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Should the primary objective of management be to increase the wealth of shareholders and owners?

Management has become a very important aspect that assists business firms in strategizing growth and improving performance. Business oriented organizations are often comprised of different groups or segments of people who are important in the general outcomes of the business. Among the people or teams that form up the business organization are the entrepreneurs and shareholders of the organization. These two groups hold substantive amount of financial assets of the business. But are these the main shareholders of the organization? This is one of the main questions that are bogging the managers of firms and complicates the exercise of management. But it also has to be remembered that management is a wide concept especially so when it is applied to business firms. There are different aspects of management which concentrate on a number of functions in the organization for instance finance management which centers on finances of the organization (Geoffrey, 1994)
Shareholders and business owners often concentrate on this function. Shareholders of the organization are often interested in the financial worth of a firm because this is what assures then of getting tangible returns out of the investments that they make in the firm (Beurden and Go¨ssling, 2008). Therefore, in this paper, it is going to be argued that the essence of management in the firm is not only to increase the wealth of shareholders and business owners. Management is a large function that concentrates on the wellbeing of the entire business including the shareholders, the employees, the real business owners and the general corporate environment which have to benefit from the business outcomes. An ethical model of doing business is going to be discussed to help in explaining the essence of sustainable business practices which form the core of management in a business firm. Management as an organizational exercise concentrates on the sustainability of the business and the increases of the wealth of the firm owners and shareholders is just one of the many factors of sustainability in the organization. Shareholders will always remain interested in the general financial outcomes of the organization because they will gain more when the firm makes more wealth (Geoffrey, 1994). However, there are many pointers to whether the firms are accumulating more wealth or not. All these point to different aspect of management in the organization. The accumulation of wealth is often an end product of the entire management exercise in the firm (Cosans, 2009).
Overview of the role of the business – wealth maximization and corporate social responsibility in management
For a long time in history, it has been argued by experts and scholars of business management that the main purpose of establishing business firms is making profits. This is a rational argument since no one can invests in a business venture without the motive of making more money or wealth in terms of the profits that are expended by the firm. It is also assumed that when business firm are making profits, the firm is most likely to benefit the society more via increased employment. But, it should be noted that business firms operate within the environment and must respect and contribute to the environment (Chapman III and Whitmore, 1974). Business owners and other shareholders need not only to concentrate on the accumulation of wealth but also on the environment that helps the business in making the wealth. There are many raging debates of the extent to which management of firms have to embrace social responsibility of the businesses which they are managing. In fact, it is argued that social responsibility is key to businesses it posits a good picture of the business thereby helping the firm to attract more customers thence fetching more profits (Hite and Vetsuypens, 1989).
According to Chapman III and Whitmore, 1974, more researchers are still interested in researching about the profit motives of businesses vis-à-vis the management through the embrace of corporate social responsibility. It is evident that businesses are managed in order to maximize profits. But profits cannot be generated for a long time if at all business practices are not structured in a way that they cater for the needs of the surroundings. Therefore, the maximization of wealth for any business cannot be easily separated from the corporate social responsibility of businesses (ssSmith, 2003). However, it is argued that because of the prevailing competition in the business environment, modern firms are responding by concentrating on activities that directly increase the wealth of the business. Whether this works well for the sustainability of profits of these organizations remains a subject of debate.
Firms that are operating on a large-scale have been struggling to clearly define ownership and control in order to help the in pursuing the objectives. These objectives often center on the creation and sharing of the wealth of the organization. One thing that characterizes the shareholders and business owners is that they are more often than not interested in making as much wealth as possible from the business. Unfortunately, this often puts them at loggerheads especially at times when they fail to concur on how to share the profits or wealth of the business. In order to make more gains from the business, the business owners will mostly pursue objectives which are considered to be inconsistent with the motives of the shareholders which are full maximization of wealth (Chapman III and Whitmore, 1974).
Manager and shareholder conflict have remained elusive and are the reasons why firms are engaging in contracts and market control mechanisms so that they can be able to reduce the existent conflicts. This aims at reducing what is referred to as managerial opportunism on the side of the business owners. Indeed, wealth maximization remains to be an empirical issue in the management of business firms. Shareholders will always monitor the operational functions of the organization so they can always be updated on the amount of wealth they is being accumulated by the business (Hadani, Goranova and Khan, 2011). This affects the manner and direction of management in firms. The whole exercise of management is highly watered down because of the loss of objectivity in management. Management needs not be subjective but objective; concentrating on wholesome aspects which are likely to make both the internal and external environment of a firm favorable. Wealth maximization has to be treated as just one of the strategic issues in the management exercise and not as the main issue in the organization (Wilcke, 2004).
There are several theories which attempt to elicit the essence of and main purpose of business firms. Most of the theories focus on corporate governance, executive compensation policies and practices and the social and economic performance of firms. One of this the theory is the shareholder theory which is derived from economics. It centers on the purpose of firms which is the creation of wealth for firm owners while ignoring the interaction of the firm with many other constituencies. These constituencies include the role of the firm in enhancing societal development through discharging societal roles (Ghoshal, 2005).
There is also another stakeholder theory which pays attention to both the creation of wealth in firms as well as maximization on the role of the firm in discharging roles in the society. This second theory is an extension of the first theory in that it considers the management of firms as a more elaborate exercise the focuses on the entire business environment. Therefore, this is the most preferred theory in modern management since it considers other functions like corporate social responsibility to be of equal importance. This theory contrasts with the argument by Friedman that the major aim of creating firms is to make money and not enhancing the moral or social development of the society. Moral and social developments are activities that should be enhanced by the government and other not-for profit agencies (Husted and Salazar, 2006). Friedman argued that the engagement in moral and social issues by firms leads to the diversion of resources which in turn minimizes the wealth maximization motive of firms. However, businesses exist in the society and thus society will obviously have an impact on the performance of firms. The management of firms cannot be secluded from the society because business firms exist and are supported by the same society where they exist. Therefore, management must factor in the aspect of societal development as they strive on putting in place the right channels of maximizing wealth or rather profits (Pfarrer).
Bejou, 2010, has noted that the corporate social responsibility was important in improving that management practice in organizations by adding a human touch to the profit objectives of firms. Good management practices are not only evaluated basing on the wealth accumulated by the firm but also on adherence to ethical standards, respecting the law and maintaining good corporate citizenship. However, the standardization of the corporate social activities of companies remains a problem since the standards are not set in empirical findings and explanations. Companies may argue and portray as though they are actively engaging in corporate social responsibility while in real sense they are attaching very little value to these activities.
Business challenges and the role of shareholders
Greater corporate accountability is being called for amidst the turbulent business environment that is characterized by major difficulties like financial crises. This undoubtedly calls for responsibility on all people who make up business organizations. Firm shareholders are being given more voice in business firms to help in enhancing accountability through enlisting and overseeing the corporate affairs of business firms. Management visions of firms are being crafted to go beyond the aspirations of shareholders as well as the shareholders in business firms. In fact, the management exercise is being made to be more inclusive and sustainable by engaging the shareholders and stakeholders in making and abiding by the sustainable decisions. Leading firms in both the private and public sectors in the United States and United Kingdom are embracing this practice. Both firms in the private and public sectors are being enlightened on this shift in the management paradigm (Shaw, 2009).
Shaw, 2009, notes that stakeholders are not only being increasingly recognized in terms of the financial goals of goals of organizations but also as part of the corporate plan crafters and implementers for firms. Corporate governance rules and principles or organizations are considerate of the interests of shareholders and stakeholders of organizations. Wealth maximization does not thus remain a norm as it used to be in ancient organizations. It is included and considered when organizations are making management decisions. Major management decisions are reached where the interests of the business owners and the shareholders intersect with the agreed corporate social values of firms. Efforts to encourage sustainability no longer lie with a few key people in the organization but have been spread to highly involve organizational shareholders. While profit maximization remains important for organizations, the shareholders are being slowly turned away from inclining their minds towards wealth maximization. They are being encouraged to focus on corporate development of the organization which is the mean through which the wealth of firms is maximized. Shareholding in business firms remains to be one of the emergent orders of investment. The more the shareholders are taught to participate in the corporate affairs of the business the more the management exercise is improved and made holistic. Financial risks often eliminate the financial risks in a firm. Financial rewards are considered as the end products of the management practice for shareholders and investors but not as the lead factor in management (Harper, 2010).
When firms focus on maximizing the stocks of shareholders, it points to the fact that that firm is focusing on the support of a positive internal environment. People who are mostly featured in this instance are the employees working in different sections of the organization including production, marketing as well as the administration (Baker and Powell, 2005). The goals of this are to increase the price of the shares on the stock so that the firm can make more money which is distributed to the shareholders and the business owner. However, the profits are no longer shared amongst the shareholders and business owners but are also invested in the society in terms of promoting a supportive environment for the business. Without a supportive environment which originates from the market and the customers of the company, the price of the stocks of the company cannot rise. In other words, what is being explained here is that corporate social responsibility is becoming an important facet of business management as it helps in fetching more opportunities thence more profits for a business organization.
Corporate environments are crafted as part of the long-run management objectives of organizations. Long-run earnings are based on how the management ensures that they set an environment that is receptive and supportive to the firm. Therefore, all aspects of management must be given priority. They include human resource management, financial management, corporate governance, marketing management and public relations. Raising the shareholder wealthy brings about the positive prospects of organizational growth. However, it is derived from collective organizational management which focuses of faceting the entire departments of a firm (Moyer, Mcguigan and Kretlow, 2009).
Research has pointed out those organizations which focus on maximizing the social welfare if the societies where they exist are bound to make more profits that firms that minimize participation in social responsibility. The shareholders are derived from the business environment which is cultivated by the management. Many organizational managers are realizing the essence of enhancing social welfare as this boosts the number of people who will be interested investing in the firm. In other words, the way firms manage their operations is a precursor to the attraction of investors or shareholders of the firm. The success of corporate firms cannot be directly attributed to the maximization of shareholder value in the firm but to the successful management of the firm. On the other hand, maximizing the wealth or value if shareholding in a firm remains relevant because a firm is likely to lose its capital is the shareholders withdraw (McSweeney, 2008).
Organizations nowadays focus on the shareholders rather than narrowing down and focusing on the business owners and the direct shareholders. Stakeholders are affected and in turn affect the operations of a firm. They have both direct and indirect contribution to the general performance outcomes of a firm. Organizations are highly influenced by the general stakeholders more than even the specific stakeholders who include both the direct and indirect customers. Other stakeholders are the organizational employees, the suppliers and distributors of the firm and the local communities. There is also the media, competitors, business partners, financers, government which comes in as business regulators and policy makers and the pats and future generations of the organization. In fact organizations are defined in terms of stakeholders. A firm is defined as a composition of stakeholders. Therefor all the interests of the stakeholders have to be given preference by the management of the firm. Managers are required to run the activities of the firm in the manner in which these activities will benefit the entire firm. The rights of participation in decision making and the interests of all the stakeholders must be safeguarded by the managers. In most instances, the interests of the firm owners and the main shareholders are compromised by the management of firms so to accommodate the interest d of other stakeholders of the organization. An example of such a decision is cutting the prices of products in favor of customers (Fontaine, Haarman and Schmid, 2006).
The resolution of conflicts of interest in firms is resolved by firms’ managements’. Conflicts often arise in organizations pertaining the finances of a firm. Shareholders of organizations consider themselves as the main salient of the firm. However, strategic and financial management functions organizations point to the importance of both the shareholders and the stakeholders of an organization. Firms have to run for the interest of both the stakeholders and the shareholders. The degree of concentration on the interests of the two groups is what the theories of strategic and financial management have not reached consensus on. However, there seems to be an agreement that both the stakeholders and the shareholders are of high value to firms and must be placed at the center of management (Beurden and Go¨ssling, 2008). Therefore, each of these groups is given preference when addressing organizational matters that are directly related to each. Firms are administers in the interest of the entire environment which includes the owners, shareholders and stakeholders. Organizational structures are thus being crafted in a manner in which they will be accommodative to the interests of the shareholders, stakeholders and business owners. The management structures are not just based on the interests of organizational shareholders and stakeholders (Vilanova, 2007). The concept of maximizing the shareholder value in organization has been given a lot of emphasis by modern organizations. However, it is being checked so that it does not derail the entire management function in organizations (The Chartered Institute of Management, 2004).
According to Ahlstrom, 2010, the profit making motive matters a lot for firms and has to be encouraged. Firms cannot operate without thinking on how they will make more profits rather they fail to meet the definition of business firms. The way firms conducts their activities is what is bringing a lot of criticisms and making them to appear as though they are only interested in maximizing profits for the firm owners and shareholders. Firma that embraced good management; which do not entirely center on maximizing wealth for owners and shareholders end up easily achieving economic and societal goals. Firms have to be mote innovate by focusing on the broader picture of the business which will help them make more than just financial goals but also meeting the social goals. Social goals end up stimulating a batter economic environment for a firm. Apart from attaining financial goals, corporate social responsibilities are considered as important components of management (Beurden and Go¨ssling, 2008).
From the ancient times, the goals of establishing firms have been entirely revolving around the maximization of wealth or profits. This made organizational management to be seen as tools of enhancing profit maximization. However, there is a realization that firms need to be considerate o entire environments in which they exist. Therefore, organizational management has become more elaborate and more proactive as to enhance both economic and social outcomes of a business firm. Maximization of wealth for business owners and shareholders are only reflected in the economic outcomes of business management. Otherwise, business are managed so as to bring both financial and social outcomes. Therefore, management cannot be anyway patented to the realization of financial or economic goals only.

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