shareholder interest

The shareholder goal is to maximize the value of the firm.
Potential agency conflict are important because large firms manager generally who own small percentage of the stock.
In this situation shareholders wealth maximization could take a back seat to any number of conflicting managerial goals.
In this situations managers primary goal seem to be to maximize the size of the firm by creating a huge, rapidly growing firm. The managers will tend to :
· Increase their job security.
· Increase their own power status and salary
· Create more opportunity for their lower and middle level managers.
In order to increase their power they will tend to bargain for high salaries and contribute generously to charities while all that is done, the shareholders will bear the cost.

Through annual compensation, in the form of the company stocks.
· Managers are motivated to act in the shareholders best interests.
· Managers are more likely to focus on maximizing stock pricestif they are themselves large shareholders.
· The company is able to attract and retain able managers
· Managers actions will be in line with interests of stockholders whose primarily interest is stock price maximization.
· It is in line with the modern method of measure of managerial performance ie economic value added (EVA) where executive compensation is pegged on shareholders wealth maximization. EVA is considered as a better method; to measure a firms true profitability . EVA is found by taking the after tax – operating profit and subtracting the annual cost of all the capital a firm uses.
· Increased pressure from financial institutions with interest in companies has awakened the directors on the need to improve corporate governance and wealth maximization of shareholder failure to which can lead to firing.
· Hostile takeovers (when management does not want the firm to be taken over) are more likely to occur when the firms stock is under valued. Relative to its potential, because of poor management and hence the needs to motivate the CEO to take action designed to maximize stock prices.
A continued undervaluation of shares can lead to the firm borrowing more to compensate for the deficit in the balance sheet as well as maintain a healthy cash flow in the firm. As such the conflict between the shareholders can arise since the shareholders will bear the increased risk of capital as a result of this, Therefore share maximization is a more prudent way of resolving stock holders versus creditors conflict.

Possible limitation
· Possibilities of over emphasizing on wealth maximization in the short run without considering the long run financial implications.
· Managers tend to prefer project with short-term profit with higher returns to the long-term project with relatively lower but stable returns.
· Other secondary objectives like the welfare of the employees cannot be considered if its shorter cost implication will be in conflict with wealth maximization.
· Possible conflict between the medium level mangers and the CEO where the former feels that they are not being considered for the senior most positions in the company and that can lead to conflict of interests which can jeopardize the ultimate goal.
· Possibility of window dressing of company performance to portray better performance, which will be in line with increased share valuation e.g. underestimating of certain provision to show a better performance. E.g. Enron and world com.
· The complication that arises on how to treat the stock compensation should it be expensed as a form of a cost to the company since it’s compensation.
· The complication as to which methods is to be used in measuring the value of the shares more attention is paid to accounting measure especially EPS. However stock prices depends not on today’s earning and cashflow but future cashflow and the riskness of the future earning stream also affect stock prices. Some actions may therefore increase earning and yet reduce stock price and the vise versa,.
· Companies that undertake actions today to enhance its earning may see a drop in its stock price.

References
Financial management theory and practice by Eugene F. Brighen and Michael
C Herhaedly 10th edition
Fundamental of financial management 10th edition by Brigham al Houston.

From: Thuku