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Using Examples Explore the Difference Between Swm and Sm

In: Business and Management

Submitted By richbraso94
Words 1052
Pages 5
Corporate governance in its simplest classification is “the system by which companies are directed and controlled” (Cadbury, A. 2002). Various theories have been proposed regarding the best method of corporate governance, which have led to the development of two key forms of management goals – shareholder wealth maximisation and stakeholder capitalism. This essay will seek to evaluate the distinctions between these two forms of corporate governance. The shareholder and wealth maximisation (SWM) principle states that the immediate operating goal and ultimate purpose of a public corporation should be to maximize return on equity capital. This perspective views corporate social responsibility as an inappropriate wealth decreasing altruism unless it yields future positive returns for the firm (Windsor, D., & Boatright, J. R. 2010). Prominent in Anglo-American markets, SWM is based on the premise that management are appointed as the agent of the shareholders, therefore having a fiduciary duty to run the company for their benefit (Jensen, M. & Meckling, W.1976). The theory is further underpinned by the assumption that the stock market is efficient, meaning that the share price is always correct; as such share prices are deemed the best allocators of capital (CORE TEXT BOOK). The stock markets constant thirst for positive quarterly financial reports filters down to management level as failure to post favourable results can lead to dismissal; such is the nature of equity markets. The fact that executive compensation schemes are often tied to profits and stock options in an attempt to align management’s interests with those of the shareholders means there is less aspiration from managers to pursue long term growth strategies. Instead a focus on short term share price increases exists as managers look to appease Wall Street and in turn protect their short term job

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