Introduction
Management has become a very important aspect that assists businesses in strategizing on growth and improving performance. Business oriented organizations are often made up of different groups of people who contribute to the general outcomes of the business.
The entrepreneurs and shareholders are among the people who form the business organization. These two groups hold substantive amount of financial assets of the business. Are these the main shareholders of the organization?
This is one of the main questions in the minds of managers. This issue complicates the exercise of management. However, management is a wide concept especially when applied to business firms.
There are different aspects of management that concentrate on various functions within the firm. For instance, there is finance management that centers on finances of the organization. Shareholders and business owners often concentrate on this function (Geoffrey, 1994).
Shareholders of the organization are often interested in the financial worth of a firm. This is because this is what assures them of getting tangible returns out of the investments they make in the firm (Beurden and Go¨ssling, 2008).
Therefore, the essence of management in the firm is not only to increase the wealth of shareholders and business owners. Management is a large function that concentrates on the wellbeing of the entire business.
The stakeholders include: Shareholders, employees, the real business owners and the general corporate environment that benefit from the business outcomes. An ethical model of doing business is discussed in this paper. This helps in explaining the essence of sustainable business practices that form the core of management in a business firm.
Management, as an organizational exercise, concentrates on the sustainability of the business. Therefore, the increase of the wealth of the shareholders is just one of the many factors of sustainability in the organization. Shareholders always remain interested in the general financial outcomes of the organization.
This is because they gain significantly when the firm makes a lot of wealth (Geoffrey, 1994). However, there are many parameters to whether firms are accumulating more wealth or not. This leads to a different aspect of management in the organization. The accumulation of wealth is often an end product of the entire management exercise within the firm (Cosans, 2009).
Overview of the role of the business – wealth maximization and corporate social responsibility in management
For a long time in history, it has been argued by experts and scholars of business management, that the main purpose of establishing business firms is making profits. This is a rational argument because no one can invest in a business venture without the motive of making money or wealth that comes in terms of profits.
It is also assumed that when a business firm is making profits, the firm is most likely to benefit the society through increased employment. Nevertheless, it should be noted that business firms operate within the environment and should respect and contribute to the wellbeing of the environment (Chapman III and Whitmore, 1974).
Business owners and other shareholders should not concentrate on the accumulation of wealth alone. They should also focus on the environment that helps the business in making the wealth. There are inconclusive debates regarding the extent to which management of firms has to embrace social responsibility.
This is in respect to businesses that they manage. It is argued that social responsibility is critical to businesses because it paints a good picture of the business. In turn, this helps the firms to attract customers hence, fetching more profits (Hite and Vetsuypens, 1989).
According to Chapman III and Whitmore (1974), there is a lot of interest in researching about the profit motives of businesses vis-à-vis the management through the aspect of embracing corporate social responsibility.
It is evident that businesses are managed to maximize on profits. However, profits cannot be generated for a long time if all business practices are not structured in a way to cater for the needs of the environment in which they operate. Therefore, maximizing wealth for any business cannot be easily separated from the aspect of corporate social responsibility (Smith, 2003).
However, it is argued that, due to the prevailing competition in the business environment, modern firms respond by concentrating on activities that directly increase the wealth of business. There is an inconclusive debate on whether this works well for the sustainability of profits in these organizations.
Firms that operate on a large-scale struggle to define ownership and control in the pursuit of organizational objectives. These objectives often center on the creation and sharing of the wealth of the organization. The shareholders and business owners are often characterized by a common aspect.
In most cases, they are interested in making as much wealth as possible from the business. Unfortunately, this often puts them at loggerheads. This happens at times when they fail to concur on how to share the profits or business wealth.
To make significant gains from business, the business owners will mostly pursue objectives that are considered to be inconsistent with the motives of the shareholders. The shareholders’ main objective is geared towards maximization of wealth (Chapman III and Whitmore, 1974).
Manager and shareholder conflicts have remained elusive. This has led to firms engaging in contracts and market control mechanisms that aim to reduce conflicts. This aims at reducing what is referred to as managerial opportunism, on the part of the business owners. Notably, wealth maximization remains to be a critical issue in the management of business firms.
Shareholders always monitor the operational functions of the organization. Therefore, they can always be updated on the amount of wealth being accumulated by the business (Hadani, Goranova and Khan, 2011). This affects the direction of management within firms. The whole exercise of management is highly watered down due to loss of objectivity in management.
Management should not be subjective, and needs to be objective in its operations. The management should concentrate on wholesome aspects that are likely to make the internal and external environment of a firm favorable.
Wealth maximization should be regarded as one of the strategic issues in the management exercise, as opposed to the main issue in the organization (Wilcke, 2004).
There are several theories that attempt to explain the essence and main purpose of business firms. Most of the theories focus on corporate governance, executive compensation policies and practices, and the social and economic performance of firms.
One of these theories is the shareholder theory, which is derived from economics. This theory centers on the purpose of firms. Most firms aim at creating wealth for firm owners while ignoring the interaction of the firm with many other areas. The other areas include the role of the firm in enhancing societal development by engaging in societal roles (Ghoshal, 2005).
There is also another stakeholder theory that pays attention to both the creation of wealth in firms and maximization on the role of the firm in discharging its roles within the society. This theory is an extension of the first theory because it considers the management of firms as an elaborate exercise that focuses on the entire business environment.
Therefore, this is the most preferred theory in modern management because it considers other functions like corporate social responsibility. These other aspects are regarded to be equally important for the success of the organization.
This theory contrasts with the argument presented by Friedman, which the major aim of creating firms is to make money and not enhancing the moral or social development of the society. Moral and social developments are activities that should be enhanced by the government and other not-for profit agencies (Husted and Salazar, 2006).
Friedman argued that the engagement in moral and social issues by firms leads to the diversion of resources. In turn, this minimizes the wealth maximization motive of firms. However, businesses exist in the society, and it is obvious that the society has an impact on the performance of firms.
The management of firms cannot be secluded from the society. This is because business firms exist and are supported by the same society where they exist. Therefore, the management should consider the aspect of societal development as they strive to establish the right channels of maximizing wealth or profits (Pfarrer, 2010).
Bejou (2010) has noted that the corporate social responsibility is important in improving the management practice in organizations. This is because it adds a human touch to the profit objectives of firms. Good management practices are not only evaluated basing on the wealth accumulated by the firm, but also on adherence to ethical standards, respecting the law and maintaining good corporate citizenship.
However, the standardization of the corporate social activities for companies remains a problem. This is because the standards are not set based on empirical findings and explanations. Companies may act as if they actively engage in corporate social responsibility. On the contrary, there are some companies that attach very little value to these activities.
Business challenges and the role of shareholders
Enhanced corporate accountability is advocated in the turbulent business environment characterized by major difficulties like financial crises. This undoubtedly calls for responsibility on all people who make up business organizations. Firm shareholders have acquired considerable say in business firms to help in enhancing accountability.
This is achieved through enlisting and overseeing the corporate affairs of business firms. Management visions of firms are crafted to go beyond the aspirations of shareholders in business firms. In fact, the management exercises embrace inclusive and sustainable strategies by engaging shareholders and stakeholders in making and abiding by the sustainable decisions.
Leading firms in private and public sectors within the United States and the United Kingdom are embracing this practice. Firms in the private and public sectors are enlightened on this shift within the management paradigm (Shaw, 2009).
Shaw (2009) noted that stakeholders are not only increasingly recognized in terms of the financial goals of goals of organizations, but also as part of the corporate plan crafters and implementers for firms. Corporate governance rules and principles in organizations are considerate of the interests of shareholders and stakeholders.
Wealth maximization does not remain a norm because it used to be in ancient organizations. It is included and considered when organizations are making management decisions. Major management decisions are reached where the interests of business owners and shareholders intersect with the agreed corporate social values of firms.
Efforts to encourage sustainability no longer lie with few individuals in the organization. This has been spread to include organizational shareholders. While profit maximization remains important for organizations, shareholders are slowly being discouraged from inclining their minds towards wealth maximization.
They are being encouraged to focus on corporate development of the organization as a means through which the wealth of firms is maximized. Shareholding in business firms remains to be one of the emergent orders of investment. As the shareholders are taught to participate in the corporate affairs of the business, the management exercise is improved and made holistic.
Financial risks often eliminate related risks within a firm. Financial rewards are considered as the end products of the management practice for shareholders and investors. However, this is not regarded as the leading factor in management (Harper, 2010).
When firms focus on maximizing the stocks of shareholders, the firm is focusing on the support of a positive internal environment. The individuals who are mostly featured in this instance are employees working in different sections of the organization.
This includes the production, marketing, and administration sections of the organization (Baker and Powell, 2005). This aims at increasing the price of shares on the stock so that the firm can make considerable profits. The profits should be distributed to shareholders and the business owner.
However, the profits are no longer shared amongst the shareholders and business owners in whole. Instead, some of the profits are also invested in the society in terms of promoting a supportive environment for business.
Without a supportive environment, the stock price of the company cannot rise. In other words, the corporate social responsibility is becoming an important facet of business management as it helps in fetching opportunities to enhance profits for a business organization.
Corporate environments are crafted as part of the long-term management objectives of organizations. The long-term earnings are based on how the management sets an environment that is receptive and supportive to the firm. Therefore, all aspects of management should be given priority.
This includes human resource management, financial management, corporate governance, marketing management and public relations. Raising the shareholders’ wealth brings about the positive prospects of organizational growth. However, it is derived from collective, organizational management that focuses on facilitating the entire departments of a firm (Moyer, Mcguigan and Kretlow, 2009).
Research has shown that those organizations that focus on maximizing the social welfare in the society where they exist are bound to make significant profits. These firms maximize on participation in corporate social responsibility.
The shareholders are derived from the business environment that is cultivated by the management. Many organizational managers have realized the essence of enhancing social welfare as this boosts the number of people who will be interested to invest in the firm.
In other words, the way firms manage their operations is a precursor to the attraction of investors or shareholders of the firm. The success of corporate firms cannot be directly attributed to the maximization of shareholder value in the firm.
Nonetheless, this can be attributed to the successful management of the firm. On the other hand, maximizing the wealth or value of shareholding in a firm is still relevant because a firm is likely to lose its capital if the shareholders withdraw (McSweeney, 2008).
Nowadays, organizations focus on the stakeholders rather than narrowing down and focusing on the business owners and the direct shareholders. Stakeholders are affected too, and this affects the operations of a firm. They have direct and indirect contribution to the general performance outcomes of a firm.
Organizations are highly influenced by the general stakeholders more than the shareholders. Stakeholders include direct and indirect customers. Other stakeholders are the organizational employees, suppliers and distributors of the firm and the local communities. There is also the media, competitors, business partners, financers, and the government.
The government comes in as business regulators and policy makers. In fact, organizations are defined in terms of stakeholders. A firm is defined as a composition of stakeholders. Therefore, all interests of stakeholders have to be given preference by the management of the firm. Managers are required to run the activities of the firm to benefit the entire firm.
The rights of participation in decision making, as well as interests of all stakeholders should be safeguarded by organizational managers. In most instances, the interests of the firm owners and the main shareholders are compromised by the management of firms.
This is meant to accommodate the interests of other stakeholders of the organization. An example of such a decision is cutting the prices of products in favor of customers (Fontaine, Haarman and Schmid, 2006).
The resolution of conflicts of interest in firms is resolved by the management team. Conflicts often arise in organizations regarding the finances of a firm. Shareholders of organizations consider themselves as the prominent parties of the firm.
However, strategic and financial management functions point to the importance of both the shareholders and other stakeholders of an organization. Firms have to cater for the interest of stakeholders and shareholders. The degree of concentration on the interests of the two groups is what theories of strategic and financial management are yet to agree.
However, there seems to be an agreement that stakeholders and shareholders are of high value to firms, and should be regarded as critical by the management (Beurden and Go¨ssling, 2008). Therefore, each of these groups is given preference when addressing organizational matters that are directly related to each.
Firms are administered in the interest of the entire environment, and this includes the owners, shareholders and stakeholders. Therefore, organizational structures are being crafted so as to be accommodative to the interests of the shareholders, stakeholders and business owners. The management structures are not just based on the interests of organizational shareholders and stakeholders (Vilanova, 2007).
The concept of maximizing the shareholder value in the organization has been given a lot of emphasis by modern organizations. However, this is being checked to ensure that it does not derail the entire management function in organizations (The Chartered Institute of Management, 2004).
According to Ahlstrom (2010), the profit making motive matters a lot for firms and has to be encouraged. Firms cannot operate without thinking on how they will make significant profits rather or else they risk failing to meet the definition given to business firms. The way firms conduct their activities has led to enormous criticisms.
This makes them appear as if they are only interested in maximizing profits for the firm owners and shareholders. Firms that embrace good management practices end up achieving economic and societal goals. Firms have to be innovative by focusing on the broader picture of the business. This helps them meet their financial goals, as well as the social goals.
Social goals end up stimulating a good economic environment for a firm. Apart from attaining financial goals, corporate social responsibilities are considered as important components of management (Beurden and Go¨ssling, 2008).
Conclusion
From the ancient times, the goals of establishing firms have been entirely revolving around the maximization of wealth or profits. This made organizations to be seen as tools of enhancing profit maximization. However, there is a realization that firms should consider the entire environment in which they exist.
Therefore, organizational management has become elaborate and increasingly proactive so as to enhance economic and social outcomes of a business firm. Maximization of wealth for business owners and shareholders are only reflected in the economic outcomes of business management.
Otherwise, businesses are managed to achieve financial and social outcomes. Therefore, management cannot be geared towards the realization of financial or economic goals only. The social aspect is equally important.
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