Maximize Shareholders' Wealth "Subject to Ethical Constraints" Meaning

Overview of Managerial Finance and Financial Markets
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Overview of Managerial Finance and Financial Markets
Shareholders’ wealth maximization measures the profitability level of the common shareholders’ investment. It also depicts the ability of the firm managers to utilize the available resource to generate value for the company owners. As custodians of the shareholders’ wealth, managers’ primary goal is to maximize such value (Nwaobia & Ajayi, 2020). Nevertheless, the managers’ capacity to maximize shareholders’ wealth is subject to ethical constraints. According to agency theory, shareholders delegate decision-making authority to firm managers in the presumption that they will act in the best interest of all stakeholders. In their quest to maximize the shareholders’ wealth, managers could potentially invest in a project that is not beneficial to the firm or has adverse environmental implications, thus raising ethical questions. Therefore, managers’ shareholder wealth maximization goal is subject to moral constraints as they must align their interests and needs to those of the owners and the community at large to ensure that profits are retained for reinv...