Rethinking Shareholder Wealth

The majority of financial managerial advice is based on the premise of maximizing shareholder wealth. That is fine as a philosophy and is more or less the legal requirement when it comes to publicly traded corporations. However, for the small business owner – who is frequently “the” shareholder of the company, a rethink of maximizing shareholder wealth is necessary.

Small business owners do indeed want to increase their wealth. Furthermore, unless they are already wealthy, they will likely need to increase their wealth. However, increasing wealth and maximizing wealth through business management are very different things.

Many small business owners have a variety of objectives for starting, nurturing, and growing their businesses. Most small business owners probably know that their odds of maximizing their personal wealth is likely higher by working for a large corporation, or by taking up a profession. However, it is the passion for their business, the satisfaction of being their own manager, or the sense of service to their customers or a variety of other factors that also drive the small business owner.

When making small business decisions, even financial decisions, it is vital that the portfolio of objectives that go beyond maximizing shareholder wealth be factored into the business decision making calculus. That is why small business financial analysis is not simply a scaled down version of corporate finance. It is not about maximizing wealth, but instead it is about maximizing utility.