What Is the Maximization of Shareholder Wealth Concept?


Quick Answer

The maximization of shareholder wealth concept is the premise that management makes decisions centered mainly on optimizing wealth of the company and gains for owners. Often, company managers are also shareholders, according to About Money, which increases their incentive to drive profit and share price appreciation.

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Full Answer

When wealth maximization is primary, the business decisions of the company center on weighing the potential gains against risks to those gains, according to the Business Dictionary. A common conflict that arises under wealth maximization is concerns over social responsibility. While wealth maximization is often pitted against socially responsible operations, it is possible to balance profitable operations with socially responsible behavior, reports About Money.

Investors and other company stakeholders have access to a lot of information about how a company does business. If a company operates in ways that harm the environment or negatively impact customers, communities and other stakeholders, it can have a drastic impact on long-term share price, reports About Money. Customers may get turned off by poor company behaviors, resulting in lower revenue and profit. Another potential conflict exists when managers of a company aren't shareholders. In this scenario a conflict known as the "agency conflict" exists. This conflict means the managers are agents of the Board of Directors and shareholders, and have no vested interest in maximizing wealth.

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