What factors drive dependent and interdependent behavior in leaders in organizations?
The primary objective of business entity is to a make profit and maximize generation of wealth. Managers are often faced with the challenge of maximizing shareholder wealth. Conversely, it is quite imperative that the corporation engage in corporate social responsibility and ensure that conflicts of interest are well addressed to bring financial success for the company (Adams, 2008). By and large, Corporate governance plays a critical role in appropriating organization responsibility towards the shareholders, stakeholders, employees, suppliers, creditors and as well as customers.
However, this paper addresses corporate governance with special reference to shareholder wealth maximization. On the same note, identify countries in which firms have differing goals from the U.S. Finally, the paper brings out the difference between stakeholder focus versus shareholder focus goals.
Paradigms regarding corporate finance in the US are built upon the notion that a corporation should maximize shareholders value (Brigham & Houston, 2011). However, there are other objectives that organizations pursue apart from wealth maximization. For instance, Organizations rationale for licensing by the government is the generation of social benefits. Most organizations formulate business strategies that aim at benefiting the shareholders and at the same time maximize the social benefits. Thus the financial performance and social performance should be optimistic. Organizations will, therefore, engage in Corporate Social Responsibility to justify company contribution of social goods in addition to the primary objective of wealth maximization (Shleifer & Vishny, 1997).
Another alternative goal for companies is business sustainability. Managers in most organizations focus on corporate sustainability. They develop strategies and objectives that aim at enhancing the organizations reputation and, therefore, promote sustainability and perpetual existence of such firms (Deng et al., 2013). Finally, corporations across the globe focus on business ethics and good customer relation, in order to obtain an edge over their competitors in the market. Firms often engage in ethical business practices and keep treating their clients well to enable them increase their customer loyalty and also win new customers.
However, Firms in Less Developed Countries such as India, Kenya, Congo have differing views as compared to the U.S. Firms in such countries have different objectives apart from those developed on the finance theory, which perceives that the primary objective is wealth maximization and the stakeholder’s theory that primarily focuses on business ethics and social responsibility.
Firms situated in such areas focuses on business sustainability and in diversification of business activities as there exists numerous opportunity in such countries. Such firms also focus in eradicating poverty by helping solve some of the problems in less developed countries. For instance, firms in such areas employ a labor intensive method of production rather than capital intensive method. Such strategies help solve unemployment problem in their countries.
There exist some similarities between stakeholder focus goals and shareholder focus goals. In both stakeholder and shareholder focus goals, they paradigms perceives that value creation is not only good for shareholders but also the society (Stakeholders). Since company revenue can only be valued after compensating each and every individual involved as well as the society where resources used were obtained.
However, shareholders focus goals differ from stakeholder focus goals since shareholder focus goals are built upon competitive market assumption. That is, all parties having a transaction with the firm are willing and are compensated fairly by market prices for the products or services they provide (Jones & Felps, 2013). On the other hand, stakeholder focus goals are built based on business ethics, business transaction as well as the society. Stakeholder focus goals look beyond the shareholders of the organization and propose that managing a firm should be based on stakeholder’s perspective.
Shareholders focus goals may have the problem of moral hazard (Deng et al., 2013). This arises from the fact that, shareholder focus goals main objective is wealth maximization. Therefore, the firm may engage in unethical behavior as long as they obtain wealth and create shareholders value by maximizing the market value of all financial claims such as warrants, debt, and preferred stock etc.
Stakeholder focus goals, on the other hand, may experience problems of less maximization of wealth as the company is not only concerned with wealth maximization but also stakeholders and the society at large.
In conclusion, management should merge both shareholder focus goals as well as stakeholder focus goals. This ideology will enable a company to create value through wealth maximization as well as develop a good reputation by engaging in corporate social responsibility and appreciate all the stakeholders of the organization.
Adams, S. (2008, February). Fundamentals of business economics. Financial Management (UK), 46–48. Retrieved from Business Source Premier database.
Jones, T. M., & Felps, W. (2013). Shareholder Wealth Maximization and Social Welfare. Business Ethics Quarterly, 23(2), 207-238.
Deng, X., Kang, J. K., & Low, B. S. (2013). Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of Financial Economics, 110(1), 87-109.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783. Retrieved from Business Source Premier database.
Brigham, E., & Houston, J. (2011). Fundamentals of financial management. Cengage Learning.