Shareholder’s Wealth Maximization Vs. Stakeholder Welfare

Stakeholder’s welfare is a superior corporate goal over shareholder’s wealth maximization. Stakeholder’s welfare looks after all the factors responsible for its success whereas the wealth maximization as an objective overemphasizes the importance of money provider i.e. shareholders

Shareholder’s wealth maximization

Shareholder’s wealth maximization is a well accepted corporate objective in almost whole the world barring a few exceptions. Indisputably, it is a superior and healthier goal compared to profit maximization which was lacking a long-term perspective. Apart from shareholders, there are various parties which are affected by a business conducted by an organization viz. employees, customers, suppliers, communities etc. Wealth maximization as a corporate goal does not mention concerns of any of these parties except shareholders. Hence, stakeholder’s welfare is evolving as a further improved and wider corporate objective.

Should a manager take the decision only for shareholders and neglect the interest of all the other stakeholders? Let us think the other way round. How is a managerShareholder’s Wealth Maximization Vs. Stakeholder Welfare as a Corporate Objective able to maximize wealth and welfare of shareholders? It is only with the support of all the other stakeholders. If the supplier does not supply good raw material, can managers produce good quality products? If the employee does not work efficiently, can the managers alone do everything? If the customers are provided low-quality goods, will they continue buying them? The answer to all these questions is a clear “No”.

If we see, there is a simple math. The management is able to serve the shareholder’s objective with the help of other stakeholders of the business and stakeholders are also not doing it for charity. Naturally, they would also look for their well-being. If their objective is not fulfilled, sooner or later their interest in working with the organization will be lost and they may mend their way. Without welfare of the stakeholders, shareholder’s wealth creation is not possible.

In different countries, the different culture is adopted. In the US, UK etc, wealth maximization of shareholders is the main corporate objective

In different countries, the different culture is adopted. In the US, UK etc, wealth maximization of shareholders is the main corporate objective whereas, in countries like Germany, the interest of the workers is given first priority. In Japanese companies, employees and customers are kept at par with shareholders.

Have we seen a tree where only one branch is grown and rest remain as it is? When a tree grows, all its branches grow. Wealth maximization as a sole objective resembles the first situation which is not practical and possible whereas the stakeholder’s including shareholders welfare resembles the second situation which is natural and healthier.

Growth and development of a business have a number of requirements and not only the money. Shareholders only provide money and rest is provided by the other stakeholders of the business. When the input required for growth is shared by all the stakeholders, the outcome in the form of wealth and welfare should also be shared among all the stakeholders.

Last updated on : August 31st, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

How Macro Environment affects Financial Management Decision?
  • Agency Cost
    Agency Cost
  • Financing Strategies
    Financing Strategies
  • Intellectual Property Rights
    Intellectual Property Rights
  • Total Quality Management
    Total Quality Management
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    american depositary receipt adrdividend relevancewhat is the definition of current liabilitiesfixed asset coverage ratiohow to calculate accounts receivable turnover ratiodefine debenture stockformula for calculating wacccorporate finance ratio analysisdefine leaseewhat is zero based budgeting definitionhow to solve for irrloan appraisal procedureusance lc discountingtypes of bills of ladingoperating cycle in working capital managementmeaning of arbitrage in hindiinvestopedia budgethow to calculate paybackdefinition of total asset turnoverquick ratio meanswhats a good quick ratioadvantages and disadvantages of cvp analysismeaning of bookkeeping and accountingasset impairment losswhat is profitability indexirr definition and formuladupont formula roeparticipating preference sharescapitalise debthypothecated propertydeferred lchow to calculate total asset turnover ratiodebenture investmentgoodwill balance sheet definitiongross profit variation analysiswacc componentsdefine financially solventprofit maximization pptretained profits definitiontypes of shares and debenturesirr vs mirrdebtors cyclemirr formularesidential leaseback agreementreceivable turnover definitionwhat is debtors collection periodlevered firm definitionadvantages and disadvantages of underwritinguneven cash flowdebenture investopediareceivable turnover days formuladisadvantages of mergers and takeoversfinancial npvliquidity ratio equationdefine debits and creditshow to calculate activity ratiodisadvantages of capmexplain debits and creditsdirect financing lease exampleinvoice discounting facilityexample of conglomeratedefine accounts receivable turnovercash ratio depositsdefine hypothecationreasons for merging companiescontribution pricing advantages and disadvantagesirr versus npvexamples of leased softwareirrelevance of dividend policy modigliani and millermiller and modigliani proposition 1advantages and disadvantages of invoice discountingdifference between debit and credit accountinghow to calculate the irr of a projectworking capital efficiency ratiosoperating breakeven pointebitda defcalculating noi