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Words 6573

Pages 27

Management has one basic, overriding goal – to create value for stockholders.

Stockholders own the firm - it legally belongs to them. That ownership position gives stockholders the right to elect the directors, who then hire the executives who actually run the company.

The directors, as representatives of the stockholders, determine managers’ compensation, presumably rewarding them if performance is superior or replacing them if performance is poor.

Of course, there are some constraints on what management can do when working to create value for stockholders. Management can’t engage in illegal employment practices, create monopolies to exploit consumers, violate anti-pollution laws, or engage in prohibited activities.

For most companies and at most times, managers do focus on shareholder value maximization, because in the long run stockholders do remove directors and managers who fail in their fiduciary duty.

There are events that refocus managers’ attention on the interests of stockholders.

First, stock ownership has become increasingly concentrated in the hands of institutional investors, and their holdings are so large they would depress a stock’s price if they simply dumped it. Therefore, institutional investors are now using proxy fights and takeovers to force changes in poorly performing companies.

Second, the penalties for executives who violate their responsibility to shareholders have increased.

Good managers focus on long-term, not short-term results, and they release accurate information so the market can accurately value the shares.

However, people with limited experience in business and economics often argue that stock price maximization is “bad” and that it results in shortsighted decisions that are bad for employees, consumers, and ultimately society. They argue that firms should pursue…...

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