Introduction
Businesses must enhance their competitiveness so as to remain relevant and successful in the market. Additionally, maximizing shareholders’ stocks is helpful in indicating how businesses progress. Shareholder’s wealth is total market worth of a business in regard to common stocks. It is obtained by multiplying the market price (price trading at market place) of each share by the outstanding common shares.
The long-standing objective of a business is to increase shareholders’ wealth. This comprises all earnings of the concerned shareholders. It is important to understand various aspects of shareholders’ wealth in the business realms. Thus, when a firm decides to increase the wealth of its shareholders, it is important for managers to analyze the future effects of such practices (Brigham & Houston 2009 p. 324).
However, it is vital to understand whether maximizing the wealth of shareholders should be the main objective of the management. Precisely, this paper focuses on whether the management of any business should augment the wealth of shareholders and owners.
Should the primary objective of management be to increase the wealth of shareholders and owners?
According to Milton Friedman, the main purpose of any business is to make profits for its shareholders and owners. In addition, he points out that businesses that involve themselves in other ventures would eventually be less competitive. This would offer smaller number of benefits to its shareholders, workers and the society in general.
When a business does not make profits for longer duration, its capital reserves and sources of funds would decrease sooner. Thus, the company would not be able to carry out its businesses appropriately (Ahlstrom 2010 p. 21).
This shows how important it is for a business to make profits and increase its shareholder’s wealth. Additionally, it is crucial to provide shareholders/owners with other viable benefits. Precisely, they should gain fully from their investments.
However, businesses should provide more benefits than just returns to their shareholders. Consequently, these businesses offer economic development, opportunities for employment as well as substantial advances in the lives of individuals. The newer products that are available in the market today are as a result of more innovations and inventions of corporations as they try to solve the problems in the society.
Therefore, the main objective of businesses should not only be making profits to its shareholders and owners but making innovations that solve societal problems (Bejou 2011 p. 5). Actually, these innovations will provide more benefits to the owners besides solving societal problems than just making profits.
In addition, inventions will bring to the market products that are not only affordable to most people but also products that are superior and more useful to customers. Most people anticipate businesses to offer these benefits. If the public prevent businesses from making innovations and developments, there could be far much adverse effects in the long-run.
Truly, even just an insignificant decrease in progress over a period of time could really decrease the possible benefits that corporations can provide to the society. This is a vital provision when considered critically. Businesses of varying sizes should focus vastly on societal issues besides corporate levels.
Various provisions of Corporate Social Responsibility demand firms to offer more benefits to the society than just making profits for their shareholders and owners. For example, companies involved in the manufacture of drugs try to make medicines accessible to people from poor countries.
If their main objective is to make more profits to their shareholders and owners, they could possibly lose viable ethics and service to the humanity. Therefore, organizations should establish, ratify, and embrace various aspects of Corporate Social Responsibilities (CSR) should be to offer solutions to the problems of their customers rather than just focusing more on making profits.
This is the fundamental relationship between a corporation and the society (Van Beurden & Gossling 2008 p. 414). Essentially, this will enable a society to develop a good rapport with companies.
Besides, the sensitive demands and anticipations of the society on large businesses have augmented cultural provisions and living standards. Many of these nations have low living standards. It is important to understand that various aspects of stakeholder’s wealth. This is a considerable provision.
In today’s society, there is so much coverage of what is happening in the world by media and technological advancements. This has enabled a quick and extensive disclosure of any suspected company abuses in even the parts of the world that are considered most remote.
Therefore, even though corporate social responsibility persists being very vital, there are more pressures from the society for consideration of corporate social responsibility today.
The most important attention for most businesses is the risk of their reputation. This is amplified by the more discernibility as well as condemnation of the practices of the companies, especially by the non-governmental organizations. Therefore, it becomes very necessary for a company to uphold their corporate social responsibility rather than just concentrating their efforts in making profits to its shareholders and owners.
Most people would appreciate working in corporations with stronger ethics. Concurrently, investors will find it easy to invest in companies with sound corporate standings. Obviously, organizations that are socially responsible are distinct from the rest within the same industry.
Preserving the standings of a business and product image has become so vital for businesses due to increasing market competition. Moreover, the images and standings of companies have become more exposed. This implies that companies could get penalized by their customers for whatever they do that is not considered appropriate or socially responsible (Husted & de Jesus Salazar 2006, p. 82).
In seeking to make more profits to its shareholders and owners, a company may lose its values and reputations. This could make it lose its customers and get penalized. Thus, it would not be appropriate for a business to focus only on making profits and ignore its social corporate responsibility.
The management of businesses has to defer the wishes of the shareholders and they must also obey the ethical practices of the company. Making profits should not be the ultimate goal of a company. Actually, the main reason why businesses would want to make profits is to satisfy the desires of their shareholders.
Even though this calls for more focus in making more profits to the shareholders and owners, the management of a business has a responsibility to analyze and deliberate on other factors while making company decisions. Therefore, it would be inappropriate to say that the primary objective of a company should be to increase wealth to its shareholders and owners.
The management therefore needs to identify areas that should be integrated into the company’s strategy and values. This defies solitary needs to make profit. Evidently, organizations should aim beyond making profits to its stakeholders. This will ensure that they satisfy both the desires of the shareholders and owners while at the same time minding about their corporate social responsibility.
For instance, shareholders and owners of a business would not want the business to involve itself in making a product that would lead to destruction of human lives at the expense of making profits.
There are many instances where the consequences of the decision made are not clear. Thus, the management of a business should evaluate the kind of decisions they are making would have adverse effects in spite of bring lots of profits to its shareholders.
The company shareholders and owners should not dictate the decisions of the management simply because the company belongs to them.While seeking to make profits and increasing shareholder’s wealth, businesses must follow the fundamental norms in the society.
This puts the management of a business in a great responsibility to ensure that the company does not go against the core values regardless of how much return the activity is likely to bring to the shareholders. Certain judgments may be required in areas that are ethically leaden and their ethical consequences can be determined together with other aspects such as low profits.
Others would just be illegal and are not allowed morally such that they should not even be allowed in the first place.Companies should consider adopting internal efforts in trying to ensure that theycomply with the ethical norms as part of their corporate social responsibility (Wilcke 2004, p. 203).
If each and every business adopts the principle that their main objective is to create wealth to the shareholders and owners, what is likely to happen? According to some people, corporations may commence involving themselves in activities that could cause harm to the society if they could only increase wealth by doing that. They would come up with policies that go against the norms of the society.
Other people advocate that companies would evade doing harm to other businesses by making sure that they do not develop their interests to the detriment of others. However, contemplating over this principle, possibly, corporations would begin to think more deliberately about their responsibilities to carry out as a business entity.
Actually, while making decisions, the company management has to consider the impacts of their decisions on all the parties that are either affected positively or negatively. They then have to incline to the interests that bear more weight. Therefore, the notion that the primary objective of businesses should be making profits to its shareholders and owners provides a different idea of company ethics.
In this case, the management emphasizes on executing certain responsibilities, which also includes increasing wealth to its shareholders and owners, as well as complying with the ethics that safeguard different parties from any harm.
It is suggestible that businesses might be unethical if they only adopt the principle of increasing profits to their shareholders and owners. Besides, some businesses overlook the authenticity of the governmental and regulatory frameworks. There are agencies mandated to regulate the activities of corporations.
Other people also stress the competitive hazard posed on a company by business unselfishness attributable to the waste-preclusion property of faultless competition and contestability.
In impeccably competitive marketplaces or even those in which liberty of entrance makes defective markets perfectly contestable, an obligatory company will be unable to gain market share to more competent rivals if it involves itself in wasteful acts.The market spontaneously recognizes any expenditure by the company that is assumed only to imply good works as an activity of absolute wastefulness (Smart & Megginson 2008 p. 562).
Such kind of wastefulness diminishes the competitive of a business and finally this would result into insolvency or overthrow by a more effective companies. If a company is able to willingly take corporate social responsibility advancements that are not focused on increasing profits, it is because they have some kind of market power it enjoys.
It is agreeable that organizations should make profits to their shareholders and owners. To be able to meet this objective, they utilize resources/production factors including land, capital, as well as labor. Consequently, they must provide considerable returns to their stakeholders (Schwartz 2011).
The manner in which companies manages and put these resources to use will determine greatly the extent of the main company objectives. This is because the existence and development of the company depends upon the firmness of the society where it conducts its operations. In terms of ethics, the company is aware that its commercial activities may possibly have constructive or destructive externalities that could impact on the welfares its stakeholders.
In case these externalities have destructive effects, the consequential financial, societal, ecological or even political problems need the intrusion of an autonomous supervisor (Cosans 2009, p. 396). The supervisor will work to ensure that both the firm and the stakeholders find the most favorable solution to their problems.
For instance, when a firm causes pollution of an environment, the government as an independent party, may levy taxes on energy use or necessitate that companies observe particular standards of emission. This will ensure that companies internalize the pollution charges incurred by others.
This indicates that even though companies would want to create profits for its shareholders, they still have corporate responsibilities that cannot be disregarded (Craig 2003, p.63). Therefore, to say that the primary objective of a company is to increase wealth of the shareholders is incorrect since there are obligations that should be observed.
Most ecological and societal complications affect the welfare of a business directly. If the company causes environmental pollution, it could be penalized or even worse, closed down. Alternatively, if the company is unconcerned about the poverty that exists around it, there could be upsurge dangers of social instability in a state. In turn, this can surge the economic costs of the company and lessen their margin of returns.
Again, if the company does not pay much attention to trainingto its workers, which is importantor to superiority of education in the society where it obtains its employees from, its productivity may become compromised. In the long run, its competitiveness as well as the margin of the profits could be minimized.
Thus, companies may be put under pressure to advance in social products to be able to endure or develop. This is completely in line with the gauge of social performance as required by the expectations of the society or law.
Essentially, the corporate social responsibility movement puts an extra weight to the influence of humans on the aims of a business to make profits. A business is considered to be creating wealth to if it observes regulations, ethics and is a decent commercial inhabitant (Friedman 2006).
Nevertheless, a lot of research done on corporate social responsibility in many publications shows that corporate social responsibility still does not have a strong definition, theoretical grounds and binding experimental findings.
In addition, there is a missing link between the activities of companies and their assertions that they care. However, the major complications of the corporate social responsibility are that it is automatic, firm and it does not differentiate between the mandatory and optional actions.
More often than not, corporate social responsibility is used to improve business image via infrequent assistance and therefore to counter criticisms of unregulated hunt for making more profits. It can be argued that corporate social responsibility, all in all, has not had the capability of impacting the social environment as some could have individuals’ deliberated (Shaw 2009, p. 571).
For instance, a corporation that was ranked at the top two years ago by a prominent raking company is currently under federal investigation. This is because, it is suspected to have been involved in the abuses of moral and legitimate standards that have been set by the government (Bacher 2007).
Most of the prominent rankings simply pay more attention to which corporations made the highest amounts of profits, their speed of developments, which corporations paid the highest amounts of salaries to their management and which ones had the most wonderful equipment.
It is irrelevant whether the managers of the corporation operate the business to a point of breaking down leaving their stakeholders penniless and vagrant. Probably, it would be necessary for adopt the principle that the primary objective of a business is to create more wealth to its shareholders and owners.
However, the core responsibility of the management of a business should be to increase wealth to its shareholders and owners (Kotler & Lee 2005). This obligation emanates from the fact that shareholders and owners have invested a lot of money into the business with the hope to get more money from them.
Some times in the past, businesses were managed by their own shareholders and owners. With time, evidences show that management mechanism of most businesses broke off from their ownership. This is true to most businesses today, where the management has to be at the forefront in making decisions on behalf of the shareholders.
Conclusion
It is crucial to provide agree that businesses are established to provide good returns to their shareholders and owners. However, there are numerous provisions regarding this. Firms should provide more benefits to their stakeholders and the society at large. It is recommended that the management of a business should have more societal and ethical responsibilities beyond increasing the wealth of its shareholders and owners.
As illustrated earlier, businesses are mandated to determine the obligations and duties of employees. Additionally, they must consider various aspects of corporate social responsibility as indicated earlier.
This is helpful as they try to achieve their legal obligations. It will also help them operate a successful corporate and increase wealth to their shareholders and owners. Precisely, organizations should provide their shareholders and owners with profits and other considerable provisions. The society and other stakeholders should also gain remarkably based on the provisions of CSR.
List of References
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