Goals of Financial Management

In this chapter, we will explain the goal of financial management. It is essential to always know the end goal when contemplating various strategies and making financial decisions. If a company focuses only on quality and makes a great product but does not make money, can they stay in business? If managers act to improve their own wealth, what happens to the future value of the corporation?

Maximizing Value Without Harming Stakeholders

A goal of financial management can be to maximize value without harming stakeholders, the diverse set of parties affected by the business.


LEARNING OBJECTIVE

  • Explain how maximizing value for shareholders can harm the business's other stakeholders


KEY POINTS

  • Stakeholders are those who are affected by an organization's activities. The stakeholders can be internal or external to the firm and some will be involved directly in economic transactions with the business, while others will not.
  • Owners, employees, customers, suppliers, trade unions, the government, local communities, and the environment can be considered stakeholders. Because of the potential breadth of the term, there are different views on whom to include in stakeholder considerations.
  • Debate is ongoing about whether firms should be managed for shareholder value maximization or also with stakeholders in mind. While the Anglo-American "model" tends to emphasize shareholders, some European countries formally recognize other stakeholders in corporate governance decisions.
  • Some proponents of stakeholder considerations argue that attention to other stakeholders is intimitely intertwined with market value and can enhance outcomes for all stakeholders. Others argue that value should be maximized without harming stakeholders.


TERMS

  • market value
    The total value of the company as traded in the market. Calculated by multiplying the number of shares outstanding by the price per share.

  • stakeholder
    A person or organisation with a legitimate interest in a given situation, action, or enterprise.

Introduction

Professionals in financial management are concerned with the practical significance of the numbers that appear in financial documents. Given a set of information about certain financial behavior, they ask, what do the figures mean? There are several goals of financial management, one of which is maximizing value without harming shareholders.


The Stakeholder Concept

The stakeholder concept is associated with the concept of corporate governance. Corporate governance involves regulatory and market mechanisms and the relationships that exist between a company's management, its board, its shareholders, other stakeholders, and the goals for which the corporation is governed. Stakeholders are those who are affected by an organization's activities. The stakeholders can be internal, like owners or employees. They can also be external, like customers, suppliers, the government, local communities, and the environment. Some stakeholders are involved directly in economic transactions with the business. Others are either affected by, or able to affect, an organization's actions without directly engaging in an economic exchange with the business (for example, trade unions, communities, activist groups, etc). Because of the breadth of the term stakeholder, there are different views as to whom should be included in stakeholder considerations.


Stakeholders vs. Shareholders

In the field of corporate governance and corporate responsibility, a major debate is currently occurring about whether a firm or company should make decisions chiefly to maximize value for shareholders, or if a company has obligations to other types of stakeholders. This increased after the financial crisis of the late 2000s, when concerns deepened about the potential of companies to lower the welfare of other stakeholders while maximizing their shareholder value. While the Anglo-American (US and UK) business "model" tends to emphasize the interests of shareholders over other implicated parties, some European countries formally recognize other stakeholders in corporate governance decisions.

Some people who argue that businesses should consider other stakeholders, like the government or the environment, argue that an attention to these types of stakeholders is intimately intwined with market value. They also argue that a holistic view can enhance general outcomes for all the stakeholders that are involved. Still others argue that stakeholders, even if they are not considered in business decisions, should at the very least not suffer harm, and that businesses should maximize value only if they can do so without generating harm.