Question

Actions that maximise profit may not maximise shareholder wealth’. Explain the statement. Which of the two should be the goal of the company and its management?

Answer 1

Actions that maximize profit will not always be maximize the overall shareholders wealth,because actions of maximizing profits can sometimes be full of unethical methods and fraudulent practices which are involved like window dressing of books of accounts in order to inflate the books of accounts to present a rosy picture of the company and save the jobs of the management people.

Management should always be focused at wealth maximization rather than profit maximization because profit maximization is a narrow concept which is focused at short term objectives but wealth maximization of the shareholders is a long term perspective and it is focused at maximization of the wealth of the shareholders in the long run in the form of capital appreciation, when the company will be growing and expanding.

Goals of of companies management should always be maximization of the value of the company and protection of the interest of the stakeholders which will be helpful in long run sustainability of Organisation .