Businesses are concerned with making money. The ends towards that money is put can differ, depending on the focus of the business owner and management. Shareholder wealth maximisation and profit maximisation are two ways that a business can orientate itself and how it deploys its resources to generate income.
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Shareholder wealth maximisation
This method of running a business asserts that the primary goal of the operation of a company is to deliver money to shareholders. This is done through effective management and growth to increase the company's share price, as well as giving shareholders dividend payouts.
Profit maximisation seeks to obtain the highest rate of return from the product or service a company sells. Profit maximisation seeks to adjust operations, supply and demand and market share to ensure that the difference between production costs and selling price is as large as possible.
The primary difference between shareholder wealth maximisation and profit maximisation is their focus. The former emphasises a long-term focus, seeking to keep investment in the company by rewarding shareholders. The latter emphasises the short-term.
A second difference is the attitude to risk. Shareholder wealth maximisation recognises and adapts to risk and uncertainty in the business and its market. This links to its long-term view, as it seeks to minimise threat to shareholder returns by evaluating risk and acting accordingly. Profit maximisation ignores risk and uncertainty in the push to maxmimise income as quickly as possible.
If a publicly listed company adopts a shareholder wealth maximisation approach it should help keep shareholders satisfied with the return on their investment. However, not all companies are listed, such as small businesses, so maximising profit tends to be the default approach. If a publicly listed company aims for maximising profit it risks alienating shareholders who can withdraw their capital, affecting the drive to profit accumulation.
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