Along with general trend of development, firm should concentrate on increasing its profit and expanding efficient activities of business. In my opinion, Maximization of shareholder wealth should be a preferential objective for managers of firms over stakeholder interest in a comparative market. But, in the reality companies should reasonably combine the interest of shareholder and stakeholder conformable with its real circumstances.
To demonstrate and make it more obvious, we should mention to certain definitions about shareholder, stakeholder, theories of shareholder and stakeholder, and what is view of everyone about them?
According to some of writers, shareholders are the owners of corporation who execute their business activities through keeping firm's stocks as well as investing capital into the corporate for expecting return of interest in the future.
And stakeholder is "a person, a group, or an organization that has a direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives and policies". Below are some debates discussing about the theories.
Refer to the shareholder theory Milton Friedman (1962) is the man supporting this point very much. He asserted that there is one and only one social responsibility of business that it uses its resource and brings its profits as much as in opening and free competition circumstance, without deception or fraud. Purpose of firm is to serve the needs and interests of the company's owners.
Besides that in 1970, Friedman also made the most famous version of the shareholder theory excerpted from "Capitalism and Freedom". He stated that in a free economy, business has one and only one social responsibility that is "to use its resources and engage in activities designed to increase its profits…without deception or fraud". Also, one more view advocates this theory. Dodge v. Ford Motor Co., (1919) supposed corporations are organized and acted for gaining primarily profit of the stockholders. Directors are employed on behalf of owners, has responsibility to bring more profit into strongbox of employers. They are simultaneously assigned power and duty for making decision so as to reach purpose of proprietors.
Moreover, according to Todd Henderson (2010), maximization of shareholder value is understood as a basis duty for a manager to think about how to act on a daily basis. The only restriction on making decision of board of directors is a pair of two duties, the duty of care and loyalty. The care duty requests board of directors to be updated and to make clear-sighted decisions after careful double check of the issues. Not similar to the shareholder point of view given above, some of writers as below support this theory very much. Mentioning to the stakeholder theory, Thomas L. Carson (2003) said that companies should be acted for the benefit of the whole stakeholders, not only the shareholders. Furthermore, as to R. Edward Freeman (2004), the most prominent defender of the stakeholder theory, asserted that corporations should take interest in the benefit of all stakeholders and the shareholders together. The task of managers has to balance appropriately interest between shareholders and stakeholders by their wise decision. The corporation shall be managed in the interests of its stakeholders, such as employees, financiers, customers, suppliers, partners and local communities in Ethical Theory and Business (1997). As a result, the rights of relevant groups and individuals will be secured. It is obviously that business has duty not only increase the interests of the shareholders as their priority, but it must also ensure its survival and safeguard of each group for the long-term.
R. Edward Freeman, Andrew C. Wicks, Bidhan Parmar were also wrote about stakeholder theory and "The Corporate Objective Revisited" (2004), that business value is created by staffs who voluntarily work concomitantly and cooperate to improve the circumstance. Leaders of business must develop relationship, inspire their shareholders, promise and deliver the best value to all of the people who create worth. The best deal for all in case managers attempt to create much value for stakeholders. Expressing of the same point, Sundaram and Inkpen (2004) said that business is required purposeful governance and goals. They should aware that the goal of maximization for shareholder value is the only appropriate objective for managers in the modern business. Business has an important responsibility is to balance the interest of relevant individuals and organizations in circumstances. Trading activities of business in reality indicate that business produces commodities and sells them to buyers, e.g. customers, employees, others. These activities impact mutually to the relevant beneficiaries.
From the above views of the shareholder and stakeholder theory, I support the ideal "shareholder wealth maximization should be a superior objective over stakeholder interest" because of as follows:
As we known, Maximizing shareholder wealth is considered as a basis factor and a very important duty to business, because it guarantees the survival and development of business in a competitive and serve environment. The wealth is shown via the market by the price of company's common stock, which is a reflection of the 3 key variables: investment, financing and dividend decisions making. People said that the shareholders spending their money on investments of business want to bring back as much as money for themselves. They seemly expect profit before income tax, earning per share (EPS) will be better for many years. Eventually, shareholders regard the outcome as an executing responsibility for stakeholders and reinvesting for development of business. Therefore, profit is considered an essential factor for shareholders and stakeholders in business. In order to gain desirable earnings, managers have to suffer a pressure for increasing stably and consistent dividend policy, establish a suitable gearing includes equity and debt, efficient structure of capital, control overhead expense for making reducing cost of capital and enhance profit for business. Moreover, responsibility of managers has to maintain and develop capital in common with increasing benefit from activities. Development of business is also contributed to solve problem in society and authority together. There is no any doubt or trouble about firm's contribution into developing society. Purpose of business should maximize the stable profit of shareholders as a top-ranking preference for long-term. Thus, supporting of business for raising and expanding due to general develop of community and society is proper working. It has been proven through the historical stages of development.
Depending on each stage, management has priority strategies as breaking turning-point for the next step of developing, such as firm opens market share rather than the current size, policy of price for competing as well as survival, strategy for stable development, new opportunities for investment, increasing and remaining value of trade mark, advantage time for issuing shares is considered for maximization of share price in the stock exchange market; reducing the productive cost e.g. expenses of material, labor and overhead… for rival of competitors or avoiding loss outcome. Especially, In the global financial crisis (2008), many corporations in the worldwide have had to face with financial difficulties due to market share has been reduced, consumers only spent money for necessary commodities not for luxurious goods…Because of redundant of employment, certain firms have been stuck in a heavy debt situation and their basis duty have had to solve liability, survive and following development. As a result, company had to sacrifice short-term target for the longer target of stable development. In such circumstances, importance of priority of shareholder maximization should be acknowledged judiciously over relevant interest according to social viewpoint because it was demonstrated in the reality. Once the benefit of relevant stakeholders can be threatened, they will have reaction for security their own interest as fast as they can. For instance, some strikes have been led by Unions against the governors, general strikes in France (2009, 2010), in Greek (2010), Spain (2010), the strike by some classes in society in Belgium (2010), the strike of employees in China (2010) and other nations in over the world. These have asked authorities and governors, especially in corporations to give back and balance the rights of stakeholders in their organizations. Therefore, maximization of profit to shareholders is a proper target of managers, but they have also to ensure the stakeholder interest which is delivered to participants fairly. Solving the conflicts will create harmony in communities and society. Firms have to perform their duties to the communities, especially the places where their business activities take place. They also have to carry out their responsibilities of protection the living environment where the companies are operating and complying with current regulations of the Government. Of course, these will influence on profit of the firm that is considered as a very important interest in its business. However, business also has to be aware of this responsibility since it is also part of stable and successful development for long-term. For examples, several frauds of financial statements found in corporations such as Enron (2002), Imclone, Tyco International, Worldcom, etc., impacted many individuals and organizations. Return to the global financial crisis (2008), there were many business organizations must declare bankruptcy such as Lehman Brothers (2008), Irwin Union Bank (2009) etc.
Furthermore, the objective of management perhaps is different from those of the firm stockholders. In a company whose stock is extensively held, stockholders are of a very little control or influence over the company operations. Upon control of company is separated from its ownership, management does not fully do their best to fulfill jobs for the best benefits of the stockholders. They perhaps are satisfied to run and look for a growth level accepted and concerned a lot with upholding their own survival than with maximizing firm's value to its shareholders. As a result, this leads to unwilling to face with reasonable risks for their fear of making a mistake, so becoming easily seen to the suppliers of capital from outside. After that, these suppliers may give out a threat to management's existence. To exist over a long time, management has to know to behave by a way that is reasonably suitable with maximization of shareholder value. However, the objectives of the parties are not always necessary the same. Therefore, the stakeholders' interest is the interest of stakeholders said above. The stakeholder interests sometimes conflict or influence with the shareholder's interests in maximizing wealth. Furthermore, the criteria for social responsibility and stakeholder's interests are not clearly specified, making formulation of an appropriate goal function difficult. Therefore, manager has to know to coordinate between the shareholder wealth and its stakeholder interests with superior financial results.
In conclusion, based on findings said and analyzed, I do feel that shareholder wealth maximization is always a goal which a firm must obligatorily do to survive especially in a competitive and crisis-struck environment. The management has to run the company with the objective of shareholder wealth maximization in its mind as shareholders will be of little incentive to accept the risk necessary for a business to thrive. But, the maximization of shareholder wealth is understood to be positive, not at all means. It will be a unanimous combination between shareholder and stakeholder interests. Being conditional upon each situation or circumstance and specific conditions of each company, they can select themselves what is the best solution for their organization.
