Shareholder Wealth Maximization

The Justification of SWM

Historically, from a legal perspective, the corporation was regarded during the 19th century as an instrument of public policy with a social responsibility. These social concerns gave way to the idea of managing the firm for the shareholders' profits. Legal theorists began to regard stock ownership as no different from other forms of private property. The corporation was viewed as owned by its shareholders. This legal model is entirely consistent with SWM. The directors' role is to manage the property of the owners, that is, the shareholders. As stewards of the shareholders' interests, their sole responsibility must be to the shareholders, and promoting the interests of other groups would be a misuse of the property entrusted to them. Insofar as private property plays such a powerful role in the American ethos, the argument for SWM, based on the value ascribed to private ownership, has had profound appeal.

At the same time, property rights are viewed as the foundation of a capital-driven economic system, and the principle of SWM also makes sense from the perspective of economic efficiency. The shareholders, as the owners of the corporation, purchase stock because they are looking for financial return. In most cases, shareholders elect directors who then hire managers to run the company on a day-to-day basis. Since managers are supposed to be working in the interests of shareholders, it follows that they should follow policies that enhance shareholder value. Property rights are deemed essential to the workings of the system, and the resulting outcomes are at the same time beneficial to society. Profits are indicative of the fact that an organization has transformed a set of inputs into a productive output of goods or services that have a higher value than the original inputs. Thus, when SWM is properly pursued, [Page 1918]the financial benefits are alleged to include the following: efficient, low-cost businesses that produce highquality goods and services at the lowest possible prices; products and goods that consumers need and want, such as new technologies, new products, and new jobs; courteous service; adequate stocks of merchandise; and well-located establishments.

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