There are many different objectives a firm can aim towards achieving. The three most used objectives are shareholder wealth maximisation, profit maximisation and stakeholder approach. But is any one of these objectives better than another?
Shareholder wealth maximisation is an objective available to companies. This aims to increase the wealth of shareholders by increasing share prices or paying back regular dividends as a reward for their investment. By selling shares companies can raise vast amounts of funds very quickly. In the long term these funds would be used to invest within the business to increase future share prices and growth. In the 1990’s business models began to change toward an equity culture which encouraged faster share price growth. According to Adrian Blundell-Wignall one factor which led to the economic crisis was global macro liquidity policies and there poor regulatory framework. The economic downturn decreased shareholder and stakeholder value. Kristen Gribben of the financial times said in 2010 that more investor rights and legislation is giving more power to shareholders and that these shareholders are demanding quicker returns. This can lead to short-termism as investors are not loyal and will sell shares and invest in other companies if they think they will get a better return. Martin Wolf stated in January 2012 that incentives given to managers to align their interests with that of shareholders may also risk the long term health of a company. Bloomberg Business Week identified that visionary companies are the ones excelling in the current economy and these companies are ones which put maximising shareholder wealth as a low priority and instead focused on their identity and drive for progress which enables them to adapt to change.
Shareholder Wealth is still an objective of many firms as it is argued it is better than stakeholder approach and profit maximisation. Firms which do operate shareholder wealth objectives may do so as it gives them access to large amounts of immediately available funds. The management are taking no financial risk themselves as all the risk is on the shareholders. Using shareholder wealth approach firms can have a more long term view as the company can become more competitive which can have positive social affects as the companies grow and they employ more people which boosts the economy.
But what about profit maximisation and stakeholder approach? It could be argued that profit maximisation is always an objective of a company otherwise the company would not have been formed and all businesses require money to be able to keep trading. This approach encourages investment, reinvestment and growth. It is not necessarily considered an ideal approach as the company will aim to maximise income and decrease costs which may not be in the best interest of stakeholders. The problem with the stakeholder approach is that there are so many different stakeholders with varied interests it is very difficult to make decisions which will benefit all stakeholders. Therefore another objective is required to resolve this problem which is when companies are likely to look at choosing the option which maximises profits or will benefit shareholders. Therefore stakeholder theory can rarely exist on its own.
There is not necessarily one approach which is the best for all companies worldwide as they all require different amounts of capital, have different management objectives and operate in different market sectors. Often more than one of the above objectives will be implemented by a firm. This shows the complex environment businesses now operate in and the firm have to choose the objective(s) they think the firm should use to enable them to be competitive.
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