Board members have a fiduciary duty to protect shareholder investment, with shareholder wealth determined by the company’s value per share and number of shares issued. Strategic decisions may temporarily reduce shareholder wealth, but bad trading decisions can be cause for concern. Shareholder wealth maximization is a priority, but board members must balance conflicting needs.
Shareholder wealth is the collective wealth vested in shareholders through their investment in a company. Board members have a fiduciary duty to shareholders and a responsibility to protect their investment by managing the company sensibly and in line with generally accepted practices. Failure to do so can result in penalties, including shareholder votes to remove board members, as well as fines and imprisonment in some cases.
Each shareholder owns a small portion of the company. Issuing more shares will dilute shareholder wealth, while providing dividends to existing shareholders will increase it. Firm value rises and falls over time, causing corresponding rises and falls in shareholder wealth. Investors who buy shares may take a long position with the goal of making a profit at a future date, or they may intend to capitalize on their wealth by selling the shares elsewhere and making money on the transaction.
Companies can determine shareholder wealth by looking at the overall value of the company in terms of the current value per share and the number of shares issued. Sometimes board members must make strategic decisions that will temporarily reduce shareholder wealth, such as investing in new facilities or technology. These investments will add value later and are acceptable to shareholders because they demonstrate a desire to grow the company. Bad trading decisions can result in losses with no projected future gains and can be cause for concern.
The fiduciary duty enshrined in the law can also be an important part of the philosophy that board members use to run the business. They are not focused on making the company bigger for its own sake, but on growing it to benefit shareholders by increasing their wealth. They must make decisions on behalf of a group of people who are not involved in daily operations and who have a vested interest in the future of the company. Sometimes this requires balancing conflicting needs, such as wanting to pay dividends but also wanting to reinvest to help the company grow and increase stock value.
In shareholder wealth maximization, business strategy focuses on creating shareholder wealth as the first priority, even if this leads to decisions that do not always immediately benefit the company itself. Board members need to be careful because they don’t want to hurt the company and set it up for future collapse, but they also want to keep shareholders satisfied. This can sometimes be a tightrope act, especially since some decisions can have unintended consequences, as not all business investments have a predictable outcome.
Smart Asset.
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