The shareholder wealth maximization goal states that management should endeavour to maximize the net present value of the future expected cash flows to the shareholder of the firm.
With a view of stakeholders as creditors, employees, customers, suppliers, communities in which a company operates, their value maximization is essential in keeping a firm running smoothly. Value creation occurs when we maximize the share price for current stakeholders. The efficiency of Financial Management of any firm is judged by the success in achieving the firm’s goal.
This approach considers that firms are an integrated part of society and the Community as a whole. So, it is the moral and ethical duty of the firm to look after and protect the interests of all the components of the firm and society. This approach encompasses both normative as well as positive aspects. Firms should look beyond the maximization of the returns of their shareholders (Turnbull, 1997; Jones, 1995), and should adopt a wider perspective of stakeholders which includes the customers, society, and environment.
Corporate social responsibility (CSR) and stakeholders' interests are partly related to each other. Firm should have relationships with constituents (stakeholders) groups and the processes and outcomes associated with these relationships of interest should be meaningful both to the firm and the society. The concept of stakeholders personalizes social or social responsibilities by delineating the specific groups or persons business should consider in its CRS orientation (Carroll 1991:43). Legitimate stakeholders have value.
Companies are maximizing their wealth using Society’s economic resources. However, it’s not clear and evident on willingness of firms to give back to the society. Companies like, Tata, Birla, Reliance etc have been explicitly using economic resources like land, roads, electricity in order to manage their cost and increase wealth for the organization in the 19th Century unlike nowadays where internet and telecommunication are critical in business world.
Neither the private sector nor the public sector are willing is willing to directly inject back to society. Private companies want to maximize the profit and reduce cost. Public sector on the other hand doesn’t optimally utilize available resources thus they experience reduction in liquid assets.
An ideal situation towards stakeholders’ wealth maximization would be a mid-point leading to a situation where private companies are operating efficiently, earning profits, and paying taxes without any misstatement of income. Similarly, government keeps on collecting taxes and other revenues and channelizes this revenue in infrastructural related projects to improve country’s infrastructure. The improved infrastructure will generate more and more revenues and also help in creating further employment and investment opportunities. Public sector companies have to take a step forward and improve their operational efficiency in order to best utilize the available resources.
Many companies have gone further in paying attention to passing over some benefits back to the community. They have been making contribution to the government in building social amenities and taking social roles amongst others. E.g. Equity Bank Kenya has come up with an initiative to educate under privileged children with help of the profits generated by a particular line of business. This invests education back to the society with an objective function of bettering the children’s future. Safaricom Kenya, also organizes peace walks and Marathons across Kenya. This is a noble cause and a very good example of passing benefits to the society and facilitates cool investment environment thus wealth creation in society.
Companies have been taking step towards wealth maximization through society’s economic resources and thereby leading to society’s wealth maximization. They have started giving increased emphasis on passing some benefits to the society because profits are ultimately dependent on the society.
Firms invest in local workforce which is cheaper and readily available. It creates a good rapport between the two. As companies get readily available labor, on the other hand society’s wealth increases through employment.
The most important theme is that the objective of the firm is to maximize the wealth of its stockholders, which translates into maximizing the wealth of the society.
Thanks for sharing the valuable information here. Keep sharing more informative articles.
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