The view that shareholder wealth maximization

Corporate Governance Practices In Zimbabwe: Literature Review Introduction In I wrote a paper on corporate governance practices in Zimbabwe.

The view that shareholder wealth maximization

The price of the Model TFord's mainstay product, had been successively cut over the years while the wages of the workers had dramatically, and quite publicly, increased. The company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically increase production, and the number of people employed at his plants, while continuing to cut the costs and prices of his cars.

In public defense of this strategy, Ford declared: My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.

To do this we are putting the greatest share of our profits back in the business. While Ford may have believed that such a strategy might be in the long-term benefit of the company, he told his fellow shareholders that the value of this strategy to them was not a main consideration in his plans.

The minority shareholders objected to this strategy, demanding that Ford stop reducing his prices when they could barely fill orders for cars and to continue to pay out special dividends from the capital surplus in lieu of his proposed plant investments. The Court was called upon to decide whether the minority shareholders could prevent Ford from operating the company for the charitable ends that he had declared.

J. Muketsi: Corporate Governance Practices In Zimbabwe: Literature Review

Judgment[ edit ] The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries. Notably, obiter dicta in the opinion written by Russell C. Ostrander argued that the profits to the stockholders should be the primary concern for the company directors.

Because this company was in business for profit, Ford could not turn it into a charity. This was compared to a spoliation of the company's assets. It said the following: A business corporation is organized and carried on primarily for the profit of the stockholders.

The powers of the directors are to be employed for that end.

Value Maps: Valuation Tools That Unlock Business Wealth and millions of other books are available for Amazon Kindle. Learn more. This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. The shareholder wealth maximization (SWM) principle states that the immediate operating goal and the ultimate purpose of a public corporation is and should be to maximize return on equity capital.

The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes Shareholder value and Squeeze out As a direct result of this decision, Henry Ford threatened to set up a competing manufacturer as a way to finally compel his adversaries to sell back their shares to him.

Subsequently, the money that the Dodge brothers received from the case would be used to expand the Dodge Brothers Company. Ford was also motivated by a desire to squeeze out his minority shareholders, especially the Dodge brothers, whom he suspected correctly of using their Ford dividends to build a rival car company.

The view that shareholder wealth maximization

By cutting off their dividends, Ford hoped to starve the Dodges of capital to fuel their growth. Ford was denied the ability to arbitrarily undermine the profitability of the firm, and thereby eliminate future dividends.

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Under the upheld business judgment rule, however, Ford was given considerable leeway via control of his board about what investments he could make. That left him with considerable influence over dividends, but not complete control as he wished.

This case is frequently cited as support for the idea that corporate law requires boards of directors to maximize shareholder wealth. However, one view is that this interpretation has not represented the law in most states for some time. Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth.The Levy Economics Institute of Bard College is a non-profit, nonpartisan, public policy think tank.

The Levy Economics Institute of Bard College is a non-profit, nonpartisan, public policy think tank.

The view that shareholder wealth maximization

SHAREHOLDER WEALTH MAXIMIZATION Two competing views about multiple principles can be articulated. A mono-tonic SWM view is that any two or more principles must be strictly hierarchical.

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Dodge is often misread or mistaught as setting a legal rule of shareholder wealth maximization. This was not and is not the law.

Shareholder wealth maximization is a standard of conduct for officers and directors, not a legal mandate. Because the goal of shareholder wealth maximization is a long term goal achieved by many short-term decisions to maintain or exceed the expected value of shareholders.

So managers with desire to maximize value for shareholder need to consider both short-term and long-term impact on their decisions so as to increase the market stock price.

Nov 28,  · My new book, "The Age of Agile" was published by HarperCollins in I consult with organizations around the world on leadership, innovation, management and business narrative.

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