“The Primary Role of Financial Management is To Maximize Shareholder Wealth.

Why do Financial Managers should consider Maximizing Shareholders Wealth as the

Primary goal of the firm? This question will be answered in this position paper.

Investors and shareholders, these are the people, other businesses whether corporations
or other business structures such as proprietorship and partnership and institutions which may
not be a not-for-profit-sector that have an ownership or interest in an organization subsequent to
purchasing shares of that organization's stock. Regardless of whether your business is a one-
person shop you are the investor or shareholder because of your invested interest in your
company. Since shareholders/investors are considered as the owners of the firm they are entitled
to the benefits and any surplus the firm creates.

Shareholders wealth maximization refers to maximizing the current value or net present
value per share of existing stock which is a long-term objective of the company to achieve the
leadership position in the market which eventually benefit the stakeholders of the company.
Shareholders as the owners invested and sacrificed their capital by purchasing the shares of the
company expects high returns or a flow of cash in the form of dividends in the long run. Financial
managers on the other should act in the shareholder’s best interest by making decisions that
helps in increasing the value of the stock, these means that financial manager best serves the
owners of the business by identifying goods and services that add value to the firm because they
are desired and valued in the free marketplace. But we should remember that shareholders are
the residual owners of the firm. By this we imply that they are qualified distinctly for what is left
after employees, suppliers, and creditors are paid their due, so if any them get nothing,
shareholders are also affected. If the stockholders are winning for the reason that the leftover,
residual portion is growing, it must be true that everyone else is winning also. Aside from the fact
that shareholders wealth maximization offers a shorter-term view, others advantages also
includes; It is based on cash flows and not on profits as cash flows are exact and certain and
therefore avoid any uncertainty associated with accounting profits, It considers the time value of
money and risk and uncertainty factor while taking into account the discounting rate.

While it is true that Profit maximization is also an important and perhaps the most
commonly cited goal in financial management, however this position cannot consider it as an
exact objective as it does not take the concepts of risk and reward into account as shareholder
maximization does & has too many shortcomings to provide consistent guidance to the
management particularly to the financial managers, since it is short term in nature and gives
more emphasis on what earnings are generated rather than value maximization and may also
cause undesirable actions or decisions, unbeneficial and may have a bad effect to the firm in the
long run, which is why profit maximization is considered as an inferior compared to shareholder
wealth maximization. On the other hand, in maximization of societal value I believe that when the
value or interest of shareholder’s wealth is maximized the welfare or interest of the society will
also be boosted as Friedman view that “ it is the social responsibility of firms to maximize the
value or return of the owners”.
Given my viewpoints on both statements and for such reasons stated above, my position
will be on the statement “The primary role of financial management is to maximize shareholder
wealth”, as maximizing shareholder wealth and value is the firm’s superior goal and play a
fundamental role not only for the shareholders but also for the stakeholder’s satisfaction and in
creating profit and value for company.