What is Shareholder Wealth Maximization and Should Firms Pursue it?

Who owns a business firm? The shareholders. Those individuals who have bought shares of stock, which indicate ownership in the firm. Even if your business is a one-person shop, you are the shareholder. If the business is a huge conglomerate, then it has a Board of Directors made up of the shareholders who own shares of the firm based on how much money they have invested. Because the shareholders own the firm, they are entitled to the profits of the firm.
Shareholder wealth is the appropriate goal of a business firm in a capitalist society. In a capitalist society, there is private ownership of goods and services by individuals. Those individuals own the means of production to make money. The profits from the businesses in the economy accrue to the individuals.
What is Shareholder Wealth Maximization?
When business managers try to maximize the wealth of their firm, they are actually trying to increase their stock price. As the stock price increases, the individual who holds the stock wealth increases. As the stock price goes up, the value of the firm increases and the net worth of the individual who owns the stock increases.
What About the Managers of the Firm
People often think that the managers of a firm own the firm. In the case of a very small business, that might be true if there is one owner that also manages the firm. Remember, however, that the one owner is a shareholder of the firm. In a larger business, there may be many levels of management and staff. They don't necessarily own the firm. Do they profit at all from the business except for their salaries and employee benefits? Only if they own shares of stock in the company. Some businesses offer shares of stock to their employees at a discount through an Employee Stock Purchase Plan (ESPP).
Conflicts Between Owners and Managers