3-3 management and stockholder wealth

management and stockholder wealth

Does modern corporate management always follow the goal of maximizing shareholder wealth? Under certain circumstances, management may be more interested in maintaining its own tenure and protecting“private spheres of influence” than in maximizing stockholder wealth. For example, suppose the management of a corporation receives a tender offer to merge the corporation into a second firm: while this offer might be attractive to shareholders, it might be quite unpleasant to present management. Historically, management may have been willing to maintain the status quo rather than to maximize stockholder wealth.

As mentioned earlier, this is now changing. First in most cases “ enlightened management” is aware that the only way to maintain its position over the long run is to be sensitive to shareholder concerns. Poor stock price performance relative to other companies often leads to undesirable takeovers and proxy fights for control. Second, management often has sufficient stock option incentives that will motivate it to achieve market value maximization for its own benefit. Third, powerful institutional investors are making management more responsive to shareholders.

Is our goal of shareholder wealth maximization consistent with a concern for social responsibility for the firm? In most instances the answer is yes. By adopting policies that maximize values in the market, the firm can attract capital, provide employment, and offer benefits to its community. 

Key words

Social responsibility

Ethical behavior

Stockholder wealth

Valuation approach

Maximize shareholder wealth

Corporate governance