The document discusses maximizing shareholder value as the primary goal of a corporation. It examines what determines shareholder value, including short-term versus long-term results and balancing shareholder and societal interests. Conflicts can arise between managers and shareholders, and debt holders have a different perspective than shareholders. Management, shareholders, and debt holders all have stakes in the corporation, but sometimes their interests do not fully align.
Maximizing Shareholder Value While Balancing Stakeholder Interests
1. Need help please writting this essay.
"The number one reason for a corporation to exist is to maximize shareholder value"
In a minimum 600-word essay, explain this concept. Explain what determines value for a
shareholder. Identify short-term versus long-term result and balancing the interest of the
shareholders versus society as a whole. Conflicts between managers and shareholders can exist.
Debt holders have a different perspective from shareholders on what is important. Discuss what
is at stake for all three groups (management, shareholders, debt holders).
Solution
First we have to understand the meaning of shareholder,shareholder is an individual or institution
that legally owns one or more shares of stock in a public or private corporation. Shareholders
may be referred to as members of a corporation.Shareholders of a corporation are legally
separate from the corporation itself. They are generally not liable for the debts of the
corporation.Shareholders are granted special privileges depending on the class of stock. The
board of directors of a corporation generally governs a corporation for the benefit of
shareholders.In fact corporations are legal entities, with shareholders having a contract with the
corporation as owning share of the stock.
After understanding the meaning of Shareholder, Now let us discuss on what determines value
for a shareholder: Increasing shareholder value increases the total amount in the stockholders'
equity section of the balance sheet. The balance sheet formula is assets less liabilities equals
stockholders' equity, and stockholders' equity includes retained earnings, or the sum of a
company's net income less cash dividends since inception.Companies raise capital to buy assets
and use those assets to generate sales. A well-managed company maximizes the use of its assets
so the firm can operate the business with a smaller investment in assets so that value for
shareholder can be maximized. Companies typically create most of their value through day-to-
day operations, but a major acquisition can create or destroy value faster than any other corporate
activity.
Short-term maximization is disastrous to shareholders. It’s true that maximizing shareholder
value in the short term leads to catastrophic results, since the firm starts to do things that hurt its
long term prosperity.Thus short termism harms shareholders!
Interest of shareholders as well as of the society are both important to the company. It is essential
to make money, the company has a higher purpose, and this purpose goes beyond profit. The
purpose could be creating value for society, and the company’s stakeholders. The corporation
2. must fulfill its higher value creating purpose. And for this they need a Conscious Culture that
fosters love and care and builds trust between a company’s team members and its other
stakeholders.when you ask whom does the company work for, one of the answers will be for
society (as tax payer), for customers who provides the means of life, and for employees. Need
not to hurry but conclusively, the most important key is who provides the source of wealth to
sustain corporate and individual life, customer is it. companies have to think of enterprise
prosperity versus profit of shareholders. Hence customers have to be nurtured and must be at the
center of the firm for the sake of the enterprise!
Conflicts between corporate management and shareholders are usually referred to as agency
costs and are borne by shareholders. Activist shareholders and increased corporate governance
increasingly deal with agency-related conflicts, but these conflicts can be especially intense for
shareholders of smaller, closely-held companies. Smaller companies can be subject to less-
rigorous audits, depending on relationships with banks, customers and suppliers.Management
teams sometimes alter capital structures, the mix of debt and equity financing employed, in ways
that preserve their levels of control rather than the mix that maximizes shareholder wealth.
There is a constant tug-of-war between management and shareholders over the company’s
capital. Shareholders often view excess cash on a company’s balance sheet and agitate for its
return to shareholders in the form of cash dividends or the repurchase of shares, which boosts
stock values. However, management teams can be very hesitant to do so, sometimes rightly so.
Management teams should not repurchase shares simply to appease shareholders, but only when
the company’s shares are undervalued. Also, management teams may want to raise capital to
invest in new projects, but existing shareholders often view this as a threat. Issuing new shares
can dilute existing shareholders’ stakes, and issuing debt can increase leverage risk and,
therefore, the risk associated with the company’s stock. Shareholders should always read
management reports on financing closely, and also examine the statement of cash flows to
understand the methods of financing that management is employing.
There are four primary mechanisms for motivating managers to act in stockholders' best
interests. Firstly, Managerial compensation,It should be constructed not only to retain competent
managers, but to align managers' interests with those of stockholders as much as possible.
Secondly,Direct intervention by stockholders,Today, the majority of a company's stock is
owned by large institutional investors, such as mutual funds and pensions. As such, these large
institutional stockholders can exert influence on mangers and, as a result, the firm's operations.
Third one is Threat of firing,If stockholders are unhappy with current management, they can
encourage the existing board of directors to change the existing management, or stockholders
may re-elect a new board of directors that will accomplish the task. And the last one is, Threat of
takeovers,If a stock price deteriorates because of management's inability to run the company
3. effectively, competitors or stockholders may take a controlling interest in the company and bring
in their own managers.
Now discussion comes on Debt perspective or share perspective.Debt instruments are assets that
require a fixed payment to the holder, usually with interest. Examples of debt instruments
include bonds (government or corporate) and mortgages.Equity financing allows a company to
acquire funds (often for investment) without incurring debt. On the other hand, issuing a bond
does increase the debt burden of the bond issuer because contractual interest payments must be
paid— unlike dividends, they cannot be reduced or suspended.
Over time, equity based investments will provide higher rates of return than debt based
investments. In the past, investment advisors recommended mixing debt and equity based
investments in a portfolio to balance risk and return. This is not recommended as often these
days, as most retail investors were led to over invest in debt based investments and experienced
significantly lower returns as a natural consequence. A better diversification strategy is to divide
your investment capital among various asset based investments.Debt based investments still
serve useful purposes in the financial world. They are often used to temporarily “park” money
while waiting for a desirable equity based investment to become available. They are also used by
institutional and government investors who are required by law to store funds in the lower risk /
lower return investment vehicles.
Above discussion is on The number one reason for a corporation to exist is to maximize
shareholder value, considering meaning of shareholder, his wealth maximization, his relationship
with management, debtholder, society as a whole and other stakeholders. All of them have there
different points. different relationships with each other collectively working for shareholder to
increase there wealth or value.