Justifying Shareholder Wealth Maximisation
JUSTIFYING SHAREHOLDER
WEALTH MAXIMISATION
Alan D Morrison
Programme Director, The Oxford Finance Programme for Senior Executives; Professor of Finance, Saïd Business School
CORPORATE OBJECTIVES AND
CORPORATE FINANCE
The Role of the Corporation
Corporate fi nance is the branch of economics that concerns itself with the ways in which corporations fi nance their activities. If we want to think clearly about this topic, we need a simple model of the corporation. Figure 1 is about the simplest I can come up with.
Corporations require fi nancial capital, and this comes from investors. They contract with suppliers to get the raw materials that they need, and they contract with their workforce to do things with the raw materials that generate value. They sell their output to customers, which generates more cash. Some of the cash is needed to pay their suppliers and their workforce, and the remainder fl ows back to the investors. INTRODUCTION
How should we think about corporations?
Management theorists have come up with a number of answers. Many see organisations in organic terms, drawing upon similar conceptualisations of society which date back at least to Plato’s writings, and which are developed by modern sociologists such as Auguste Comte, Herbert Spencer, and
Emile Durkheim. A related vision is one of an organisation as a cultural entity, with its own personality and ways of doing things. Marxist thinkers have viewed organisations as mechanisms for sustaining the cultural hegemony of the ‘Boss Class’, which uses them to extract surplus value from the proletariat. And post-modernists reject grand unifi ed theories of this type, and see organisations as refl ecting the power relations that underpin a socially constructed reality.
Economists, and fi nancial economists in particular, tend to approach this question from a different angle. Finance and economics rely upon a number of assumptions about corporations, the role
WEALTH MAXIMISATION
Alan D Morrison
Programme Director, The Oxford Finance Programme for Senior Executives; Professor of Finance, Saïd Business School
CORPORATE OBJECTIVES AND
CORPORATE FINANCE
The Role of the Corporation
Corporate fi nance is the branch of economics that concerns itself with the ways in which corporations fi nance their activities. If we want to think clearly about this topic, we need a simple model of the corporation. Figure 1 is about the simplest I can come up with.
Corporations require fi nancial capital, and this comes from investors. They contract with suppliers to get the raw materials that they need, and they contract with their workforce to do things with the raw materials that generate value. They sell their output to customers, which generates more cash. Some of the cash is needed to pay their suppliers and their workforce, and the remainder fl ows back to the investors. INTRODUCTION
How should we think about corporations?
Management theorists have come up with a number of answers. Many see organisations in organic terms, drawing upon similar conceptualisations of society which date back at least to Plato’s writings, and which are developed by modern sociologists such as Auguste Comte, Herbert Spencer, and
Emile Durkheim. A related vision is one of an organisation as a cultural entity, with its own personality and ways of doing things. Marxist thinkers have viewed organisations as mechanisms for sustaining the cultural hegemony of the ‘Boss Class’, which uses them to extract surplus value from the proletariat. And post-modernists reject grand unifi ed theories of this type, and see organisations as refl ecting the power relations that underpin a socially constructed reality.
Economists, and fi nancial economists in particular, tend to approach this question from a different angle. Finance and economics rely upon a number of assumptions about corporations, the role
References: Buchanan, J. M., Tullock, G., 1962. The Calculus of Consent De Soto, H., 2000. The Mystery of Capital. Morrison, A. D., Wilhelm, Jr., W. J., 2007. North, D. C., Thomas, R. P., 1973. The Rise of the Western World: A New Economic History.