Q:

What is shareholder wealth maximization?

A:

Quick Answer

Shareholder wealth maximization is the attempt by business managers to maximize the wealth of the firm they run, which results in rising stock prices that increase the net worth of shareholders, according to About.com. The overall valuation of a firm also rises with increases in its share price.

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Full Answer

In the case of a publicly held corporation, it is the shareholders whose wealth is maximized by the growth of the firm, according to About. A firm's managers and staff do not profit (aside from their salaries and benefits) from the company's growth unless they own stock in the company themselves. Many companies offer Employee Stock Purchase Plans to encourage employees to benefit from the shareholder wealth maximization their efforts on the job create.

Shareholder wealth maximization differs from profit maximization, explains About.com. Profit maximization does not take into account protecting the company from risk in the way that shareholder wealth maximization does. For example, many big banks seeking profit maximization nearly failed in 2008 because they invested in complex, risky investments that turned out to be toxic, resulting in drastic reductions in their stock prices. They did not adequately factor risk into their investment strategies and failed to practice good shareholder wealth maximization.

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