Category: 

What Is Wealth Maximization?

A business with a wealth maximization strategy may develop new technologies, like 3d printers, that will not reach the market for a few years.
Businesses with wealth maximization strategies focus on investing in long-term assets like real estate and technology.
Article Details
  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 15 March 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
A 2003 blackout affected 50 million people in North America and had an economic impact of about $10 billion USD.  more...

April 23 ,  :  William Shakespeare was born and died. (1564, 1616)  more...

Wealth maximization is a financial management technique that concentrates its focus on increasing the net worth of a company or firm. This approach contrasts with the more traditional method of management that seeks out increased profits above all other pursuits. Those who pursue this technique also seek out profits, but they concern themselves with cash flow, earnings per share of shareholders, and the social value of any financial initiatives as well. By including all of these disparate aspects of a company's operations, this process takes more of a long-term approach to financial management.

The financial management of a company must be focused on a number of different factors to gain the maximum amount of capital for those people who have an ownership share in the company. In the process of conducting business, it's obvious that management would try to make the most possible profits by pulling in a great deal of revenue and incurring minimal costs. But profits are transitory, and they might not be the most accurate representation of financial strength. As a result, wealth maximization has become an increasingly popular goal for financial managers.

Ad

When pursuing this strategy, it is crucial for management to try to get shareholders the most earnings per share. This is a true reflection of the company's worth, since the company that gets its shareholders the most wealth is one that would likely attract the most investors. Cash flow is another crucial aspect, since the amount of cash a company has is affected by many other factors in addition to profits.

There are some times when the search for profit can be problematic for shareholders. For example, a certain initiative might bring in a great deal of profit for a company, but it might do some sort of environmental harm to the surrounding community. Many shareholders would prefer to neglect the profit and prevent the environmental issues. Those who follow wealth maximization are aware of the fact that a socially responsible company is more valuable to many shareholders than other firms who neglect social issues.

In many cases, the difference between wealth and profit maximization comes down to a question of time. Those seeking profits are often more concerned with an immediate return on investments, without looking very far ahead. By contrast, maximizing wealth requires more of a long-term approach for financial managers. These managers feel that the ups and downs of temporary profit-seeking will ultimately be subordinated in importance to the long-term wealth of the company.

Ad

Discuss this Article

lluviaporos
Post 3

@Mor - There are more than enough watchdog organizations though, who do all the dirty work of assessing companies to see where they stand on all kinds of issues. Yes, it's a difficult thing to evaluate. I mean, I doubt there is a single company on Earth that hasn't done something wrong at some point.

But there are enough guides out there now that I really think people who go for wealth maximization strategies over everything else are basically bad people. There's no excuse. You can make money and still invest ethically, and anyone who says otherwise is wrong.

Mor
Post 2

@bythewell - It's really difficult to get people to take responsibility for that kind of thing though. Often a person isn't investing their own money, they are trusting someone else to do it, so it gets even more removed from the situation. Because the person they trust is just going to want to work with shareholder wealth maximization, without worrying about every aspect of every company they invest in.

bythewell
Post 1

I think it's really important for investors to be aware of the impact the companies they invest in have on the community. Not just the local community, but the world as a whole.

It's all too easy to think that just because you aren't making those decisions, you aren't culpable. But, it's not that difficult to find investment packages that cater to people who want to invest their money ethically, and anyone who doesn't do that should consider themselves culpable.

If everyone who invested money in companies insisted on strict environmental and ethical codes, we'd have a much cleaner, better world for everyone.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email