Why should maximization of sha

Why should maximization of shareholder wealth NOT be the primarygoal?

Hint – A common mistake is to address a “strawman”instead of the true goal of maximizing shareholder wealth. This isdone in some of the articles referenced above. An example of a“strawman” in this case is saying that maximizing shareholderwealth is focusing on the short-term AT THE EXPENSE of thelong-term. Since firm value is the present value of ALL EXPECTEDFUTURE CASH FLOWS, strategies that hurt the long-term would alsolower value in the short term UNLESS shareholders held inaccurateexpectations


Traditionally managers were taught that maximization ofshareholders wealth is the primary goal of their organisation.While some agree with keeping profit maximization as the primarygoal many do not agree with valid reason. Risk is a major aspectthat a manager must keep in mind before performing his duties. Ifmaximization of shareholder wealth is the primary goal thevolatility and risk of operations may be ignored. This will bedetrimental to the business in the long run and can in fact reducethe shareholder wealth. The organisation should also focus on theinterest of other stakeholders such as customers, employees and thesociety at large. Another aspect that is ignored if wealthmaximization of shareholders is kept at priority is that ofdistribution of dividends. Organisations may distribute moredividends initially to maximise shareholders satisfaction but thiswill mean lower retained earnings within the firm which again willbe harmful in the long run to the business as a whole.

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