Goals of Financial Management

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

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 corporate governance. Corporate governance involves regulatory and market mechanisms and the relationships 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, or external, such as 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 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 about who should be included in stakeholder considerations.

Environment as stakeholder The environment can be seen as a stakeholder. Maximizing value without harming stakeholders is, for some, one of the goals of financial management.

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 (United States and United Kingdom) 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 attention to these types of stakeholders is intimately entwined 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. Businesses should maximize value only if they can do so without generating harm.