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Business profits yes, because executives exert direct control over revenues and expenses. Share prices no, because it depends on the future expectations of oth
by cs702 4y ago
Business profits yes, because executives exert direct control over revenues and expenses.
Share prices no, because it depends on the future expectations of others who buy and sell shares every day.
Imagine you are part-owner of, say, a local landscaping business, and you're a passive investor, i.e., not part of its management. The managers of this business would be working for the owners, including you, and the managers' mandate would be to maximize business profits over time, a portion of which you would get as income in the form of annual dividends or distributions.
When you buy a share in an exchange-listed company like, say, Apple, you're a part-owner of Apple. Our legal framework (encompassing everything from federal and state laws to company bylaws) stipulates that the board of directors works for and represents the interests of shareholders like you, and that the company's executives work to maximize profits for the shareholders over time. Shareholders, including you, vote to elect the members of the board, who have a fiduciary obligation to act in the best interests of shareholders, including you.
However, when most people think about "maximizing profits" they think about it as maximizing share prices. In practice, executives of exchange-listed companies are "held accountable" (by the board) for share prices, generally under the assumption that present share prices are correlated with future profits.
- boh 4y agoNope. Feel free to cite whatever regulatory statute that legally demands profit maximization. Also when you buy a share of Apple you are not a part owner of the company. You are granted rights to board votes and cash flows in the form of dividends and that's pretty much it. Shareholder primacy is a 20th century marketing campaign to make people more comfortable with investing their money--as a shareholder you're entitled to very little and do not have legal rights to demand profitability.
- cs702 4y ago> You are granted rights to board votes and cash flows in the form of dividends Yes, exactly: Shareholders elect the board. Here's a question for you: What are the legal obligations to shareholders of those board members elected by the shareholders? (Hint: board members have a fiduciary obligation to act in the best interest of shareholders.)
- boh 4y agoNot very much. Just issue filings and have meetings to retain the company's corporate status. They may have unique contractual obligations that may result in a lawsuit should they not be fulfilled but those aren't necessarily "legal obligations" since it's subject to scrutiny (contracts aren't laws). edit: and in terms of "fiduciary obligation", maximizing profitability isn't one of them.
- shukantpal 4y ago> Also when you buy a share of Apple you are not a part owner of the company. This is totally wrong. > as a shareholder you're entitled to very little and do not have legal rights to demand profitability. Only if you are an isolated minority shareholder. If shareholders group together form a quorum (+ 50% of total ownership), they can demand anything from their company - including replacing the entire board and taking operational control of the company.