Q. Conflicts in Profit versus Value Maximization Principle?
1) Conflict between Departmental Goal and Firm Goal: There are several departments in affirm such as sales department, purchase department, production department .and marketing department etc. There may be conflicts among the goals of these department. Moreover, the internal operative goal of the department may conflict with the goal of the firm. At times, the departmental head may fail to visualize the ultimate corporate goal, which is more important to achieve. It is necessary to resolve these conflicts to achieve the goal .of the firm.
2) Diverse Interests of Stakeholders: Company is a complex organization. There are various stakeholders in a company, other than the shareholders. They are creditors, debenture holders, employees, customers and society who have their own interest in the organization. The interests of stakeholders are different. Every group wants to evaluate the performance of management from its own objective viewpoint. Each group recognizes the efficiency of management only when their interests are satisfied. So, management has to satisfy all the groups. By achieving wealth maximization, management can satisfy all stakeholders. Shareholders are benefited with the maximization of their equity share prices in the market. Market is defined as the place where the shares are quoted e.g. Bombay stock exchange or National stock exchange. Creditors are more secured about refund of their principal as well as interest amount. Employees, get better salaries and can have better career, with improved working conditions.The real focus of wealth maximization is on the satisfaction of customers through production of goods and services, with better quality. Unless the customers are satisfied, there would be no survival for the organization. Even the Government can secure higher revenue through higher tax collection, due to increase in profits. Society, in general, gets the gain in the long run.
3) Concentration on Easily Attainable Goals: In case of corporate firms, the ownership is held by the shareholders while the management is in the hands of Board of Directors and senior management who work as functional directors or heads. The owners set the goals for management to achieve. Certain goals are easy while others may be difficult to achieve~ In a company, the decision-making authority lies in the hands of management. The management may concentrate on easily attainable goals like achievement of production and ignore the effect of the other variables on the market price of the share.
4) Differing Viewpoints: Usually, the shareholders are scattered and ill organized to control the Board of Directors. Board of Directors may tend to develop their own goals on account of their functional autonomy. More so, now, the professionals hold tlie senior management positions. This may result in differing viewpoints between the shareholders and management. The professional management may alienate from the viewpoint of the shareholders. This situation has not been there, earlier, when sole proprietorship firms conduct the business.
5) Survival of Management: The survival of management will be threatened if any objective of the stakeholders remains unfulfilled. It is certain that the management wants to survive, satisfying the interests of all stakeholders, over a long run. So, the management cannot pursue its own personal goals because of the continuous supervision by the company's owners, employees, creditors, customers and Government. The responsibility of the management is to maintain a balance between the goals of various groups.
The objective of wealth maximization may be in general harmony with the interests of the various groups such as owners, employees, creditors and society.