Profit-making organizations have to attain various objectives, but their most important goal is to maximize the wealth of their owners or shareholders. This paper will explain how one can measure the achievement of this goal and the major decision variables that financial managers should take into account.
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Furthermore, it is necessary to determine if this objective is always justified and if it should be reconciled with the interests of other stakeholders such as customers or employees. These are the questions that should be discussed. Overall, one can say that the wealth of shareholders has to be the main goal of them firm, but there are stakeholders whose needs cannot be neglected.
First, it should be noted that mere increase of profitability should not be the only priority for financial managers and corporate executives because it does not always maximize the wealth of shareholders. The thing is that profitability does not include such a factor as risk which influences the rates of return per each share (Gitman, 2009, p. 13). Moreover, profits do not always increase the price of the stocks (Gitman, 2009, p. 13).
Therefore, the goal of financial managers is to increase the income of those people who own the stocks of the company. It can be done by raising the price of the stocks. Every decision that managers or executives take should be oriented to this goal. Thus, the interests of owners should be the topmost priority for financial managers and corporate executives.
This wealth is usually measured by the share price of the stocks. It is believed that the price of stocks reflects such things as the timing of cash flows, risks, and the magnitude of these flows (Gitman, 2009, p. 13). This is the main indicator of the shareholders’ wealth. While taking any decisions, financial managers should consider two important variables, namely cash flows or returns and risk (Gitman, 2009, p. 13).
These are the most important factors that affect the price of stocks. For instance, high returns usually result in the increase of stock prices. In turn, higher risk reduces the price of stocks and increases the amount of compensation that should be paid to stockholders (Gitman, 2009, p. 15).
Therefore, financial managers should find balance between cash flows and risks. Every decision or alternative that does increase the price of the stock has to be rejected. This is the main principle that decision-makers should follow while developing strategies of the firm or introducing new products.
To a great extent, I agree with this goal. The thing is that every profit organization should first try to maximize the income of people who invested money in it, in other words, one can speak about shareholders. If this objective is not achieved, the very survival of a firm can be imperiled.
Moreover, the owners of stocks invested either money or effort in the firm, and their interests have to be the most important ones. Such an approach can be ethically acceptable and it is quite understandable. Nevertheless, one should take into account that there are other stakeholders whose interests cannot be disregarded; in particular, one can speak about clients and workers who can significantly influence the performance of the firm.
For instance, if the management tries to reduce the company’s operational costs only by downsizing the personnel, they can lose the loyalty of these workers, and some good employees may eventually leave the company. As a result, the firm will have to struggle with increased turnover that can very harmful for its organizational performance. Furthermore, lack of attention to the quality of products or services, may lead to litigation and loss of market share (Gitman, 2009, p. 17).
In the long term, such an approach can result in the decrease profitability and reduced price of the stocks. Therefore, one can say that the wealth of shareholders should be the first priority for financial managers, but this goal should be reconciled with interest of customers or employees; otherwise, the wealth of shareholders may eventually decline.
Thus, senior managers should think about various stakeholders who can contribute either to the success of the firm or to its failure. This is the most important issue that managers and executives should remember.
Overall, this discussion shows that managers have to find ways of increasing the wealth of owners or people who invested capital in the firm. This is the main objective that every profit organization has to pursue; otherwise it is not likely to survive in the long term. Nevertheless, one should not forget that there are other groups of people who can shape the organizational and financial performance of a company, namely clients and employees.
By overlooking their needs, managers can achieve some short-term improvements and even increase the price of stocks. However, this strategy can weaken the company’s competitiveness and lost its positions in the future. This is the main risk that decision-makers should bear in mind, if they want to ensure sustainable growth of the firm.
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Gitman, L. (2009). Principles of Managerial Finance. New York: Pearson Education, Limited.