Shareholder+maximization

Shareholder wealth maximization
// “Shareholder value is an argument, a tool, a means to an end.” // Justin Fox –Harvard Business Review scholar

The singular objective of the corporation is a staple of academic literature in organizational behaviour and corporate governance specifically and business in general. There are broadly speaking two schools of thought: the current paradigm states that the foremost and, indeed, only goal of the corporation, and justification for its existence, should be to maximize the wealth of the shareholders, the investors, the owners. The, if not opposite, but delineating view is that a corporation is as much a member of society as an individual and is therefore subjected to rights as well as responsibilities.

Professor of Strategic Management at Bocconi University, Robert M. Grant, highlights four reasons that supports the view that a corporation should focus on maximizing profit for its owners:

**Competition**: The competitive business landscape will weed out the firms that cannot withstand the competition; the profit protects the firm. Therefore, focusing on profit is a survival tool for the corporation, diverting resources from this goal will ultimately be subjected to the pressures of competition and drive the firm into bankruptcy.

**Public pressure on control**: Grant states that as profits are the prime measurement tool of a company’s performance, corporations that fail to deliver this will have a declining share price that will (possibly) subject them to takeovers which leads to the management being replaced. Therefore, parting from the objective of maximizing profits will put external pressure on the firm to return to this objective.

**Convergence of stakeholder interests**: The firm should be united in its search for profit; when all the stakeholders (owners, customers, employees etc.) internalize profitability as the main goal, the firm can achieve this.

**Simplicity**: Simplicity employs the view that a firm with several objectives at the same time might run the risk of having to deal with “political wrangling and management paralysis”. Pursuing several aims at once will spread out the resources thin and dilute focus.

Stakeholder theory
As an alternative to the objective of maximizing shareholder value we can turn to the stakeholder approach to organizational theory and corporate governance.

The basis for a broader view on the role and objective of the corporation has its roots in Immanuel Kant’s // categorical imperative //. It states that persons are ends in themselves and all humans should act towards each other in the way that they expect others to act toward themselves.

As corporations are made up of moral human beings, this imperative should be carried over in the aggregate actions of these human beings. As Gibson states:

// “stakeholder approaches… often involve an implicit or explicit moral claim to the effect that the corporation has duties to others, even in the absence of potential benefit

// However, this approach is put under scrutiny by Heath and Norman: //

// “One cannot justify a system of stakeholder governance on the naïve assumption that managers will always be motivated to act in stakeholders’ interests rather than their own.

Joseph Heath & Wayne Norman – philosophers at the universities of Toronto and Montreal

// These researchers suggest that the principal-agent discrepancy that exists between shareholders and management will not ensure a positive outcome for the shareholders, or stakeholders for that matter. Therefore, the extended mandate of the owners in the form of voting rights, and thus the possibility to get rid of ill-performing management, serves as a watchdog over their interests. An idea they provide is to have stakeholders represented on company boards similarly to shareholders. //

// They criticize the approach by stating that a strategy that dilutes the profits of the owners, prioritizing CSR over wealth maximization, might lead to a drop in share prices thus exposing the firm, again, to takeover attempts. If the CSR proponents were to prevail the corporate law would have to be changed. As managers would act with impunity from the shareholders fraud might be rampant and ultimately equity financing would dry up. //

"There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profit”

Milton Friedman –economist

To focus solely on profits is inherently a short-term view. The incentive of managers to maximize their profits at the expense of the profits of the shareholders is the fundamental principal-agent problem that corporate governance deals with.