The people who provide financial backing to a company for the return of lifetime dividends are known as shareholders. One can become a shareholder of a particular organization either by memorandum subscription during incorporation and they can also invest in new company shares or by purchasing shares of an existing shareholder (Yan, 2017). Shareholders can transfer their shares, but a company can decide to apply a restriction on the process. Shareholders have a responsibility to approve decisions that are related to the company’s overall goals and performance. Shareholders are responsible for the changes to the constitution and the declaration of dividends (Lankoski and Smith, 2018). They are as well responsible for approving all the business’s financial statements.
Shareholders can increase their wealth by deciding to increase the price of the stock. An increase in stock price helps increase the general increase in the firm’s value. The theory of profit maximization aims at risk reduction and minimization of uncertain factors that are related to operational decisions (Tanggamani et al., 2017). When all other factors are reduced, it helps the firm to aim at improving its production activities and increasing production efficiency (Latapí et al., 2019). Most shareholders involve profit maximization theory as it helps determine the behaviors of a particular business organization and other factors of production like price and output of the varying market conditions.
From the theory of profit maximization, shareholders understand clearly that for the survival of the organization, profits must be realized. Once the company generates profit, shareholders will try all means possible to maintain the same profit level (Masud et al., 2019). The development and growth of the company are largely dependent on the profit the company realizes. Growth is a key factor if the business has to survive for long. Growth helps the company acquire new assets and attract new qualified and talented employees. Shareholders can also decide to fund new investments. With profit maximization, shareholders can also decide to maximize alternative objectives of the organization (Kotey et al., 2020). The objectives may include increasing the sales and market share, which will maximize the growth of the company.
Shareholders can predict the future as profit maximization helps in predicting the other factors of organizational behavior. The profit maximization theory is used to measure the efficiency of the company (Slorach and Ellis, 2017). Since internal sources act as major sources of finance, shareholders can use the information to accurately estimate revenues. Even though Profit maximization theory has been successfully implemented in several organizations, it has several constraints (Weale, 2020). Modern economists believe that no organization can have a perfect knowledge of its business, pricing, and output. They believe that shareholders can on rely on the information provided based on probability (Boubaker et al., 2017). Profit maximization theory, clearly states that shareholders have perfect information about their business environment, price of their products, and costs.
In Growth maximization theory, the shareholder’s focus is mainly on market share and profits, while the managers of the business desire increase in salary, job security, and also promotions. Shareholders and managers in this theory have different priorities. To establish a common link between shareholders and managers, Marris came up with the Growth maximization theory (Parmar et al., 2019). Marris believes that both managers and shareholders should pursue maximization of the firms’ sales and value. Based on the firm’s aims and objectives, Growth maximization is good since it focuses on managers and shareholders maximizing their full potential (Joffe et al., 2018). Marris experienced a constraint as it was necessary to distribute a good amount of profit as dividends to the shareholders.
Growth maximization theory employs the reasoning that there will always be a difference between ownership and control. This is contrary to the profit maximization theory that assumes most firms are owner-controlled, and their operation is based on the decisions of the shareholders (Sproull, 2019). Shareholders use this theory to forecast the demand for the products. Clear estimates of what is required help in prior planning of the business. Production of goods on time helps the company provide goods and services on time hence fulfilling consumer needs (Fanti and Buccella, 2017). Accurate planning will help the company realize its profits hence growth within a short period.
Shareholders employ growth maximization theory to perform market research on their products, services, and also customers. Information obtained helps the company to easily forecast the demand. Shareholders will not only use information from the market research to gain a competitive advantage but also identify and evaluate consumer needs and wants (Mert, 2018). Well performed research will help identify the strengths and weaknesses of the competitors, which will help the company adjust its services to be more professional and satisfying. Provision of quality products and having a dedicated team to offer professional services to customers will help the company increase sales hence maximizing the profit (Besley and Ghatak, 2017). The results will have both the managers and shareholders happy and satisfied as both will have met their goals.
Growth maximization theory also focuses on in-market testing of the products before they are fully rolled out to the market. Market testing has many advantages to the business as the information gained will help in forecasting (Owie, 2017). Since testing is done based on the survey, data entered helps the company to identify and evaluate customers’ feedback. An informative survey helps the shareholders modify the product to best suit the consumer demand and needs. The survey carried out can help the company identify its strong and weak areas, which provide shareholders with a clear road map on how to improve the overall performance of the company. Improved performance of the company will be a result of efficiency in production hence maximum returns (Denis, 2019). The realized profits will then be converted into the expansion and growth of the firm.
Mergers and Acquisitions of companies have been heavily practiced in the Growth maximization theory. A merger is a process where two companies perform together for the main purpose of maximizing growth (Newman et al., 2020). The process takes place when one company offers securities to the stockholders in return for the other company surrendering its entire stock. On the other hand, Acquisition is whereby one company buys all or most of the stakes of the target company to take full control of the target company. Shareholders can decide to merge their company with another in a situation where the merger company is closely related and has the potential to attract customers (Cardao-Pito, 2017). Depending on the merger the shareholders decide to go with, the main aim will be to attract more customers, which will increase sales hence maximization of profit.
Some of the criticism of the Marris model of Growth maximization is assumed that the firms have a specific structure. The theory fails to explain that most of the prices are determined in the market (Rodriguez-Fernandez, 2016). The theory also assumes that firms can continuously produce and sell new products. It fails to consider the fact that consumers purchase their products based on taste and preferences. The Marris model is most effective for firms that produce consumer goods and not effective for a business involved in manufacturing or traders (Alcaniz et al., 2020). Despite the constraints articulated by both profit maximization and growth maximization theories, shareholders can effectively determine the firm’s position and employ the best theory that will maximize the profits.
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