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As a CEO, one must remember that they are the stakeholder’s agent who has been appointed to guard the investors’ life savings. As such, it would be imprudent for me as a CEO to act in my best interests as this would compromise shareholder wealth. Therefore, A CEO should take actions aimed at maximizing shareholder wealth since this approach requires the manager to consider the time value of money and risk factors hence leading to prudent investment decisions. As well, a profit maximization approach helps the manager to generate value for all the stakeholders unlike when the CEO acts in their interests (Petty et al., 2015). For instance, if a company is giving investors a handsome return on investment, it is likely to retain top talent, pay taxes on time and have enough funds to invest in social initiatives.
Conflict of interest is a significant issue between stockholders and the management of a company. In this light, pegging the remuneration of the management to compensation will ensure that the company’s leaders are working towards maximizing the shareholder’s wealth (Eakins & McNally, 2014). To illustrate, stockholders might enact a company policy stating that a CEO’s income is a 3 percent of earnings after tax. Such a policy would motivate the CEO to achieve high returns on stockholder’s investment. Furthermore, requiring managers to hold a specific percentage of a company’s total shares will make a firm’s top leadership mindful of the investment decisions since their finances are also at stake (Petty et al., 2015). The factors that affect management action can be internal or external. Internal factors include pressure from stakeholders, employee culture, technology in the company and the firm’s financial health. External factors include government regulation, state of the economy and competition (Eakins & McNally, 2014).
Eakins, S., & McNally, W. (2014). Corporate Finance Online. Upper Saddle River: Pearson Education, Inc.
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.
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