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Corporate Finance: Maximizing Shareholder Wealth

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Question: What would you do if the goal of maximizing the stock value was in conflict with other goals (i.e. customer and employee safety, the environment)? What steps would you take to avoid unethical or illegal behavior? Why?

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Maximizing shareholder wealth and ethical behavior are two of the most important principles within finance. The normal thought process is that maximizing shareholder wealth ranks as the most important because we are providing the highest return possible to our owners - the shareholders. At the same time. logic and courtesy, and sound business practices dictate that we use integrity and ethical business practices to further our reputation and standing within the business community.

As a former CFO of a large distribution facility, I would opt to insure ethical behavior and standards for operating - not in conflict with our primary goal of maximizing shareholder wealth, but in concert with running an efficient and well thought of organization. Remember that we have corporate ...

Solution Summary

This solution discusses how to balance seemingly conflicting financial principles of maximizing shareholder wealth and ethical behavior.

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a. discuss an aspect of the relationship between corporate financial management theory and the maximization of shareholder wealth.

b. '...[O]ne might suppose that capital creates wealth - which is strange because a pile of capital sitting there creates nothing. Yet capital providers (stockholders) lay claim to most wealth that public corporations generate. Corporations are believed to exist to maximize returns to shareholders.' Kelly (2001)
Discuss whether a different assumption for the underlying purpose of the existence of public companies would be desirable, rather than maximization of shareholder wealth.

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