Question

The cliché we use quite a lot in finance is: there is a need to maximize shareholders' wealth. What is this about? Why is this important?

Answer 1

So , Heard this sentence a lot that shareholders maximization is the primary goal of the business , its is because increasing the shareholders wealth has distinctive advantages . You may agree or disagree with reasons given below but they are considered important and make this a primary goal of companies
So the primary reason for this need to maximize shareholder's wealth is because it is  directly linked to the value of the company i.e the market value of the company , if the market value of company is increasing , its share price must be increasing and that makes it a good investment , also if share price of the company is increasing shareholders wealth is automatically increasing .

By using this cliche as an objective of the company , companies can very well focus on timing of benefits and risk associated with the stock ownership of the company , if the benefits of stock ownership over weighs the risk associated with it , it makes it a good investment , also it helps companies formulate adequate dividend policies so the shareholders are fairly compensated.

Using this as an objective can help us make important decision regarding a company and help us gauge market sentiment regarding new policies and corporate actions through movement in stock price.

This are some of the reasons why shareholders wealth maximization is important but nowadays corporates are following a much broader scope than shareholders theory , they are focusing more on stakeholders of the companies which include it employees , suppliers , environment , sharholders , creditors and almost everyone i.e directly or indirectly linked to the benefit of the company .