What does it mean to say that managers should maximize shareholders' wealth "subject to ethical constraints"?...
What does it mean to say that managers should maximize shareholders' wealth "subject to ethical constraints"? What ethical considerations might enter decisions that result in cash flow and stock price effects that are valued lower than they might otherwise have been?
Homework Answers
Answer :-
The Ultimate objective of company / corporation is to maximize the wealth of shareholders of the company / corporation. The managers must maximize the wealth of shareholders in a way that leads to increase or maintaining market price of shares, avoiding high level of risks, reducing overall operating costs, paying dividends on timely basis to shareholders and strive for growth of organization in long-run. This phenomenon / concept is referred to as "maximizing wealth of shareholders but subject to ethical constraints".
Here are some of the ethical considerations in objective of maximizing shareholders' wealth:-
1) The Shareholders of company can motivate the managers of the company to reduce the operating cost of company by giving their valuable suggestion. Reduced operating cost will help to achieve the objective of shareholder wealth maximization.
2) The Shareholders of company can help the managers in preparing the plans for the future growth and development of the company.
3) The manager of the company has to avoid unnecessary risks while planning for long-term business operations. Thus, Shareholders of company can help manager of the company in selecting less level of risks as compared to high level of risks which may prove injurious for the company. Thus, by helping the management in avoiding high level of risks, Shareholders can encourage the managers of company to act in a way consistent with the objective of shareholders wealth maximization.
4) The Shareholders of the company can motivate managers to increase the sales potential and earning capacity of the company by giving their valuable advice. Increased profit earning potential of the company will increase the market price of shares and accordingly shareholders wealth at large scale. Thus, the objective of maximization of the wealth of shareholders of the company is achieved.
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