Introduction
With the rise of globalisation pressure and sudden increase in the global competition, many organisations are pursuing different objectives to keep operating as a going concern and capture more market share and attention . In this regard, the maximisation of a shareholder wealth or value is important. This is one of the core objectives which every Publicly Limited Company (PLC) wishes to achieve. Therefore, this paper is written to analyze whether the managers of a PLC should maximise shareholder wealth as the only primary objective or should they pursue other corporate objectives as well. Different corporate dimensions are presented in this paper which magnifies the kind of business objectives managers of every PLC are undertaking.
Discussion
In order to serve the purpose of this section, one must understand that Public Limited Companies (PLCs) have different corporate objectives to achieve. However, in finance theory, a PLC should set its corporate objectives to increase the wealth or value for its owners. According to finance, shareholders are the real owners of a publicly limited company. Therefore, according to theory, maximization of a shareholders wealth happens to be the fundamental objective of a PLC .
When investors provide the business with necessary capital and become shareholders, they generally expect to derive satisfactory investment returns by increasing the value of their investment stake. Generally, a PLC benefits its shareholders and maximises their value by a lucrative dividend payout or capital gains by enhancing the market value of the price per share. The managers of the PLC act on behalf of the owners while operating day to day business activities and making viable decisions within the business.
These days, as globalisation pressures are increasing, the maximising of business profits is also an objective pursued by every PLC which is achieved by maximisation of the net profits. It is, actually, a short-term objective whereas increasing the value of the shareholders is a long-term objective for a PLC. Therefore, it is not mandatory that maximisation of profits should be the primary objective like increasing the shareholders wealth. To capture more market share in the face of an intense competition, a PLC now pursues an objective to increase its profitability so that it can retain its business earnings and reinvest them to expand the business operations.
Shareholders are normally concerned about the maximization of earnings which are made available to them after all expenses and costs are paid in full. This can be measured by the level of Earnings per Share (EPS) which is one of the main indicators of the PLC’s profitability and this method is broadly used to measure a firm's success which also dictates the return-on-equity, in theory. Since the level of EPS is usually determined the amount of profitability a PLC has earned during an accounting period, therefore, EPS and profit maximisation are some of the secondary objectives which a PLC goes after to create not only a shareholder value but maximise the stakeholder wealth as well.
Apart from maximising the shareholder value and firm’s profit, PLC now-a-days are working on a secondary objective of accepting feasible projects that add value to the business in addition to value creation for all stakeholders. For this, managers of every PLC employ capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR) etc. Additionally, to get higher returns, managers of a PLC also undertake the objective of risk management. This is so because of the fact that PLC operates in multiple markets and is, therefore, exposed to various degrees of diversifiable and non-diversifiable risks. Therefore, apart from maximising shareholder value, PLC’s managers pursue the objective of keeping the business run smoothly by mitigating the possible risks and managing the overall returns.
Similarly, maximising the shareholder wealth is not the only goal which the managers of a PLC go after. They are also required to generate profits and improve the financial performance and management of the PLC. They are also required to keep enough liquidity into the current assets to pay short-term obligations. Similarly, they are obliged to employ an optimal capital structure into the business so that the financial flexibility and leverage could be maintained to a sustainable level.
The main objective of every publicly limited company has always been to maximize the shareholder wealth by generating as much profits as possible. However, many organisations have started to balance the primary objective of value creation with other environmental and social objectives which help satisfy demands of all stakeholders and help generate more profits. Many managers of some PLCs have indulged into another corporate activity called CSR. This is so because shareholders (as owners) are not the only group among stakeholder who interested in the well-being publicly limited company .
There are other stakeholders who must be taken care of in a professional manner for which managers of every PLC get involved in CSR activities. Customers want to purchase from companies who display the attributes of ethics and honesty. Communities wish that organisations care about the society from whom they derive business revenue. Employees want to feel highly valued and motivated by the company they work for. Business partners want to collaborate and work with those companies having similar ethical values and objectives as well as corporate vision.
Each of these stakeholder objectives and expectations generally share the focus of a PLC’s boards and leaders along with the objective of maximising shareholder wealth and profits. Without caring for any of this group of core stakeholders, it may be difficult to derive and benefit from long-term profits .
Conclusion
After a careful analysis of numerous objective which managers of PLCs undertake, one may conclude that shareholder wealth maximisation is not the only objective which the managers are obliged to achieve. Because the business involves various other stakeholders like customers, employees and community at large, it is necessary that PLCs should undertake the liquidity, risk management, profit maximisation and other objectives as well to keep the business running smoothly and keep competing in the face of a rigorous competitive environment. However, maximising profit should also be undertaken to improve the financial performance of a healthy business.
References
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