Important information about goals of financial management

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Reference no: EM1366393

Important information about Goals of financial management

Shareholders wealth maximization

The goal of the firm, and therefore of all managers and employees, is to maximize the wealth of the owners for whom it is being operated. The wealth of corporate owners is measured by the share price of the stock, which in turn is based on the timing of returns (cash flows), their magnitude and their risk. When considering each financial decision, alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to increase share price. Because share price represent the owner's wealth in the firm, share price maximization is consistent with owner-wealth maximization.

Although shareholder wealth maximization is the primary goal, in recent years many firms have broadened their focus to include the interests of stakeholders as well as shareholders. Stakeholders are groups such as employees, customers, suppliers, creditors, owners and others who have a direct economic link to the firm. Employees are paid for their labor, customers purchase the firm's products or services, suppliers are paid for the materials and services they provide, creditors provide debt financing that is to be repaid subject to specified terms and owners provide equity financing for which they expect to be compensated. A firm with a stakeholder focus consciously avoids actions that would prove detrimental to stakeholders. The goal is not to maximize stakeholder well being but to preserve it.

The stakeholder view does not alter the shareholder wealth maximization goal. Such a view is often considered part of the firm's social responsibility and is expected to provide maximum long-run benefit to shareholders by maintaining positive stakeholder relationships. Such relationships should minimize stakeholder turnover, conflicts and litigation. Clearly, the firm can better achieve its goal of shareholder wealth maximization with cooperation of (rather than conflict with) its stakeholders.

Reference no: EM1366393

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