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What Is Shareholder Wealth?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 20 September 2016
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Shareholder wealth is the collective wealth conferred on shareholders through their investment in a company. Members of the board have a fiduciary duty to the shareholders and a responsibility to protect their investment by running 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 jail time in some cases.

Each shareholder holds a small portion of the company. Issuing more shares will dilute shareholder wealth, while providing dividends to existing shareholders will increase it. The value of the company waxes and wanes over time, causing corresponding rises and falls in shareholder wealth. Investors who purchase stock may take a long position with the goal of profits at a future date, or they may intend to capitalize on their wealth by selling the stocks to another party and making money on the transaction.

Companies can determine shareholder wealth by looking at overall company value in terms of the current value per share and number of stocks issued. Sometimes board members must make strategic decisions that will temporarily reduce shareholder wealth, such as investing in new facilities or technologies. These investments will add value later, and are acceptable to shareholders because they demonstrate a desire to grow the company. Bad business decisions may result in losses with no projected future gain, and can be a cause for concern.

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The fiduciary duty enshrined in law can also be an important part of the philosophy board members use to run the business. They do not focus on making the company larger for its own sake, but on growing the company to benefit the shareholders by increasing their wealth. They must undertake decisions on behalf of a group of people who are not involved with daily operations and have a very strong interest in the company's future. Sometimes this requires balancing conflicting needs, like wanting to pay dividends but also wanting to reinvest to help the company grow and increase share value.

In shareholder wealth maximization, the business strategy focuses on building wealth for shareholders as a first priority, even if this leads to decisions that may not always immediately benefit the company itself. The members of the board must be careful because they do not want to undermine the company and set it up for future collapse, but they also want to maintain shareholder satisfaction. This can sometimes be a tightrope act, especially because some decisions may have unforeseen consequences, as not every business investment has a predictable outcome.

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Vincenzo
Post 2

@Soulfox -- Maybe, but a good board will take those steps that will keep the company profitable in the long term. No board should get so obsessed with shareholders wealth that it focuses on short term gain rather than long term viability.

You can probably name a few companies that have traded in that long term security for short term game. You will notices those companies failed. There is a lesson to be learned there.

Soulfox
Post 1

A common problem is that boards of directors often think it is their duty to maximize shareholder profits by any legal means necessary. That is completely different from running a company sensibly and in line with generally acceptable practices.

We could call this strategy maximizing shareholders wealth, but the problem with that is that short term gains are generally more acceptable than what is good for the long term health of the company. Doing something that generates a lot of money in a hurry is a lot sexier than taking measures that build up value over time, so guess which tactic some boards use? That's right. The one that is flashy and generates a lot of cash in a hurry.

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