CORPORATE FINANCE

Corporate Finance

Corporate Finance

Introduction

It is the common view of the people it is believed that the management should make investment and financing decisions keeping in view the goal of maximizing shareholder wealth, which is the share price. The main purpose of this paper is to give an overview that the main aim of an organization should be to maximize the shareholder wealth. The traditional shareholder perspective asserts that the exclusive focus of corporate governance should be to maximize shareholder value. If the goal of maximizing shareholder wealth conflicts with the interests of other groups, those other interests should be ignored, unless certain laws and regulations mandate the management to consider those.

Discussion

It is the normal perspective of people that the goal of an organization should be to maximize the shareholder's wealth. Maximizing shareholder's wealth means that maximizing the share price.

Arguments in favour

It has long been held that corporations have legal obligations to serve the interests of their shareholders. Since shareholders own the firm's equity, they have certain rights and privileges over other groups, and any action taken by management must ultimately be justified by whether it furthers the interests of the firm's shareholders. The shareholder perspective has its roots in the principle of private property rights - the foundation of capitalism. The traditional wisdom is that private ownership is fundamental to social order as well as economic efficiency (Agrawal, 2006, p. 377). In this view, the corporation as a legal extension of its shareholders should be obliged to serve the shareholder interests (Freeman, 2003, p. 88). In the past decade, the shareholder approach to property and the corporation has been further justified by the principles of free market, economic efficiency, and profit maximization. Hayek (1969) among others posits that when individuals own private property and pursue self-interests, the most efficient economic activities are ensured. The logical extension is that corporations owned by shareholders should seek to maximize profits to enhance shareholder value (Donaldson, 2005, p. 63). In the shareholder model, the market-based governance mechanisms like shareholder meeting, independent boards of directors, performance-based executive compensation, and the market for corporate change should be used to ensure the interests of shareholders.

Arguments against maximizing shareholder's value

By contrast, the relatively new stakeholder perspective states that corporations should consider the interests of all or many stakeholders, such as employees, suppliers, customers, and local communities.

Stakeholder theorists argue that the firm cannot create value if it ignores the interests of stakeholders. In practice, the active participation of stakeholders, the pursuit of long-term firm value, the trust relationship between the firm and stakeholders, and the interconnection among stakeholders are the main proposals in the stakeholder model of corporate governance. This means companies have to go beyond the pure shareholder-maximization goal and consider the interests of a wide range of constituents affected by media companies (Cochran, 2004, p. 42). Indeed, without the support of such stakeholders as employees, readers/viewers, and local communities, media organizations simply cannot exist. Furthermore, through serving the general welfare, firms may optimize both the returns ...