefore, I strongly agree with maximization shareholder wealth be placed as main goal of any firms looking from financial perspective. There are three reasons backing up this assertion: firstly, it is supported by both theoretical and empirical literature; secondly, if the firm does not operate under the goal of shareholder wealth maximization, it will face the threat of corporate death; thirdly, maximizing shareholder return also satisfies other stakeholders' interests (Boateng & Kamara, 2010).
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The very early reason for this assertion is from the verification provided by both theoretical and empirical literature. Firstly, from the viewpoint of practical possibility, when a firm has various objectives covered different goals, managers find it difficult to release decisions that can fulfill all the objectives (Arnold, 2008). Moreover, when there are two completely opposite objectives, any decision of manager to achieve one objective will let the other fall off or vice versa. In the other hand, if a firm has only few similar objectives, or just only one, managers will find it easy to release clear decisions. Clearly, it is not only from the finance perspective, multiplicity of objective causes decision makers problem but also from any other perspectives of our life. Secondly, the "contractual theory" viewing the firm as network of contracts, actual and implicit, which specify the roles to be played by various participants in the organization (Arnold, 2008), represents theoretical literature encouraging the assertion. According to this theory, most participants, when investing their money on a firm, always bargain for a limited risk and a fixed pay-off, while shareholders accepting a very high risk of the capital they invest on business are neither promised to receive any dividend nor guaranteed to get their money back when things go wrong. For example, Vietcombank, a popular bank in Vietnam, requires borrowers applying for Investment Project Lending to present their collaterals including:
"â- All assets forming from borrowed capital and borrower's capital of the Project.
â- Other assets outside the Project (such as balance on current account, valuable papers, movables, real estates not belonging to the Project, guarantee by assets of a third party) as additional collaterals." (Vietcombank, 2010)
Visibly, the bank has assurances from firms that their loans will be repaid in any circumstances, while shareholders do not have anything to get unless those firms do well. In brief, both theoretical and empirical literature have agree that a firm should only have one main objective of maximizing shareholder wealth which facilitates the firm's managers to have clear decisions and gives incentives to shareholders to accept their high risk of investment
The second reason reassuring a firm to focus on maximizing shareholder wealth is the threat of corporate death. Initially, it seems unfair if the firm follows goals which are not beneficial for their shareholders, the owners of the firm (Arnold, 2008). Apparently, shareholders would have little incentive to accept the risk necessary for a business to thrive if they found the risk they had to tolerate offering them little benefits. On the other hand, they would not withdraw the capital, even invest more, if the firm's objective is to maximize their wealth. Secondly, it argues that if a firm reduces returns to shareholders in order to pay more surplus to other stakeholders, it will hardly survive (Arnold, 2008). According to Lumby and Jones (2003), potential shareholders through supply and demand markets may buy shares in firms with expectation of being provided the greatest possible return. On the other hand, existing shareholders can sell out their current shares to obtain other firms' shares if they find those firms providing them better return than the current shares do. As a result, the firm who lost their existing shareholders' capital will face various problems such as slow growth, lack of liquidity and possibly corporate death (Arnold, 2008). The liquidity problem of Abu Dhabi Securities Exchange (ADX) in 2008 illustrated how investor selling out their shares could put a firm in a difficult market position. In his story, Sambidge (2009) reported that Tom Healy, CEO of ADX had blamed for the fall in oil price that made foreign investors sell out their shares emergently to retain their positions at home markets. He also added the lack of liquidity in the U.A.E. banking sector was another reason causing the stock exchange the only source of cash for many investors. Apparently, the example shows how negative investor can cause to a firm by selling out their shares. Briefly, the goal of a firm should orient towards their owners (shareholder) benefit firstly and other stakeholder later; if not, nothing will be gained by any.
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At last, the third reason for the assertion which explain how the main objective of maximization shareholder wealth be cloaked, is that the objective itself includes also the task to satisfy other stakeholders' interest. According to Jessen (2001, quoted in Arnold, 2008), a firm objective of maximizing shareholder wealth cannot be achieved if managers ignore other stakeholders' interests. They must have a good relationship with customers, employees, suppliers, creditors, tax authorities and other stakeholders' interest to urge them to create profit for the firm. Moreover, Ross, Westerfield and Jordan (2010) also indicated the residual will legally be entitled to the claimant: the shareholders after satisfying all other stakeholders. This is the explanation for the hidden objective inside two statements from the topic that "the right thing" (e.g. satisfying customers, employees, suppliers, local communities and wider stakeholders' interestsâ€¦) is done to build "a sustainable business" (e.g. maximization of long-term shareholder wealth "through consistent and profitable growth"â€¦). Obviously, we just disclose the fact that main objective of Marks & Spencer is maximization of long-term shareholder wealth although its financial statement show that the firm seems to focus on many things else. A recent example of a firm failing to achieve the maximizing shareholder long-term wealth because of its ignorance on the environmental is the case of Vedan Vietnam. The firm has been trying to maximize their profit by release hazardous chemical directly to the surrounding without decontaminating it has destroyed the aquatic environment of nearby Thi Vai River (Vietnam Environment Administration, 2009). As a result, Vedan Vietnam products have been boycotted by not only farmers and fishermen living along the river but also by consumers all over the country. Definitely, when "the right thing" cannot be done, Vedan Vietnam cannot achieve "a sustainable business". Another example could be the notorious case of BP Gulf Oil Spill in which the firm lost over £44bn of its value and (Tyldesley, 2010). From the chart below, we can easily find out how much the share price of BP which determines the shareholder wealth dropped down because of the problem caused by the lack of environment taking care from BP.
BP Share price Chart 2010
Sky News (2010)
In addition, according to the first statement from the topic, "the right thing" may only be done under the supervision of "governance". Without supervision from governance (e.g. corporate governance, government,â€¦), a firm can face "managerialism" or "managementism" problem which takes place when the management team pursues objectives attractive to them, but which are not beneficial to the shareholders (Arnold, 2008). For example, Vinashin, a large business group in Vietnam, has almost collapsed under $4.5 million of debt because its former Chairman and CEO Phan Thanh Binh pursued various inappropriate objectives without well-supervision from any governance (Thomas, 2010). Apparently, since Binh held both two most important positions of the firm at the same time, there were no or enough persuadable opposite arguments to counter against his wrong objectives such as spreading the firm investment in many business areas which was definitely a fault in the time of global recession. In a few words, maximizing shareholder return usually implies that firms must also legally satisfy in specific: their customers, employees, suppliers, etc., and in general, the whole societies first before the residuals are collected by their shareholders. There is also the need of supervision from governance to ensure management teams pursue the right objectives.
In conclusion, maximization of shareholder wealth is undeniable superior goal to any other objectives. There are three strong reasons supporting this goal: firstly, the goal is backed by practical ground and respectable theoretical justification such as "contractual theory"â€¦; secondly, for a firm to survive in competitive world managers must bear in mind the goal of maximizing its owners wealth; thirdly, all stakeholders will benefit if shareholder wealth are maximized. Besides, from my viewpoint, I would suggest that the term "maximization shareholder wealth" be modified to "maximization shareholder wealth within other stakeholders' interest" to avoid possible misunderstanding by other stakeholders as they think the objective does not take them into account.