Why Is Shareholder Wealth so Important?
Shareholder wealth is important because the shareholders own the company, and in a capitalist society, the measure of a company’s value is in the profits it generates for the owners. The primary goal of a for-profit business firm is maximizing shareholder wealth, according to About.com.
A business can consist of a single shareholder who has sole ownership or a number of shareholders who have bought shares of stock. In a large firm, the board of directors often consists of the shareholders who have invested the most money in the company and own the most shares of stock. When a business thrives, the value of its stock goes up, and this increases the shareholder wealth.
The managers of a firm are not necessarily the shareholders who sit on the board of directors, but they are accountable to the shareholders. Managers do not profit directly from a company, apart from salaries and benefits, unless they own shares of stock. Businesses often offer discounted shares of stock to managers and other employees as part of an employment compensation package. This gives employees added incentive to ensure the profitability of a company, as they themselves directly benefit. Increasing profits is a short-term financial goal of a company, whereas shareholder wealth maximization, which takes into account concepts of risk and reward, is a sustained long-term goal.