Building Your Business Operations & Success Accounting What Is Shareholder Wealth Maximization? By Rosemary Carlson Updated on December 30, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by Hans Jasperson Fact checked by Hans Jasperson Hans Jasperson has over a decade of experience in public policy research, with an emphasis on workforce development, education, and economic justice. His research has been shared with members of the U.S. Congress, federal agencies, and policymakers in several states. learn about our editorial policies In This Article View All In This Article How Shareholder Wealth Maximization Works Ethics of Shareholder Wealth Maximization Pros and Cons of Shareholder Wealth Maximization Frequently Asked Questions (FAQs) Photo: VioletaStoimenova / Getty Images Shareholder wealth maximization is the idea that the main goal of a business's managers should be to increase its stock price as much as possible. Key Takeaways Shareholder wealth maximization means that a company’s primary goal is raising its stock price.Shareholder wealth maximization can be a good thing because it gives a firm's managers a clear objective that builds value.However, shareholder wealth maximization can be a negative if it encourages questionable behavior and decisions at the expense of society, the environment, and the company's own long-term sustainability. How Shareholder Wealth Maximization Works When business managers try to maximize the wealth of their firm, they are actually trying to increase the company's stock price. As the stock price increases, the value of the firm increases, as well as the shareholders' wealth. Shareholder wealth maximization is a principle of corporate governance that sets one primary goal for business managers. Who owns a corporation? Shareholders do. These are the individuals, businesses, and institutions that have an ownership interest in a company after purchasing shares of that company's stock. Even if your business is a one-person shop, you are the shareholder based on your invested interest in your company. Because shareholders own the firm, they are entitled to the profits of the firm. Increasing shareholder wealth is the appropriate goal of a business firm in a capitalist society, which is when there is private ownership of goods and services by individuals. Those individuals own the means of production by the business to make money. The profits from the businesses in the economy go to the individuals. Role of Business Managers People often think that the managers of a firm are the owners. That may be true in the case of a small business or partnership. In a larger business, however, there may be many levels of management, and they do not necessarily own the firm. Aside from their salaries and benefits, they only profit from the business if they own shares of stock in the company. When employees are also shareholders, they tend to have a greater sense of responsibility to the firm. Consequently, many companies encourage employees to become shareholders. In fact, some businesses offer shares of stock to their employees at a discount through an Employee Stock Options Plan (ESOP). Note Because the managers of a firm are directed and guided by a board of directors, and because they do not profit directly from the firm unless they are also shareholders, conflict can sometimes arise between stockholders and managers. This conflict is called the agency problem. Managers serve as agents of the shareholders. If there is an agency problem, it is imperative to find a resolution as soon as possible to prevent problems within the business that can impede performance. Why are business firms not seeking profit rather than an increase in share price? One reason is that profit maximization does not take the concepts of risk and reward into account as shareholder maximization does. The goal of profit maximization is, at best, a short-term goal of financial management. Example of Maximizing Shareholder Wealth For instance, a company that governs itself under the guiding principle of creating a company with unending intrinsic value would be maximizing its shareholders' wealth. That's because every action it takes would be dedicated to increasing the share price, which makes the company and its shares ever more valuable to those who invested in it. The goal of increasing stock price would supersede all other business goals, not to mention social and environmental goals. Ethics of Shareholder Wealth Maximization There is an idea that businesses focused on money are greedy and don't care about social issues or that socially responsible businesses can't increase stock values. But a company can be both profitable and socially responsible. Consider the 2008 Great Recession and one of its main causes, the subprime mortgage crisis. These banks were more concerned about their investment portfolios instead of properly loaning money to customers, which is their charge. Those investment portfolios were filled with toxic assets, which eventually compromised the operations of many financial institutions and caused the failure of several big banks. As a result, their share prices fell right along with them. In this case, greed and a lack of social concern led to their downfall. On the other hand, after almost failing during the Great Recession, automaker GM turned itself around, strengthened its ability to withstand future recessions, and developed "greener" vehicles. As a result, it realized an increase in its share price. Note Business firms cannot exist and profit in the long run without being socially responsible. Pros and Cons of Shareholder Wealth Maximization Pros Can create long-term value Aligns shareholder and manager goals Provides a clear framework for decision-making Cons Other business goals can suffer May go against public interest Can conflict with manager goals Pros Explained Can create long-term value: When a company's managers are focused on increasing its share price, they naturally look for opportunities to increase the overall value of the company.Aligns shareholder and manager goals: Maximizing shareholder wealth is a way to align the goals of the shareholders with those of the managers.Provides a clear framework for decision-making: This principle makes it easier for business managers to identify a route forward because their goals are clear and measurable. Cons Explained Other business goals can suffer: By nature, a primary goal means all other goals must be secondary. An unrelenting focus on increasing stock price can block the advancement of a business's other goals.May go against public interest: As in the case of the Great Recession of 2008, prioritizing wealth above all other goals can have detrimental and unintended consequences.Can conflict with manager goals: A business's managers may see a stronger incentive to put their own welfare and job security ahead of increasing the company's stock price. These conflicting priorities can make it difficult to maximize shareholder wealth. Frequently Asked Questions (FAQs) How do you measure shareholder wealth maximization? You can measure shareholder wealth maximization by finding the value of the company's common stock. You can measure progress on a per-share basis by seeing how much the company's stock price has increased, although you must account for any stock splits (or reverse stock splits). Why is shareholder wealth maximization important? Shareholder wealth maximization is important because it provides a guiding objective (subject to laws and ethical norms) upon which a firm's managers can base their decisions. This goal gives the managers clear direction in the face of otherwise competing interests and priorities. It has become one of the most common norms in corporate governance. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Securities and Exchange Commission. "Employee Stock Options Plans." Federal Reserve History. "Subprime Mortgage Crisis." Wharton School of the University of Pennsylvania. "The Auto Bailout 10 Years Later: Was It the Right Call?" Harvard Law School. "Why Shareholder Wealth Maximization Despite Other Objectives." Florida Law Review. "Shareholder Wealth Maximization and Its Implementation Under Corporate Law," Page 6.