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Corporations usually exist as a large business company or group of organizations that are recognized by law as a single unit. Corporations can be made up of one person and it is known as sole corporations or it may include a group of people and it is therefore termed as aggregate corporations. Corporations must have at least one owner, but there is no upper limit. The owners of a corporation are known as shareholders or stockholders. The ownership interests of the shareholder in a corporation are divided into units called stock, shares or shares of stock (Scully, 2005, p.12). If the corporation shall issue stock, it will be therefore governed its shareholders, either in a direct way or indirect way.
The rules governing corporations apply equally to all corporations whether it is Sole Corporation or Aggregate Corporation. The board of directors carries the larger part of decision making for the corporation aiming at meeting all the interests of the shareholder. Corporations do not actually exist as involving a person, and it grants a very little protection to the real people that are involved in running the corporation. This state of being legally responsible is the main advantage of incorporation and these as lead to incorporation of many smaller businesses especially those businesses they that are governed by rule of court.
Shareholders are the legally owners of shares in a company or business or any other institution. They may also be referred to as a stockholder. They only own the stock, but not the corporation itself. They are given special rights depending on the class of stock. These rights are rights to sell their shares, nominate directors, buy new shares, denying the sell if an asset, and right to dividends (McSweeney, 2008, p.58). Stakeholders are directly involved in the actions taken by the business as a whole.
The shareholder Value is a business term meaning that the overall determinant of a company's success is to profit their shareholders in increasing their wealth through payment of dividends by increasing the stock price. To achieve this concept, there should be planned actions by the management whose ultimate results are more shareholders returns than the cost of a company's fund. The shareholders money should be used to earn a higher return than they could earn themselves by investing in other assets having the same amount of risk (Rappaport 1986, p.17). Maximizing shareholder value is a management principle stating that management should put the interests of shareholder in its business decisions the first priority.
Maximizing shareholder value (MSV) is a guide to many businesses decisions and is becoming of interest to study in many business schools. The understanding of shareholders interest has become of much importance. The maximization of shareholder value is more preferred at the industrial level rather than at the individual firm level by the shareholders. The assumption that the shareholder interests are like the share price is known to be not applying to a greater extend. An example was stated by Scully (2005, par 2) saying that "if a firm is a takeover target and its share price spikes in the short run that might appear to the shareholders interest". In contrast, if that same takeover strategy results to the downfall of the company, then it will be of no importance to the shareholders who have varied ambitions.
The shareholders, including institutional investors, that are more diversified do not maximize their returns basing on the performance of a single firm since the firm can face various external problems that can lead to its failure. Though even after noticing these difficulties, the interests for managers to exploit industry performance have not been practiced. There has been a critical view by the business and society while considering shareholder interests on the way it balances its interest with the interest of other stakeholders taking into consideration the profitable side of these maximization in the society. Shareholders are said to be socially situated being the diversified investors and consumers, and citizens. As consumers they are they are interested in knowing whether the industry concentration will lead to rise in prices, while as citizens, they have an interest in collection of government tax revenues.
Benefits of maximizing shareholder value
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Privately owned organizations' primary goal is to maximize revenue and profit, while the public limited company that has numerous shareholders, then the primary goal is to maximize shareholder affluence. The search of maximum shareholders' value optimizes economic as well as social benefits for society at large. The performance of corporate governance is expected to improve upon implementation of the principle of maximizing shareholder value. Before, the corporations tended to retain both the money they had earned and the people whom they employed, and they reinvested in physical capital and complementary human resources. Due to the rise of new competitors and growth of the corporations, the retaining of reinvestment experienced problems.
From a report released by financial economists it was concluded that, when the corporate enterprise maximizes shareholder value, everyone including workers, consumers, suppliers and distributors will benefit (Lazonick and O'Sullivan, 2000,p. 16). The shareholders are the principle owners of corporations and their interests should be kindly observed. The managers who are the main controllers in the allocation of corporate resources and returns should first consider these interests of shareholders. When corporation are involved in maximizing shareholder value, it is not only the interest of shareholders that are enhanced but also the economic status at large. Any revenues or profits that the corporation generates that promote economic functions are largely contributed to the performance of shareholder.
If the corporate managers cannot allocate resources and returns to maintain the value of the shareholders' assets then the 'free cash flow' should be distributed to shareholders who will then allocate these resources to their most efficient alternative uses. Creating of shareholder value have enhanced profitability and higher market valuations of the given investment. Through the release of labor and capital from the corporations, there have been establishment of more industries. The labor and capital markets can relocate their current resources and establish new firms that are fast, flexible and innovative since they are not bonded to major corporations. The high rates of return on corporate stocks are achieved when shareholder value increases income inequality.
The value drivers that managers use to influence shareholder values are; revenues, operating margin, cash tax rate, incremental capital expenditure, investment in working capital, cost of capital and competitive advantage period. Some of these elements show clearly that short term profit maximization doesn't necessarily increase the shareholder value. Focusing on shareholder value can benefit the owners of corporation financially, but it does not provide a clear measure of social issues such as employment, environmental issues or ethnical business practices. Other stakeholders like customers can be disadvantaged through establishment of shareholder values since the company shall concentrate much in improving shareholder value, and decline in providing support for old and new products.
Through pursuit of enlightened set interest and to maintain market -based relationships between the corporations and its entire stakeholders, in pursuit of maximal value for the shareholders, will result in the maximization of societal wealth (Lazonic and O'Sullivan, 2002, p.14). Any organization pursuing self interest and economic efficiency should take responsibility of developing society. A company is not only made up of share holders, but it also involves various resource suppliers who have got a common interest of increasing their commonwealth. Developing strongly motivated employees and practice of high levels of trust within the organizational level in pursuing the interest of all stakeholders in the organization will eventually lead to moral improvement in society. Trust is first built among the employees of a company and external environment that includes customers, suppliers, government and interest groups before motivating them.
The importance maximizing shareholder value is central aim of corporations as required not only by the shareholders rights but also for economic efficiency and social wealth grounds. A company's main aim is primarily to maximize shareholder value, within what is illegally permissible. Unproductive companies can be transformed into innovative, entrepreneur, efficient companies and countries if they aim everywhere and every time to create the greatest value for shareholders. The achievements of successful corporations have been attributed to their commitment to maximizing shareholders and these which fail are said to have had less focus on maximizing shareholder value. It is established that nearly all the economic growth that has occurred since the eighteenth century is almost attributed to innovation inspired by a desire to maximize shareholder value. The different groups affected by an organization's action are the stakeholders. The corporate social responsibility involves the economic, legal, and discretional organizations responsibility and business ethics more often than not focuses on the moral judgments in addition to behavior of individuals and groups in an organization.