Wealth Maximization vs. Profit Maximization: Definitions And Differences

• Published date: 25 November 2022
• Subject Matter: Corporate/Commercial Law, Wealth Management, Corporate and Company Law, Wealth & Asset Management, Shareholders
• Law Firm: Innovation Park
• Author: Ms Julia Vorontsova

There are two primary objectives of every business and corporation. One bases its decisions entirely on the shareholders' interest, and the other focuses on company profits. What are the key differences between wealth maximization vs. profit maximization?

Does one objective take precedence over the other?

Learn about the definition of wealth maximization and find out why most firms consider it their primary goal. Discover what profit maximization means and if it's an outdated concept in financial management.

Unearth what these strategies aim to achieve and whether they're different from each other. First, let's start by defining wealth maximization.

The Definition of Wealth Maximization

Wealth maximization is the concept of increasing a firm's worth to increase the value of stockholders' shares.

Wealth maximization is also known as net worth maximization. A stockholder's wealth increases when a company's net worth maximizes.

Many businesses consider it superior to profit maximization. In fact, most large management-controlled firms are likely to list shareholder wealth maximization as their dominant goal.

A corporation focusing on wealth maximization as its primary goal puts the shareholders' interests at the heart of every decision. Therefore a firm needs to appoint professionals such as experienced CFOs, CEOs, and sales directors to manage shares.

This management team considers crucial factors like the timing, risk, and duration of a company's earnings and dividend policies. They also examine other factors that may influence or affect market prices.

A share of stock represents ownership in a corporation or business. The objective of any stockholder or investor is to gain a substantial return on their capital. Wealth maximization aims to improve their wealth by increasing the marketing share prices.

Shareholder numbers are rising worldwide, so more businesses are focusing on wealth maximization. For example, South Korea's listed corporations saw an almost 50% rise in stockholders between 2016-2020. That's a substantial amount of new investors.

How can you keep your shareholders happy?

Appoint professional managers to make essential operating, investment, and financing decisions to increase the market price of common stock.

Consider the law of supply and demand. If stock supplies are higher than consumer demand, the market price will fall, and the shareholders will lose money.

If shareholders aren't happy, they might sell their shares and diversify their...