Comparing Profit Maximization and Shareholder Wealth Maximization

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Introduction Business being the most pragmatic of all social organizational forms has historically focused narrowly on its economic activity without being distracted by the demands of political affiliations, societal and communal needs, environmental concerns, individual aspirations or civic pursuits, except for those which have been legislated or decreed by regulatory agencies, or the occasional token donation to a cultural charity such as the opera. In fact, it is believed that a business can best serve its societal purpose by focusing on doing what it does best, the efficient production and distribution of goods and services (Yau and Brutoco, 2012). However, businesses all over the world are struggling in one aspect or the other. This…show more content…
We must also note that before shareholder wealth can be fully maximized, corporate decision- making has a role to play that is when the corporate manager works solely in the best interest of the shareholders. In addition, shareholders even pay much attention to the “non-shareholders” activities. A typical example is corporate philanthropy (corporate social responsibility), or any other “socially responsible” activity that may seem to reduce profit at the initial stages but are very conscious of the fact that these activities will generate profits, at least in the long run. This is what Friedman calls the enlightened egoist which simply means good business, nothing more, nothing less (Friedman, 1962). Example Vodafone Health Line which aims at improving health for the vulnerable in the society thereby deepening their awareness. By focusing squarely on shareholder wealth maximization, businesses can best contribute to the public good by paying taxes, hiring employees, and providing goods and services (ibid). Furthermore, law is part of Friedman’s “rules of the game” firms are constrained by various rules and regulation which affect them, thus, it is generally argued that stakeholder interests matter very much, but are adequately (and best) protected and advanced outside of corporate law by separate bodies of regulation, such as labour, environmental, or consumer protection regulations, and by explicit private contracts, which are the proper

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