What Are the Differences Between Shareholder Wealth Maximization & Profit Maximization?

Shareholders are different in nature, in terms of their knowledge and business orientation. Most of them are myopic and are highly concerned about the immediate benefits. They, therefore, aim at profit maximization. However, others are rational and future-oriented. They aim at wealth maximization, increasing an entity's scope through larger markets share, greater stability and higher sales. Though different, both perspectives are beneficial to an entity. Profit maximization can be seen as a subset of wealth maximization since in the process of creating wealth, profits must be made.

Horizon for Assessment

The wealth maximization goal focuses on a longer term horizon. It aims at accumulating wealth for the long-run success of an entity. It gives priority to the creation of value since it is a function of all long-term yields to the stakeholders. Profit maximization is short-term horizon. It does not focus on creating wealth.

Emphasis on Time and Revenue

Wealth maximization goal highly focuses on cash flow over time. It focuses on the present values of inflows and outflows. One of its components is that money has time value and, therefore, can sacrifice today's profits for tomorrow's super profits and future success. Profit maximization considers today's revenues. It does not deliberate on the element's time or risk in the profits.

Management and Shareholders Difference

Shareholders, being the owners of an entity, will focus on the wealth maximization goal. They are more risk averse and would take the risks to strain for the long-term success of their entity. They would sacrifice current revenues to reinvest for the future wealth maximization. Management, on the other hand, highly focuses on the present-day revenues of an entity. They prefer profit maximization goals that are more concerned with their earnings.

Value

Wealth maximization goal is the value of an entity expressed in terms of the market value of its common stock, i.e., the current trading market price per share times the number of common shares outstanding. Profit maximization measures the value of an entity in terms of the currency profits that it makes. It assumes that the yield of highest value is making as much profits as possible.