Appendix 1 - Shareholder Wealth Maximisation vs. Profit Maximisation

There are a number of different characteristics between wealth maximisation and profit maximisation.

Profit Maximisation is a more traditional approach which is often seen as the main goal of any business. The objective of financial management is profit maximisation. It cannot be the sole objective of a company as there is a relationship between risk and profit. If profit maximisation is the only goal, then risk factors are ignored. Maximising profit can help the business to survive, pay any debt, pay the businesses employees, basically profit maximisation is equal to revenue minus any expenses which the company may occur. If the business is not making any significant profit then overall the business is in danger of surviving. Profit maximisation is more short term based to gain short term returns. Profit maximisation is not very specific as there are many profits such as profit before tax, net profit and gross profit.

Wealth Maximisation is more of a modern approach with many arguing that is is more superior than profit maximisation. According to Arnold, He believes maximising wealth can be defined as maximising purchasing power and to maximise purchasing power companies pay a flow of dividends to investors who are interested in the long term gains and sustainability of the company rather than short term gains.Wealth maximisation simply means maximising the shareholders overall wealth. When the overall value of a business increases also does the shareholders wealth. Wealth maximisation serves a purpose towards shareholders objectives of getting good return and safety of their capital which they have invested, Profit maximisation does not do this. Wealth Maximisation is for long term gains. Wealth maximisation considers the time value of money, a certain amount of money valued today will be valued differently in a years time. Future cash flows will be discounted at an appropriate discounted rate to represent their present value. When talking about wealth we simply mean wealth is equal to the cash flows subtracted by costs. Wealth maximisation strategy involves making sound financial investment decisions which take into consideration risk factors.

Jensen 'Enlightened' theory

Michael Jensen in his enlightened shareholder value theory explains that a business must take into account competing interests and stakeholders cannot be ignored. Wealth and profit maximisation are intended for shareholders, but to ensure shareholders are receiving money the business must not ignore any interests of stakeholder who have interest in the business or this could have a negative impact on the money the shareholders receive.He also goes on to explain that the key ways to create value are business vision, competitive and organisational strategy 

Tesco over stating profit situation
Arnold has argued that one difference between profit maximisation and wealth maximisation is “profit is a concept developed by accountants to aid decision making, one decision being to judge the quality of stewardship shown over the owner’s funds.” Companies accounts are not always accurate as Tesco are currently in crisis due to the company inflating the profits by 250 million pounds in the first half of the year. To tie in with what Arnold said in the above statement Tesco overvaluing the profit will lead to wrong decision making as the company may believe they have more profit to play with than they actually have. Also Tesco managers have shown very poor stewardship over the owner's funds. The situation Tesco are in has caused Tesco to suspend four senior executives and call in accountancy firm Deloitte and law firm Freshfields who are to investigate this crisis that Tesco have found themselves in. Tesco have seen that they have lost 2.2 billion pounds from the value of the company. Many shareholders have walked away from the company with the major shareholders having a lot of unanswered questions which they demand to be answered from Tesco's managers. The Sunday Telegraph recently reported that one of Tesco's largest shareholders, Harris Associates, has sold around two thirds of its stake, saying the business currently lacks a clear strategy.

One of the four men suspended was Chris Bush, the most senior executive outside the Tesco boardroom as the manager who oversees its UK operations, which rang up sales of £48bn last year. “We have uncovered a serious issue and have responded accordingly,” said Tesco’s chief executive, Dave Lewis who admitted he did not yet know whether the practice had been going on for some time.

Above graph shows Tesco's share price over the last year with the over estimate of profits clearly affecting shares with share value in October 2014 clearly less than half the value they were in October 2013.

Summary
Overall wealth maximisation is better for shareholders than profit maximisation as wealth maximisation is more stable which offers greater market performance which delivers long term financial gains for the shareholders. Many consider that wealth maximisation also helps with reaching other business objectives. Total profits are not important as earnings per share.