The primary goal of every corporation is to maximize shareholder wealth, primarily through cash dividends and share value appreciation. To this end, the role of the financial manager is to act in accord with this premise. Under his/her auspices, the financial manager must determine which factors affect the company's stock price, and which choices will add value to the company, all the while ensuring that the company does not run out of the cash necessary for continued, day-to-day operations and planned growth strategies. Within these areas fall decisions such as which short-term and long-term investments should the company engage in and ways the company will finance these investments.
All these decisions should be made with the intent of maximizing shareholder wealth. However, this view is not without obstacles. Most significantly, corporations must battle with the agency problem, which arises when managers within the company act in their personal best interest.
For example, embarking on a project that is not in the best interest of the company, but will result in personal gain through pay increases, bonuses, and even professional reputation. With financial managers exerting so much control over a corporation, poor oversight can easily lead to value destruction of the company as financial managers engage in risky investments, or even criminal activity like Enron, for personal gains.
Theoretically, when the financial manager acts in accord with maximizing shareholder wealth, the shareholders benefit through cash dividends and share price gains. With respect to employees however, maximizing shareholder wealth is not always in their best, personal interest. For example, when a company announces a layoff to cut costs, assuming the intent of maximizing shareholder wealth, stock share price often increases, as the secondary market reacts to the news as an appropriate and proactive approach to reducing costs and increasing...