根据传统的金融范式，企业管理主要是面向最大化股东财富（V. Sivarama奎师那，2009年）。一些假设认为竞争激烈的市场上的经典。由于股东是剩余索取者，他们都是独一无二的。有没有这样的事先明确的或隐含的索赔。有一个公司的员工，供应商，客户，贷款人等股东承担所有的风险与任何项目或新投资交易，直到所有的参与者都满意，他们无权以增加他们的财富，因此它是公平的，他们得到相应的回报。此模型还支持一种假设，即没有外部或损害的是任何非参与者的交易。大力支持这个假设，股东财富最大化，不仅有利于股东，但也为社会，股东获得的实际价值后，推导出满足所有的人都参与的企业和资源使用的“（V. Sivarama奎师那，2009年）。
Financial Essay Overview
Financial position of the company cannot explain alone for its outperforming situation. Several other macroeconomic factors, qualified management and employees, expected growth rate and brand value play significant role describing the outstanding performance of the company over its competitors (John Gerzema, Ed Lebar, and Anne Rivers, Young & Rubicam Brand, 2009). However it is not an easy task to determine exact intangibles.
Corporate finance deals with the financial or monetary decision of an organization and is used as the most significant tool to analyze and support financial decision making process with a primary objective to maximize shareholder’s wealth (Aswath Damodaran). In addition managing financial risks are also associated with the corporate finance roles and responsibilities.
Managing firm’s cash flows, present value or future value, profitability, debt/equity financing, etc. are considered as the core function of the management role under corporate finance. Organizations use short-term and long-term decisions and techniques for their financial decision making process. Project investment or capital investment are considered as the long term planning that consist of financing methods whether to use debt or equity to fund the project; whether to pay dividend to stockholders or not in order to maximize the shareholder’s wealth, etc. on the other hand decisions on current asset and liabilities are considered as the short term decision making process for any organization. It is focused on maintaining cash, inventories, short term funding or loans, etc.
Corporate Finance: roles and responsibilities
Corporate finance is often associated with Investment Banking that plays a role of to evaluate the organization’s financial requirements and then accordingly provide the best possible ways to raise the capital that could meet the requirements of any project. Such principle roles are performed by the following activities (Shaun Beaney, 2005):
• Raising start up or seed capital; expansion capital or development funding
• Mergers, acquisitions, takeovers, and demergers
• Management buy-out or buy-in, spin off activities
Several theoretical and empirical studies already done in financial economics have described and accepted that the normative and ideal goal for any enterprise is maximizing shareholder’s wealth and it has been experienced that many of the enterprises have considered as the most significant factor for decision making process (Brealey and Myers (2003), Brigham and Ehrhardt (2002), Moyer, McGuigan and Kretlow (2003)). Jensen (2001) has strongly argued that maximizing the market value of the firm is the most purposeful and single-valued objective function for effective and efficient management.
Maximizing shareholder’s wealth has been considered a desirable goal from the society perspective as well, not only from the shareholder’s perspective as it helps to lead the society’s wealth in turn along with the firm’s wealth (Jensen, 2001).
The Finance Paradigm
According to traditional finance paradigm, corporate management is largely oriented towards maximizing shareholder’s wealth (V. Sivarama Krishna, 2009). Several assumptions have considered on the classic competitive markets. As shareholders are residual claimants, they are unique. There are no such prior explicit or implicit claims. They are not entitled to add in their wealth until all the participants are satisfied who have transactions with a firm-employees, suppliers, customers, lenders, etc. Shareholders bear all the risk associated with any project or new investment, thus it is fair for them to get rewards accordingly. This model also supports an assumption that no externalities or damage is done to any non-participant in the transactions. This assumption strongly support that shareholder’s wealth maximizing is not only good for shareholder’s but also for society as the actual value that shareholders receive is derived after satisfying all the people involved in the firm and resources used(V. Sivarama Krishna, 2009).
Traditional finance paradigm considers competitive markets with no imperfections. Corporate finance research and works have provided various effects of market imperfections on shareholder’s wealth. Agency relationship and information asymmetry are the two areas that have been focused on the development of shareholder’s wealth in corporate finance with respect to imperfections in the shareholder’s transactions. Titman and Wessels (1988) has explained in their work that corporate capital structure and financing decisions are interrelated with respect to the relationship between the firm and its shareholders. This explanation was also supported by Banerjee, Dasgupta and Kim (2008) in their recent work.
According to Friedman (1971), Sternberg (1991) and Jensen (2001) shareholder wealth maximization concept is seen as an ethical and moral approach by the firms. Moreover, management is focused on maximizing the shareholder’s wealth considering Corporate Social Responsibilities (CSR). Along with firm’s increasing value, financial positions with respect to preferred stocks, debt or equity, and warrants are known as significant factors enable to increase shareholder’s wealth. Society also gets benefited in maximizing society’s wealth (Jensen, 2001). Increasing shareholder’s wealth has been recognized and accepted as the normative goal for many enterprises (Stemberg, 1999).
The Stakeholder Theory
Freeman (1984) as the original proponent of this theory has argued in his work that corporate management should not only look for shareholder’s perspective, but also focus on beyond that in order to provide the better value and management in the firm. He has added that a stakeholder is a person who can influence the decision making process with respect to financial decisions or get affected by any financial activity by the firm. This definition by Freeman has turned into hackles among the critics. Jenson (2001) has criticized this approach saying that according to Freeman’s definition even thieves and terrorists can be considered as stakeholders.
In order to clarify the exact meaning of shareholders, Phillips (2003) has proposed shareholders in two types who could contribute to the value creation of the firm. Normative stakeholders who engage in direct transactions with the firm while Derivative stakeholders who might influence the firm or get affected by the firm
Normative shareholders are considered as an obligation for corporate management with respect to financial decision making. However, in order to increase the market value, firms must be focused on derivative stakeholders as well (PFW, 2003). According to Kaler (2004) only contributive stakeholders should be concerned of. There have been essential premises identified by Jones and Wicks (1999) that signifies that corporations have strong relationship with many stakeholders and is concerned with processes and outcomes. In addition, all legitimate stakeholders have been provided value in managerial decision making process.
Donaldson and Pretson (1995) have also added in stakeholder’s theory by proposing three classes: instrumental, normative and descriptive. Instrumental prospects of the theory imply that there are always certain outcomes as a result of management actions. These further states that corporate management must attend to stakeholders in such a way so that firm’s other objectives and goals can be achieved, mainly maximizing shareholder’s wealth (PFW, 2003. On the other hand normative class suggests that managers must behave in certain ways considering corporate ethics. At the last descriptive class has focused on describing the actual behavior of the managers. Jones and Wicks further classified these versions as ethics based (normative) and social science based (instrumental and descriptive). They found instrumental stakeholders theory more promising.
PFW (2003) has pointed that shareholder wealth maximization is accepted to be the firm’s primary goal. Moral and ethical prospects for the shareholders are emphasized under normative approach of stakeholder’s theory. This can be considered as critics for organizations that focus on maximizing shareholder’s wealth as their primary goal.
Maximizing Shareholder’s Wealth
Based on the various studies and research explained in the report here, it is true to say that management must focus primarily on shareholders. Shareholders are concerned with the value of the firm and play a vital role in funding for existing as well as new operations or projects. Top management executives such as CEOs, MDs, GMs etc., gets enrich themselves following by the management actions at the expense of shareholders.
It is quite difficult to evaluate of value any shareholder by the management directly as it heavily depends on the financial position, performance, present value, future value, etc. Ruth Bender and Keith Ward (2008) have identified few drivers that help to analyze and evaluate the shareholder’s value:
- Turnover or revenue
- Operating performance: operating margin
- Tax policy or tax rate
- Incremental capital expenditure
- Working capital fund
- Cost of capital/financial structure
- Length to have Competitive advantage