Why shareholder’s wealth maximization:

We as a group are of the view that Shareholders wealth maximization should the
approach a company should follow. Let’s talk about why we as a group think so, in
this approach every other stakeholder looks after their own interests and the
management is supposed to work as to maximize the wealth of shareholders and
Board of directors are to see that it happens. It’s not like others groups interest are
not looked after, they become constraints for the business in which they operate.
Let’s talk about how they become constraints
I. Bond holders and Lenders: They have covenants and place restrictions to
protect their interests
Puttable bonds, convertible bonds

II. Customers: They have ways to protect their interests too

Consumers Protection Act 2019,

III. Employees: They have contracts with the business.

IV. Society: In India the govt. charges companies tax on tax that is Cess.
i. Education Cess
ii. Health Cess
iii. Krishi Kalyan cess
iv. Infrastructure Cess
v. Swatch Bharat Cess
Vidhi Centre for Central Legal Policy is nonprofit set up under
Section 25 of the companies Act 1956, in 2013. It is an
independent think-tank that performs legal research to make
better laws and improve governance for the public good.
Corporate Social responsibility: 2% of the average net profit for
the last 3 years amended under section 135 earlier it was voluntary
now its mandatory. The Ministry of corporate affairs has notified
that companies’ expenditure to fight the pandemic will be
considered valid under CSR activities.
Shareholder are the only group who don’t have a contractual claim but
residual claim.
When we talk about maximize the value we are talking about the asset
side of the balancesheet. But how do I judge if the company is taking
good projects or not, Stock prices are good way to judge that. It
essentially means assessment of the market if corporate decisions taken
by the company creates value or not.
This will lead to better corporate governance.
There are some different types corporate governance
I. Cut-throat Corporatism: In this the promoters run the business.
They take decision to be rich, in this approach everybody pays a
price for this.
- John D. Rockefeller ($ 418 billion net worth) founder of
Standard Oil Company
 Strike of 1913–14 and the Ludlow Massacre
- Andrew Carnegie founder of Carnegie Steel Company.
Homestead Strike, Johnstown Flood
II. Managerial Corporatism: Managers work for their own interests,
Board of director’s work for managers not for shareholder’s
interest. Lenders and managers co-exist. So Activist investors are
need to keep them in check, hostile takeovers are also a good way
to keep them in check.
Japan and Germany followed this after world war II, It works like
a company hold shares in others 60, 70 company, it like
interlocking each other.
III. Crony Corporatism: The govt. doesn’t do what’s best for society
but are with companies together. Examples can be after elections
some company’s shares might go up. Normally this is seen in
family group companies, we might benefit but accidentally.
IV. Shareholder Based corporatism: The power lies with the
shareholders.
V. Con

Now some false choices:

Maximizing shareholder wealth or maximizing customer satisfactions:
customers will be satisfaction will be maximized if the product or
service will be given for free.

Maximizing shareholder wealth or maximizing employees value:

 Employees are also stockholders
 Higher stock prices higher wages
 A. Shareholder wealth maximizing doesn’t mean the company social
outlaw.
- Coca-Cola has had to close a plant in India for infrigement of
environmental regulations - a bottling plant in Kerala was
closed in 2005 for heavy metal pollution
-
B. Single objective multiple constraints.
C. One group needs to be picked as a central group.

Why not Stakeholder wealth maximization

I. All stakeholders cannot be satisfied equally. There will be
tradeoffs
II. There will be no accountability.
III. How to judge if value is created or not ?