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Why aren’t firms maximizing shareholder wealth?

As taught across B-Schools across the land, the role of a firm’s management is to maximize shareholder wealth.

Managers utilize many different strategies to maximize shareholder wealth; these strategies may be criticized by some and hailed by others as innovative and the ideas of tomorrow. However the ultimate arbiter is the firm’s bottom line, net income. Managers should minimize costs as much as possible without faulting the quality of the product.

Therefore, I ask why are firms not maximizing shareholder wealth?

The hot political topic of the day is Healthcare. The current administration and legislatures on Capitol Hill are attempting to reform this countries health insurance system. Many firms are being destroyed by their great legacy costs – including healthcare, and the effects were felt more than ever in the past recession. Revenues plummeted as Health insurance cost increased 5% in 2008 according to the National Coalition on Health Care. While the recent debate has sparked great enthusiasm from grass root organizations and private citizens, one group has been remarkably quiet – big business.

Now don’t get me wrong, I recently witnessed a small business organization denounce health care reform, but that was an organization controlled by small businesses. Not businesses that have hundreds of millions in healthcare related costs and consequently must answer to its shareholders. For instance, big business such as Catepillar Inc. (NYSE:CAT) who as of December 31st 2008, had over 53,000 employees. For fiscal year 2008, Caterpillar Inc. reported a net income of $3,557 million, whereas health care cost or the period was $287 million. Though $287 million may seem significant compared to $3,557 million, shareholders could have earned an additional 12.39 % on their investment, if big business vocally supported the government’s effort to create a government run health insurance system. This is the same with other labor intensive firms such as Ford (NYSE:F). Health costs for the firm were $1.3 billion for employees, retirees and their dependents, according to Ford’s 2008 10-k; an additional $1.3 billion that could be apart of shareholder returns.

Moreover, U.S firms are facing increasing competition overseas, where firms based in Europe and Asia are not required to finance employee healthcare costs. Therefore enhancing the firm’s bottom line. The disparities between two firm’s costs within the same industry may cause an investor exodus from one firm, or industry within the nation to the other. Yet many firms have remained remarkably quiet.

Some firms such as Walmart (NYSE:WMT), and Starbucks (NASDAQ:SBUX) been very vocal in the past for the need of healthcare reform due to the great tolls it has taken on the firms income. Starbucks CEO Howard Schultz due to personal reason decided to provide healthcare for not only fulltime workers, but the majority of part-time employees, and as any wise businessperson would expect, this was a very costly endeavor.

The basis of this discussion is not to advocate a government run health insurance system; I know nothing of the matter. But the great burdening cost healthcare has on firms is depriving investors of even greater returns. If exercised, businesses can use their great power to control and reduce healthcare costs, increasing to their net income. Recent discussion has focused on a cooperative health insurance system, and though I do not the details – Just as knowledgeable as I am concerning the government run health insurance program. I know if businesses all rally about the great costs of health care and form some sort of cohesion, the greater number of participants can reduce healthcare premiums and maximize shareholder wealth.