Wealth Maximization Model
Wealth Maximization Model
CEO of electronic equipment USA has a task of creating shareholder value environment. In discussing the company’s governance model, Mark approaches the CEO with some ideas on how to develop a strategy for the said situation. Mark has a task of educating the board of directors in order to develop a sound decision. He is not sure whether to use corporate wealth maximization model (CWM) or shareholder wealth model (SWM). This essay will give Mark a rough idea on the two models. This will help him educate the board of directors hence develop a decision for the organization.
In order to create an environment for shareholder value the CEO of the company has decided to apply one of the wealth maximization models. According to CWM, suppliers of capital are not the only entities that own the company simply because there are other stakes that have interest within the organization. When developing any wealth related decision in an organization, parties involved in the operations are considered and catered. In developing their wealth decision, the company should come up with an approach that covers all entities in the organization environmental setting. Evidence shows that organizations and firms have different objectives when developing their businesses, but the main objectives include maximizing shareholder wealth and profit maximization for the company’s benefit. Although profit maximization is vital for an organization it should not come first before the concept of shareholders wealth maximization, (Graham & Smart, 2011).
Stakeholders of the company are equally essential as suppliers of capital in any given situation. This implies that the CEO of the company should focus on shareholder wealth model in order to incorporate the entire thing in growth. In any given business operation, managers does not put a lot of consideration in total profits a company earns. Their main focus is the earning per share for a given concept. In the process of business growth, managers of the business develop strategies to ensure that the company does not stand still. They always develop ways which enable the company to grow. Increasing stock price is one of the common ways that managers use in maximizing the wealth of the shareholders who owns the company. Shareholder wealth maximization is equally vital as corporate maximization, but it has weight simply because it helps the company has a strong financial background, (Boatright, 2010).
Shareholder wealth maximization helps organization stock price increase. With the increase in the company’s stock price, owners of the company increase something that helps the company become stable in its financial growth and development. Shareholder wealth maximization is of importance in the organization more compared to corporate wealth maximization simply because it helps increase owners of the company. By the increase in owners of the company, a company ensures that it has a strong financial base that gives hope for future development. Increase of stock price owners indicates that an organization value increases. Increase in company’s value is relevant compared to the profit a company may realize for sharing. Another important aspect in SWM is that it helps increase net worth of owners of the organization, (Vishwanath, 2007).
If the company focuses on corporate wealth maximization, this means that it will create an environment that has no strong foundation. Operation of an organization depends on its net worth. When the net worth is slightly weak, it may fail to realize its objectives in the proper direction. It would be advisable for the CEO of the company concentrate more on SWM as compared to CWM simply because SWM will establish an organization that has a strong foundation. Shareholders wealth maximization will helps shareholders have a clear explanation on the notion that managers are the owners of the company. In most cases, shareholders think and believe that managers are the real owners of the company although they are not supposed to be owners. Shareholder wealth maximization will help shareholders feel that they own the company hence get involved in the decision making process. Other than maximizing on corporate wealth, the company should focus on shareholders wealth concept, and this will create a friendly workable environment, (Graham & Smart, 2011).
A company that focuses on corporate wealth maximization always creates an environment that develops conflict between managers and shareholders. The reason behind this is that shareholders believe that they have no control over their business. If the company focuses on shareholder wealth maximization, stock price owners will increase. This means that shareholders will increase hence reduce that conflict of ownership in the organization. Corporate wealth maximization is a short term concept in an organization as compared to shareholders concept and that is why the CEO of this company should focus on SWM. SWM takes the concept of risk in an organization and has strong rewarding concepts compared to CWM. It is advisable for any organization to go for SWM as compared to CWM when making any organization development strategies, (Boatright, 2010).
Reference:
Boatright, J. R. (2010). Finance Ethics: Critical Issues in Theory and Practice: John Wiley & Sons
Graham, R. J. & Smart, B. S. (2011). Introduction to Corporate Finance: Cengage Learning
Vishwanath, S. R. (2007). Corporate Finance: Theory and Practice: SAGE
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