FINANCIAL GOALS OF THE MODERN CORPORATION

In this chapter we suppose that a financial manager's main target is maximizing shareholder prosperity, which is corresponding to maximizing the price of the firm's ordinary stock. Managers should, of course, institute and pursue other goals as well. For example, managers also are involved in their own personal welfare, in their employees' welfare, as well as their standing among key constituency.  Still, for the reason we explain throughout this chapter, share price maximization is one of the most imperative objective for companies. Moreover, share cost maximization creates the most assessment for managers and shareholders finding to pursue additional goals and objectives.

Shareholders own the compact and select by ballot the board of directors, which then appoints the corporation's management. Management, in turn, is theoretical to make decisions that are in the best benefit of all the shareholders. Afterward in this chapter, we discuss the most significant decisions that managers make to accomplish this goal and objective. We know, however, that because the supply of most huge companies is extensively held by a great number of shareholders, managers of huge corporations have a great deal of independence. Because most corporations have a huge number of owners (shareholders), each with a moderately small ownership of the company, managers could be tempted to follow goals and targets other than stock price maximization. For example, managers of a huge, well-recognized company come to a decision to work just hard enough to keep stock- holder returns at a "sensible" level and then dedicate the remainder of their hard work and resources to elevated executive salaries, or to other behavior or expenditures that don't necessarily enlarge the firm's stock price.

Unfortunately, no one exterior the firm can without difficulty determine whether a exacting management team is repeatedly determined to maximize shareholder prosperity or is simply attempt to keep shareholders content while pursuing their own individual targets. For example, how can we tell whether employee or society benefit programs are in the long-run best wellbeing of the shareholders? Likewise, was it actually necessary for Walt Disney to pay its chairman Michael Eisner, more than $200 million in the mid-1990s to get and reward his military, or was this just another example of a manager taking advantage of shareholders?

Perceptibly we do not have ultimate answers to these significant questions. However, managers of firms in use in markets theme to concentrated competition from other company will be enforced to undertake actions that are realistically consistent with shareholder wealth maximization. If they depart too far from this purpose, they risk being uninvolved from their jobs by their own board of directors, or through an aggressive takeover or a proxy struggle.

A hostile takeover is the attainment of one organization by another regardless of the opposition of management, while a proxy fight involve one group annoying to gain management control of a company by getting shareholders to vote a new management collection into place. Both proceedings are more likely to occur and achieve something if a firm's stock price is low, so to preserve their jobs, managers try to keep stock prices as high as probable. Successful antagonistic takeovers and proxy fights frequently consequence in the dismissal of top management from their jobs. Therefore, while some managers may be more concerned in their own individual welfare than in maximize shareholder wealth, the warning of behind their jobs motivates them to try to maximize stock sells. Many of the most stunning takeover contests for the duration of the past two decades were precipitated by the argument of concentration between managers and shareholders. A critical task for any modern-day manager is to manage corporate capital professionally to achieve all of his or her objectives. Throughout the remainder of this chapter, we describe and develop a basic understanding of how a winning manager can make sound financial decisions.