The goals of corporations in maximizing shareholder value
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Published: Mon, 5 Dec 2016
The goal of any corporation, excluding non-profit corporation is to maximize its shareholders’ value .Athough maximization the shareholder value is very important but the manager should not ignore social responsibilities such as protecting consumers, paying fair wages, maintaining fair hiring practices and safe working conditions, supporting education and becoming activelt involved in environmental issues like clean air and water. Because social responsibility creates certain problems for the firm , it falls unevenly on different corporations and sometimes conflicts with the objective of wealth maximization.
The objective of the firm is to maximize its value to its shareholders, Any firm in this society have the same tendencies to acquire a successful business, attaining this success through mission statements, goals and objectives is simultaneous through all business. The standard neo-classical assumption is that a business strives to maximize profit , expect to increase revenues more than costs, it means that maximizing in earning per share.The managers are suppose to make money, profit. Therefore, they should make the firm as profitable as they can, they want a high return on investment. Shareholder wealth as the main objective of the firm.
The main objective of the management is to maximize profits by maximizing profits at the cost of customer and minimizing cost. Maximizing shareholder wealth and maximizing profit go hand in hand. Both theoretical and empirical literature support the assertion that manager should focus on shareholder wealth maximization. The firm shareholders are the residual claimants and therefore maximizing shareholder return usually implies that firms must also satisfy customers, employees, suppliers, creditors, tax authorities and other stakeholders first. If firms did not operate with the goal of shareholder wealth maximization in mind, shareholders would have little incentive to accept the risk necessary for a business to thrive.Managers with a primary goal of shareholder wealth maximization have impersonal, objective, and accurate information available to make successful decisions for the long-term of the company.
Social responsibility creates certain problems for the firm. One is that it falls unevenly on different corporations, another is that it sometimes conflicts with the objective of wealth maximization.
Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
The company can not create shareholder value if they ignore important constitiences, they must have good relationship with customers, employees, suppliers, government and so on. This is a form of corporate social responsibility, within an overall framework of shareholder wealth maximization.
Kotler and Lee (2005: 10-11) report that there are many benefits to being a socially responsible firm. These include: increased sales and market share, strengthened brand positioning, enhanced corporate image and clout, increased ability to attract, motivate, and retain employees, decreased operating costs, and increased appeal to investors and financial analysts.
Pava (2003: 62) provides a reason that many firms do not act in a socially responsible manner. Many executives believe that “there must be a trade-off between profits and social responsibility: An activity is either socially responsible or profitable, but it cannot be both.” Pava, an accountant, whose research compared socially responsible firms with those that were not, came to the following conclusion (Pava, 2003: 62): “Much to my surprise, we were unable to uncover any cost of social responsibility. In fact, the evidence suggested that there might even be a financial advantage for the companies carrying out these projects.”
Knowing about corporate social responsibility is one way to incorporate “how” and “why” a firm should do the right thing into the business curriculum.
Kotler, Philip and Lee, N. (2005). Corporate social responsibility: Doing the most good for your company and cause. New York: John Wiley & Sons, Inc.
Pava, Moses L. (2003). Leading with meaning: Using covenantal leadership to build a better organization. New York: Palgrave Macmillan.
Our aim is to build a sustainable business through consistent, profitable growth and to ensure that our customers and wider stakeholders can always trust us to do the right thing, the right way.
as a business owner, you have to make a choice: you can either make money, or you can do good. you can both make money and do good.
Benefit Corporations, commonly known as B Corps, are a new type of corporation. Unlike the traditional corporation that gives priority only to financial profitability, B Corps actually use the power of business to address social and environmental problems.
How do they do this? Among other things, they “institutionalize stakeholder interests.” Instead of taking the shareholder as the primary person to which they are responsible, B Corps give primary consideration to the stakeholder. This is a very important distinction. A shareholder, as we know, is someone who owns shares in a company; a stakeholder, by contrast, is someone who has a stake in the company, regardless of whether he/she actually own shares. Who can have a stake in the company? Anyone who is affected by the actions of that company, such as employees, members of the local community in which the business operates, or members of the community in which the business has an environmental impact.
A traditional C Corporation will focus on increasing shareholder profits, often without regard to how that affects other stakeholders. This is why corporations sometimes do not pay living wages or provide inadequate health benefits – because those are costs that, if saved, can provide profit for shareholders. B Corps, however, are committing to taking social and environmental interests into account when making decisions.
By becoming a B Corporation, you will ensure that your own business meets high standards, join a community of like-minded businesses, and support a larger movement towards sustainable business.
Commit to stakeholder interests in your business. Prior to becoming certified by B Lab, you may be able to include your commitment to consideration of stakeholder interests into your legal organizing documents if you are an LLC, which is what I did for Cultivating Capital. However, be sure consult with an attorney about this, preferably one who is familiar with B Corps. The Katovitch Law Firm explains more about the legal implications of being a B Corp on their blog.
Identify areas in which you can improve. Even if you do not get certified right away, the Impact Assessment is a tool that you can use to identify areas for improvement in your business. To get started with the Impact Assessment, visit the B Corp website.
Support other B Corps. Every dollar that you spend, for yourself or your business, is a vote for either an economy in which businesses can make money at the expense of people and the environment, or one in which businesses can make money in support of people and the environment. Supporting businesses with a social and environmental mission will also help to green your own supply chain.
Managers should always strive to act in the best interest of the firm’s owners. This view does not cause managers to ignore non-owner stakeholders; indeed, when taking actions that benefit stakeholders also benefit owners, the separation perspective would advise managers to do so. One facet that differentiates this perspective from the others, however, is the rationale behind such decisions; the reason managers make decisions and take actions benefiting non-owner stakeholders is ultimately to reward owners. Clearly, problems arise when a given decision would maximize the benefit to non-owners at the expense of owners, but that would serve the greater good of society in general.
managers have come to view non-owner stakeholders as essential to firms’ success, not only in financial terms, but also in societal terms (Rodgers and Gago, 2004). However, this has not eliminated managerial decisions that are overly concerned with financial performance at the expense of other stakeholder interests. The collapse of Enron and WorldCom early in the twenty-first century, charges of accounting fraud against firms such as Tyco and Time Warner, Medicare fraud by HealthSouth and United Healthcare illustrate that despite the apparent logic of an integrated perspective of stakeholder management, some managers still hold to the separation perspective. As shareholders of these and other firms have seen, however, is that sole regard to financial results is not always in the best interests of these shareholders. Those holding Enron and WorldCom stock, even those who knew nothing about illegal activities by the firm’s top management, quickly came to realize that excluding non-owner stakeholders is not necessarily consistent with maximizing shareholder wealth. In fact, excluding non-owner stakeholders can inadvertently bring more pressure on managers when non-stakeholder interests are not respected.
The focus of the ethical perspective is the firm’s responsibility to stakeholders from a normative view; that is, the ethically correct action should supercede actions based solely on self-interest, thus making managerial decisions and actions that impact stake-holders based on universal standards of right and wrong the rule that managers should follow. This standpoint, though, suffers from shortcoming stemming from different standards of right and wrong. When right and wrong are apparent, decisions are easy, but management challenges are rarely so clear. Simply suggesting that managers do the “right thing” ignores conflicts of interest inherent in capitalistic competition, and doing the right thing can result in compromises that are not in the best interests of any of the stakeholders, but rather a way to satisfice or make decisions and take actions that are “good enough,” but not optimal. The ethical view of stakeholders can result in managers overemphasizing the greater good to the point that they ignore the reality of self-interest, particularly as it pertains to maximize shareholder wealth.
Integrating the broad categorizations of separation and ethics allows room for both self-interest of owners and corporate responsibility to non-owner stakeholders. An integrated perspective of stakeholders positions the self-interests of managers as a key driver of economic growth, but tempers this with social responsibility toward non-owner stakeholders.
Conclusion :It is overly simplistic to suggest that managers should just do the right thing in all situations, because the “right thing” to do is not always clear. On the other hand, acting solely in the financial interests of shareholders can result in unintended consequences that ultimately cause shareholders harm. Integrating multiple perspectives allows room for managers to balance the interests of multiple stakeholders. Such stakeholder perspectives allow for competing dimensions, thus provide a framework to help managers harmonize the interests of multiple parties.
History of State-Run Enterprises Teach Us in the Post-Enron Era?” Journal of Business Ethics 53, no. 3 (2004): 247-266.
Crane, Andrew, Dirk Matten, and Jeremy Moon. “Stakeholders as Citizens? Rethinking Rights, Participation, and Democracy.” Journal of Business Ethics 53, no. 1-2 (2004): 107-123.
Heath, J., and W. Norman. “Stakeholder Theory, Corporate Governance and Public Management: What Can the History of State-Run Enterprises Teach Us in the Post-Enron Era?” Journal of Business Ethics 53, no. 3 (2004): 247-266
Lea, D. “The Imperfect Nature of Corporate Social Responsibilities to Stakeholders.” Business Ethics Quarterly 14, no. 2 (2004): 201-218.
Rodgers, W., and S. Gago. “Stakeholder Influence on Corporate Strategies Over Time.” Journal of Business Ethics 52, no. 4 (2004): 349-364.
Bingham: Not only is maximizing shareholder wealth consistent with ethical behavior, but maximizing wealth for shareholders in the long-term is only possible by behaving ethically. Unethical behavior is bad business. It incurs costs and damages a company’s reputation. Both affect the bottom line.
Shareholders demand ethical behavior for a basic financial reason, namely that they bear the costs of environmental cleanups, lawsuits, fines, and product recalls. For instance, the clean up of Prince William Sound in Alaska, following the Exxon Valdez spill, cost the shareholders of Exxon over $2 billion. Likewise, General Electric’s shareholders paid a $69 million fine in 1992 after the company pleaded guilty to submitting fraudulent government contracts. Unethical behavior, by sullying a company’s reputation, also affects future business. When Beech-Nut admitted that it had sold adulterated apple juice, not only did shareholders foot the cost of the numerous lawsuits, but they also saw their company’s market share drop three percent in the year following the scandal.
A recent example shows how shareholders suffer from unethical practices. In the summer of 1992, the California Department of Consumer Affairs conducted a number of undercover investigations at the auto repair stores of Sears, Roebuck & Co. They found systematic overcharging, and regular performance of unnecessary repairs. A similar operation in New Jersey reached the same conclusions. California consumer regulators demanded the closure of all 72 Sears auto stores in the state. If the closure occurred, Sears would lose $200 million in annual revenue, and 3,000 employees would lose their jobs. Sears settled the New Jersey accusations with a payment of $200,000 to a fund set up to study auto malpractice nationwide. At least a dozen class-action suits relating to the fraud were filed. The scandal also deeply affected Sears’s reputation at a time when it needed all the goodwill it could get. The Auto Stores, one of Sears’s most profitable operations, saw a 15% decline in business in wake of the scandal.
This shows how unethical behavior is deeply damaging to shareholder wealth. Maximizing such wealth is only possible when a company acts as a resolutely ethical corporate citizen. Management do their shareholders good by doing right.
The argument that maximizing shareholder wealth is inconsistent with ethical behavior goes like this: shareholders are inherently short-termist, they are more interested in a company’s performance over a quarter, than over a decade. The result is that managers cut corners and break rules to avoid charges to quarterly earnings.
This argument is false. America’s shareholders today are mostly giant institutions — pension funds, insurance companies, trusts and endowments — whose view is long-term. They do not attempt to beat the market by short-term trading because increasingly, they are the market. For example, the average holding period of U.S. equities by the largest public pension funds, the California Public Employees’ Retirement System, is eight years. For them, the long-term health of a corporation is critical, and that means conforming to a high standard of ethical behavior.
Rosenbaum: Your first question cannot be answered yes or no without a better understanding of the terms used. If by “ethical behavior” you mean not lying, cheating or stealing, the answer is clearly yes. But if you mean “ethical behavior” in the broader sense of not intruding on the interests of any other stakeholder, as I am assuming you have in mind, the question poses one of the principal issues of the 1980s. I believe most shareholders today would try to answer this question in the affirmative, but to do so requires some additional qualifications.
If we exclude short-term maximization of shareholder wealth, and focus only on the long-term interests of the corporation, on the premise that shareholder wealth will increase accordingly over time, there is no necessary inconsistency between that objective and “ethical behavior” broadly understood. As courts and ethicists have understood for some time, socially responsible corporate behavior is usually in the long-term interests of the corporation and therefore of its shareholders, such as by generating goodwill among those interest groups on whom the corporation depends for its prosperity in the long run. If you unduly pollute the air in the town where your widget factory is based, for example, you will ultimately encourage new laws which might shut the factory down.
When we talk of financial ethics, we seem to be talking about two different types of considerations, which are quite different. First, we are talking about societal considerations, such as environmental concerns and balancing the interests of the corporation against those of stakeholders. Second, we are talking about preventing conduct which is either a violation of law or is sufficiently close to the line of illegality that the corporation has determined not to take a risk of violation, particularly without careful consideration at senior levels. I would like to address myself for the moment to the second of these two concerns.
When speaking about ethics issues of this type, the role of ethical principles is essentially to supplement and reinforce legal strictures. In these highly competitive days, when corporations are under enormous pressure from shareholders to produce financial results, financial executives face substantial temptations to take measures which, for example, might make their corporation or division appear more profitable than it is. Most executives are strong enough to resist these temptations.
A senior manager in a publicly traded corporation, on the other hand, is separated from the pleasure and pain of owning the entire equity funded portion of the firm and it is not their own money at risk. They are typically employed via a contract which specifies remuneration and responsibilities, but they do not personally bear the entire financial consequences of decisions made. As shareholders, we ask the Board of Directors and the senior management to act in our own selfish interest as equity holders. We structure the contracts in a manner we hope will be sufficient to both reward them for outstanding decision making and we reserve the right to remove them when things are not performing up to expectations. Like everyone, management is self interest motivated and can easily forget or ignore shareholder interests in hopes of personal gain. The business news of the past 3-5 years has been full of such events including Enron, Tyco, World Com and others. It is unlikely that any former shareholder or employee of Enron would view the senior management as acting in an appropriate manner as an agent working on their behalf! In the short run, share prices were higher and wealth was increased, but the longer term consequences were devastating to any investor who was not sufficiently diversified to avoid the full brunt of the collapse.
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