Critical Evaluation Of Shareholder Wealth Maximisation Research Paper

Critical Evaluation Of Shareholder Wealth Maximisation - Research Paper Example As we enter the 21st century, calling it the postindustrial era or postmodern era, the moral status of the shareholder wealth maximization for the corporate activity has changed. Shareholder wealth maximization is exempt for moral scrutiny, within the disciplines of financial economics and corporate culture. This concept is undeniably protected against the critics by the theory of invisible hand that each individual company that competes in pursuit of shareholder wealth maximization ultimately leads to maximum cumulative economic advantage. "Many managers have considerable discretion to substitute their own interest for that of the stockholders. Stockholder and manager interests can conflict or be independent in significant respects. The extent to which firms are managed in stockholder interests vary considerably" (Findlay & Whitmore, 1974). The term itself appears to entail a narrow worldly focus on shareholders but in reality, it really stands for a focus on the equity market value disclosed in the company's price of the stock. In this respect, the finance manager who is in pursuit of shareholder wealth maximization is in fact only concerned with the things that can have an effect or impact on the company's price or value of stock and therefore, other stakeholders can influence company value. Critical Evaluation of Stakeholder Approach An approach to strategic management was proposed by Edward Freeman in 1984 called the stakeholder approach. The traditional view of corporate strategy, stakeholders were associated with terms such as owners or stockholders of a company. According to Freeman, he described the term stakeholder more broadly and included in his definition that any group or an individual who can influence or is influenced by the company's objectives and goal is a stakeholder of that company. In order to understand the stakeholder model, it should be recognized that this model does not only imply any concern only for the stockholders but also for the stakeholders such as animals or the environment. The concern for finance managers at this point is ineradicably inter-twined with a company's finance concern. A company that is insensitive to the concerns of the stakeholders will not be able to rise financially and therefore would not be able to cater to the needs of the stakeholders.The stakeholder model als o has many drawbacks. The interests of the stakeholders of any company can deviate sharply from one another and managers pursuing the path to keep all the stakeholders happy, who have no sense of compromise, can do more damage than those managers who put the shareholders first in their doctrine and objectives. In modern times, the interests of the stakeholders are inter-twined as aforementioned. To elaborate, employees are shareholders in the company due to the investment in the pension funds.