All shareholders agree on one point and that is to maximize the current profit and overall value of the firm. But, for management there are two questions and decisions to take:
- A corporation may be able to increase current profit by cutting some investment which could benefit the corporation in the long-term and increase the value of the firm and thus increase future’s profit. Shareholders will not welcome increased current profit if long-term profits are damaged.
- A corporation may be able to increase corporation’s value which will increase future’s profit by cutting current year’s profit. In this case, the shareholders will not welcome current profit less than opportunity cost of their capital.
Should Firms Be Managed for Shareholders or All Stakeholders?
Shareholders want managers to maximize their wealth, but it does not mean they want maximum profit through unfair means.
The most successful corporations are those who not only satisfy their shareholders but also satisfy their employees and customers. Corporations can add value by building long-term relationships with their customers and establish a reputation for fair dealing and financial integrity.