Corporate governance is a critical process aimed at supporting the business functions of a corporation. The most significant debate “about business management centers on whether a firm should focus on the goals of its shareholders or stakeholders” (Ross, Westerfield, & Jaffe, 2013, p. 28). A shareholder is a person who has invested in a given firm. Stakeholders include every person affected by the actions of an organization (Ross et al., 2013). These individuals include creditors, suppliers, employees, and consumers. The issue of shareholder wealth maximization is widely debated in many parts of the world. Studies have explained why different companies work hard to maximize their wealth. The practice also increases the price of the firm’s stock. Any increase in the stock price will increase the company’s wealth.
There are many reasons for shareholder wealth maximization. The first goal is to promote new business practices such as research and development (R&D). The practice also results in profit maximization. The approach also creates value for the business. Shareholder wealth maximization ensures every company achieves its business objectives. The strategy also improves the firm’s financial performance. Every business “using new practices to maximize the wealth of its stockholders can become socially responsible” (Adams, 2008, p. 47). The firm can engage in better practices that support the welfare of the society.
According to the corporate finance (CFT) theory, every business practice should maximize the wealth of its shareholders. Many American companies work hard to increase their stock prices. According to many financial analysts and economists, the focus on shareholder value continues to face numerous challenges. Many companies in Japan and Mexico focus on their stakeholders. Shareholder wealth maximization is a strategic practice aimed at increasing the value of a business. Every firm should empower its manager in order to achieve its goals (Adams, 2008). Many companies become socially responsible while attempting to maximize their wealth.
Many Japanese companies encourage customer-driven practices. Such firms always support the expectations of their customers and employees. Many American companies always focus on the needs of their stakeholders. Such companies also support the needs of their respective employees. Every firm “should embrace new practices such as social responsibility and environment conservation” (Adams, 2008, p. 47). According to Rappaport (2009), any company that supports the best relationships with its stakeholders will become competitive. Such companies will also “meet the required standards for engagement and environmental impact” (Rappaport, 2009, p. 69).
These two approaches present some potential problems. The decision to focus on the goals of the stockholders might impede performance. This strategy creates new conflicts between the managers and the shareholders. Every manager acts as an agent of the stockholders. Failure to solve these conflicts will affect the level of performance. Giving stockholders more power can affect the performance of the managers. Failure to support the needs of the managers and directors will threaten the level of performance. Every business should emphasize on the needs of the stakeholders in order to achieve its objectives (Ross et al., 2013). The strategy might also be problematic especially when every shareholder expects the firm to make profits. The board of directors approves some of the issues affecting every stakeholder. The board might fail to support the best practices in the business. This practice will affect the performance of the business. In conclusion, the debate on whether firms owe a greater responsibility to its stakeholders or shareholders will not end soon.
Adams, S. (2008). Fundamentals of Business Economics. Financial Management, 1(1), 46-48.
Rappaport, A. (2009). 10 Ways to Create Shareholder Value. Harvard Business Review, 1(1), 66-77.
Ross, S., Westerfield, R., & Jaffe, J. (2013). Corporate Finance. New York: McGraw-Hill Irwin.