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 manager 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 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.