Shareholders are the people who own share of stock in a company. Shareholders are the owners of the company, since each share stock entitles owner to say in how the corporation is run. Shareholders elect a board of directors to make the company’s major decision, such as the number of shares to be issued to the public.
Shareholders wealth maximization is maximization of shareholders purchasing power. It is attempt made by a shareholder to accumulate as much wealth as possible, by whatever means possible. Wealth maximization is a long term objective, although is some instances a short term effort may be carried out to provide shareholders with wealth.
Shareholder wealth is the collective wealth right on shareholders through their investment in a company. Members of the board have involved duty to the shareholders and a responsibility to protect their investment by running the company sensibly and in line with generally accepted practice.
Each shareholder holds a small portion of the company. Issuing more shares will reduce shareholders wealth, while providing dividends to existing shareholders will increase it. Investors who purchase stock may take a long position with the goal of profits at a future date, or they may intend to capitalize on their wealth by selling the stock of another party and making money on the transaction.
Companies can determine shareholder wealth by looking at overall company value in term of the current value per share and number of stocks issued. Sometimes board members make strategic decision that will temporarily reduce shareholder wealth, such as investing in new facilities or technologies. These investments will add value later, and are acceptable to shareholders because they demonstrate a desire to grow the company. Bad business decisions may result in losses with no projected future gain, and can be a cause for concern.
Law is also an important part of the board members use to run the business. They do not focus on making the company larger for its own sake, but on growing the company to benefit the shareholders by increasing their wealth. They must undertake decisions on behalf of the group of people who are not involved with daily operation and have a very strong interest in the company’s future. Sometimes this requires balancing conflicting needs, like wanting to pay dividends but also wanting to reinvest to help the company grow and increase share value.
In shareholders wealth maximization, the business strategy focuses on building wealth for shareholders as a first priority, even if this leads to decision that may not always immediately benefit the company itself. The member of the board must be careful because they do not want to undermine the company and set it up for future fall down, but they also want to maintain shareholder satisfaction. This can sometimes be a difficult act, especially because some decision may have unexpected result, as not every business investment has predictable outcome.