Introduction
Companies’ main target in engaging in business activities is to make profits. Companies need to firmly base their financial muscles to be able to compete effectively in the business world. The business world is full of uncertainties which always call for unbudgeted expenses. The term financial Foundations refer to the preparedness of a company to survive in the market in case of these uncertainties. This idea of Financial Foundations then leads to the discussion on whether companies should make shareholder value maximization their primary goal. The concept of shareholder value maximization refers to a situation where a company’s main target is to enrich its shareholders, which is believed to be the success of a company.
Should Shareholder Value Maximization be made The Primary Goal of a Firm?
The fundamental target of any business is to create a friendly market for its current and future customers and shareholders. The price of a share in a company is determined by the value the company places itself on during its operations (Roche, 2017). The value of companies is determined by the profit it can make in the business it is involved in, which is through buying and selling goods to its customers. If the company is able to make high profits, then the value for its shares increases. This idea of focusing more on profit making for the purpose of increasing income for the shareholders then makes it necessary for companies to make Shareholder Value Maximization their primary goal. Funds received from shareholders when they buy shares from any company are the ones which are used to run the company’s operations. Therefore, any company must work hard to ensure good returns to its shareholders for it to survive in the market (Roche, 2017). In a case where shareholders do not realize good returns for their money, then they are compelled to withdraw their shares, and such a company risks its survival in the business world.
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Pros and Cons of Prioritizing Shareholder Value Maximization
Shareholder value maximization just like any other business strategy has its benefits as well as shortcomings. Pros and cons refer to advantages or benefits and disadvantages or shortcomings. One advantage of prioritizing shareholder value maximization is that it leads to the company making huge profits (Wolfe, 2019). This is because the company is being driven by the fear of losing shareholders if they don’t get returns for their money. Thus, the company must ensure that it beats all odds to make huge profits to satisfy their shareholders. This push for a company to ensure that it makes huge profits to please its shareholders will have a negative impact on the workers. The company’s employees in most cases are exploited through being forced to work for longer hours in a day to ensure that the company meets its target as per its shareholders.
Another advantage of prioritizing shareholder value maximization is that it enables the company to stabilize its financial muscles (Wolfe, 2019). In order to please its shareholders and ensure smooth operations of the company, huge profits must be realized. In that case, the company will go an extra mile in its operations to ensure these profits are realized. The huge profits made through sales by a company will be sufficient to meet their shareholders needs and fund its internal operations in a bid to ensure that it remains in the business. The disadvantage which comes along with focusing on huge profits to benefit its shareholders is that the company’s freedom of operation is derived of them. At this point, a company will no longer be operating according to its work principles, rather it will be working to please someone else, and who are the shareholders in this case.
Conflicts Arising from Shareholder Value Maximization
In a company, the management body is entitled to run the day to day activities of the company to ensure that its set goals and target are met within the stipulated time. On the other hand, shareholders are the real financiers of the company and they don’t fully participate in the day to day activities of the company. There are some instances where conflicts arise between these two bodies; the company’s management and the shareholders (Roche, 2017). One of the conflicts that might occur between a company’s management and its shareholders is unmet targets. When shareholders invest their money with any company, there is a surety from the company that their money will earn an interest with time. The shareholders expect the company to make profit from their money so that part of the profit can be redistributed back to them in terms of dividends. In a circumstance where a company incurs a loss, then it will not be in a position to honor its promise to the shareholders, which sparks up a financial conflict between the company’s management and the shareholders.
Another kind of conflict that is related to shareholder value maximization is leadership conflict (Roche, 2017). This kind of conflict is mostly witnessed among the shareholders. The top management board of any company is elected by the shareholders. These leaders are then supposed to run the company as per the company’s constitution. In a circumstance where the shareholders are divided on who to vote in for the leadership position of the company, then wrangles are witnessed among the shareholders. This is mostly witnessed when a section of the shareholders is supporting a certain manager while the other section is supporting another. This division issue leads to leadership conflicts in the company.
References
Roche, C. (2017). My View On: “Maximizing Shareholder Value”. (Online). Retrieved from https://www.pragcap.com/lets-talk-about-maximizing-shareholder-value/
Wolfe, H. (2019). We DO Need To Maximize Shareholder Value. Here’s Why. (Online). Retrieved from https://www.valuewalk.com/2019/03/shareholder-value-maximization-model/
