Rich countries should not forgive poor countries all their debt since their poverty is not the responsibility of the rich countries, which when forgiven risk failing to use forgiven debts to revive their economies, but need to establish the underlying reasons for their poverty and fix them.
Thus, instead of forgiving the poor countries the debts they have accumulated, the rich countries should reinvest the money to address needs of their poor people by lessening taxes, investing in infrastructure development, and in reviving their economies. However, poor countries are poor because poor government policies such as poor planning into the future, lack of jobs and a poor population, and irresponsible government and people in general. Thus, rich countries should not forgive poor countries their debts.
Poor countries
The poverty that ravages poor countries is not the responsibility of the rich countries. According to studies by Bailey (1), poor planning by policy makers in many governments of the poor countries, is one of the most significant factors affecting the level of poverty of the governments and the level of poverty of their people. Bailey (1) argues that many governments, instead of working to alleviate the poverty levels of their people are working hard to make more people poor and to keep them poorer.
That is reflected evidently in the poor planning policies these governments and people in government have adopted as their monetary policies. According to Barkley (1), poor countries need to plan their economies well in relation to issues of investment, thus come up with economic systems that address investment approaches, which help to consolidate resources effectively and efficiently.
An economic system is viewed as an amalgamation of different sectors concerned with the production and allocation of resources, which provide economic inputs and outputs in their interactions to form an economic entity. In addition to that, the economic systems use available resources, which are scarce to address the economic problems by allocating the resources effectively and efficiently.
However, poor countries have critically failed to use the scarce resources effectively and efficiently due to their failed economic planning policies. In agreement with the assumptions of Bailey (1), poor countries fail to plan well in the allocation of resources in infrastructure development, in the payment of debts, in the creation of jobs, and in poverty reduction projects, thus causing further poverty in government and in their people.
On the other hand, Bailey (1) confirms that rich countries always consider it a critical issue to plan well and effectively and efficiently allocate the scarcely available resources, thus, the problem of poverty with poor countries in not the responsibility of rich countries.
Thus, poor countries should make every effort to plan well, establish the reasons behind the mistakes in their planning policies, and formulate methods of addressing these problems to overcome the problem of poor planning and eventually fight the prevailing poverty.
Studies show that effective planning leads to affordability of life and associated cost of living, effective and efficient utilization of resources, higher employment rates, and improved business activities, higher levels of production and improved productivity, and sustainable tax burdens. On the other hand, despite the heavy debts poor countries are experiencing, there is the risk that when forgiven the debts, the money accruing as a result might not be well used.
Forgiving their Debts
There is hardly any evidence showing that if poor countries are forgiven their debts, the money generated could be used to alleviate the poverty of the governments and the poor people. Bailey (1) has observed that many of the poor countries continue to be poor and the poverty levels of the poor continue to rise.
That is despite the debts forgiven these countries. Typically, the main reason for the failure of the poor countries to address their problem of poverty is mainly due to poor planning. Thus, making it important for rich countries to seek for an alternative use of the money generated from debts payment by the poor countries. One of the most important alternatives is to address the needs of the poor people in rich countries.
It has been shown that even rich countries have poor people and to address their needs, it is important for the rich countries to plough back the money earned from loan repayments in infrastructure development and any other projects that lead to the creation of employment. Harris (1) views economic development from the perspective of investing money from debt repayment as a direct cause for reducing inequalities on income levels, thus reducing the poverty of poor people in rich countries.
Thus, instead of levying and increasing taxes on the people in rich countries to support social programs and other necessary funding for economic sustainability, the money could be used to curb tax rises, and lead to economic revival. The ripple effects could be infrastructure development, job creation, and poverty alleviation in the rich countries. Thus, poor countries should take responsibility of their poverty.
Poor Countries’ Responsibilities
Poor countries are responsible for their poverty, as mentioned elsewhere due to poor planning policies, which have evidently been the result of the ravaging poverty experienced in the poor countries. Poor planning in government and the people is shown evidently by the lack of decision-making organs run by well-trained personnel in economic planning to stimulate employment that eventually leads to increase in income levels in households.
In addition to that, poor countries fail to that, poor planning has lead the failure of the countries fail to focus the resources for the future development of the countries and fair and planned allocation of the money, taking advantage of money resulting from forgiven debts to plan well for the future.
Typically, the governments, as well as the people do not have plans or policies to plan in view of the resources available, but the people in these countries have such high birth rates that are not commensurate with the economic development of their countries, thus creating more and poorer people (Harris, 2).
One of the problems experienced by the people in poor countries that point toward rich countries as direct causes of their poverties in high birth rates is lack of employment, poor allocation of resources to address the plight of the poor.
Thus, it is a combination of the poor planning of the people such as in giving birth to many children whom they cannot afford to feed because of lack of jobs, and the governments due to poor planning policies. However, there is a string need for improved planning of the resources to avoid blaming rich countries for their plight.
Thus, rich governments should not forgive poor countries their debts, but instead should use the money to address the needs of the poor people in rich countries.
Works Cited
Barkley, John. Comparative Economics in Transforming World Economy. MIT, second edition. 1991.
The decision by the International Monetary Fund (IMF) and the World Bank in 1996 to cancel the debts of 26 heavily indebted poor countries (HIPC) that were undertaking reforms outlined, under the HIPC initiative, to decrease their degrees of poverty which led to heated debates between experts in development policy around the world with some supporting it and encouraging other Western nations to follow the same steps while some criticized the move vehemently.
The underlying principle behind the move was that heavily indebted poor countries that were making modest progress in lowering their poverty levels merited a cut in their debt burden so that they could have a temporary break to try to escape poverty while preventing them—once and for all—from restructuring their perpetual debt (Williamson, Nancy, and Deese, 34).
The move by the IMF and World Bank was followed by Paris Club, a group of official lenders who met in Paris, which decided to take the terms laid down in Naples in 1994 one step further and give an 80 percent reduction in the net present value of their debt servicing.
Since then, this initiative has gained momentum particularly after it had been taken up by the G7. In 1998, a consensus was reached to cut HIPC’s debt servicing by a further $50 billion; in return, these countries were to accelerate their domestic programs to fight poverty. This move led to a debt waiver of up to $40 billion by 2002 with more nations joining the program.
Recently, the UK pledged to cancel hundreds of millions of pounds owed to it by a number of the nations that belong to the HIPC group. The move followed a similar one by the US (“Should more countries cancel the debt?”).
Anti-poverty crusaders have welcomed both moves. Is this a positive step in the eradication of poverty in the world’s poorest nations? Should other nations emulate the move? I tend to disagree. I believe that forgiving the existing debt of HIPCs is a quick cosmetic fix that only functions to delay reforms that would permanently end the chain of poverty witnessed in most of the emerging countries.
Besides, a pardon of debt sullies the already negative image the international capital markets have of the heavily indebted nations. Therefore, rich countries should not forgive all debts of developing nations.
Several criticisms serve to support the idea that rich nations should not pardon the debts of heavily indebted emerging countries. First, the move is not new. It had already been suggested in several meetings: in 1977 with UNCTAD; in 1987 in Venice; in 1988 in Toronto; in 1990 in Houston; in 1991 in London; and 1994 in Naples. The failure to approve the pardoning of debts in all of these meetings serves to show the challenges involved in endorsing this idea (Williamson et al., 34).
If all the previous propositions failed to sail through, then we could never be sure that this was the right time to endorse such a move. Second, since these nations’ GDP and export growth rates have been lower in the last decade, they have not managed to lower their percentages of debt to a significant margin concerning these two aggregates, regardless of the huge cost it involved.
Third, rich countries should not pardon developing countries’ debt as it would encourage them to become indebted again with the hope of getting another pardon. This could also act as an incentive for other nations without so much indebtedness to increaser debt margin so that they can receive the same pardon. Pakistan, Nigeria, and Indonesia are applying for a debt pardon under the plan, and the countries that obtained debt reductions totaling $33 billion in 1996 have accumulated $41 billion of debt since then.
The move would also be unfair to countries that have fully serviced their debts. Other nations may see such an opportunity as a chance to fault in servicing their debts presently or in the future. If other developing countries can work hard to maintain their loans, why should we exempt other nations from the course?
A debt given to another country is a contract between two or more nations, or between a society and the lending agency, such as the IMF or the World Bank. Both parties in the agreement must be made to share the weight of the risk; that is, the moral hazard must be applied to both ways. A nation, bank, or multi-lateral agency that has loaned money to a country should not bear the full cost of repaying the loan (“Should more countries cancel the debt?”).
After all, the money is lent from the taxpayers and such a move functions to burden the taxpayers as they have to increase their taxes to cover the written off debts. Multilateral lending agencies have always based their fear of debt cancellation on the subject of moral hazard which can be summarized as “If you borrow money you pay it back” (Williamson et al., 34).
They fear that if a nation fails to pay back its loan and does not face the appropriate penalties, how can they trust it if it may need another loan in the future? It is understandable that developing nations will require a considerable inflow of capital to build their economies and loans will play a significant role in this development process. However, if all debts are pardoned, how will these countries ever convince the lending countries and agencies’ to issue loans to them in the future if they cannot pay their current loans?
While the cancellation of debts may seem like a respite for the developing countries, such a benefit may only be short-lived, the long term effects of this move would outweigh the benefits as the pardoned countries would no longer be able to receive loans. Besides, why should the lender be made solely responsible for any defaults in the repayment of a loan (“Should more countries cancel the debt?”). In essence, writing off HIPC‘s debts would only stifle future development projects that require credits.
A significant percentage of money lent out to developing countries ends up in the pockets of corrupt government officials and contractors. If a developing nation’s government is severely corrupt, then the status quo- no pardon on debt and no additional loans- is best for it gives the government no official resources to misuse and limits its ability to raise private sector funds.
The problem of corruption is partly responsible for the high poverty rates experienced in these countries, hence, writing off their debts without the appropriate penalties or conditions ignores the root of the problems in these countries, letting them continue down the same doomed path of bad leadership, corruption, and financial indiscipline.
Debt relief often comes at a cost to developing countries. For instance, G7 nations, through the IMF, require states to achieve unimaginable economic practices and gain decline themselves (Mason).
They demand that the developing nations “open up your markets” while they cannot allow such practices to be undertaken in their economies. Another demand is to “structurally adjust their economies,” while the nations themselves cannot undertake similar acts although a significant number is spending beyond their means.
Developing nations are also required to lower the prices of their commodities while the developed countries fail to reduce the costs of their imports (Mason). These economic demands only serve to hurt the feeble developing nations’ economies, and when the requirements are finally met, the debt cancellation is of little benefit.
However, there are good examples of nations making good use of debt write-offs to spur growth in important sectors of their economies. For instance, the government of Uganda used savings from this initiative to waive school fees for more than two million children while Mozambique, Senegal and Burkina Faso, are using these funds to fight AIDS.
The World Bank approximates that 40% of funds obtained through debt write-offs are used in the education sector, while 25% is used to improve healthcare services. These success stories are available only in a small number of developing countries.
Instead of writing off debts lent to heavily indebted and developing countries, the lender should ensure accountability of the amount lent. Debt relief should only be used as a last option, particularly if the risk of financial distress is a serious problem.
In 1970, the distinguished economics professor Milton Friedman wrote an essay in which he argued that the sole social responsibility of a company is to generate profit for its shareholders. Bejou (2011) notes that the core message that Friedman was advancing through his argument was that the primary responsibility of managers was to the owners or investors of the company.
This outlook is regarded as the traditional shareholder primacy theory and its main argument is that the primary task of management is to maximise shareholders wealth. The school of thought further on proposed that organizations should not be concerned with solving social problems since this the responsibility of other actors such as the government. Friedman’s defence of managers’ duties to shareholders continues to be the prominent concept dominating corporate governance.
In line with this reasoning, many top managers of public corporations today seek ways to increase the profits of their shareholders. This begs the question what is should the primary role of management in public corporations be. This paper will argue that management should expand its role and responsibilities to cater to the needs of other stakeholders in addition to the shareholders and owners of the company.
Increasing the wealth of shareholders and owners should not be the core objective of management. To provide a balanced view on the subject, the paper will also review some of the arguments made in support of shareholder wealth optimization by management and offer counterarguments to the same.
A Case against Shareholder Primacy
Corporations cannot exist on their own; they need the input of other groups such as creditors, employees, and the government (Stout 2002). As such, the shareholders alone cannot make, much less sustain a corporation. For this reason, the other contributors to the existence of the corporation also need to be considered by management. Stout (2002) elaborates that the non-shareholder groups who contribute to the welfare of the corporation also need to be compensated in accordance to some explicit and/or implicit contracts.
For example, the employees will engage in operations on behalf of the organization in return for a salary, favourable work conditions, and prospects of career advancement. If management’s only concern is shareholder wealth, they organization will not be sustainable and it will fail therefore hurting the shareholders and all the other stakeholders. Management that is focused only on maximizing the wealth of shareholders will damage the firm’s economic interests.
Stout (2002) states that such management will be inclined to take wealth and resources from other corporate constituencies such as employees, creditors, and governments in order to increase shareholder wealth. Management therefore needs to consider the other groups who make a contribution to the corporation’s survival.
Emphasis on increasing the wealth of shareholders and owners will reduce the productivity of the firm since it might lead to lower employee motivation (Kellerman 2007). Motivation is a highly desirable attribute in employees since motivated employees are integral to the success of the business.
Kellerman (2007) explains that job satisfaction plays a significant role in creating motivated employees who in return direct their energies to meeting organizational goals. If management only considers the profit interest of the shareholders, they are going to sell the corporation to the highest bidder without considering the losses that may arise to the employees and the local community.
Employee motivation will be diminished if the workers believe that the management will sell the company to the highest bidder even if such a move will negatively affect them. Such employees are unlikely to commit their careers or give their loyalty to the corporation. This will result in reduced productivity for the company and this will reduce returns to shareholders.
Shareholder primacy has led to risky financial undertakings by management in their question to increase shareholder value (Bergstresse & Philippon 2006).
Many organizations have tied the pay received by top managers to the share price in an effort to incentivize them to increase company performance. Managers therefore have a vested interest in the increased profitability of the organization and they are motivated to ensure that shareholder interests are met.
Bergstresse and Philippon (2006) confirms that many bit US corporations are in the habit of offering extravagant pay packages to their top executives as a means to align the upper management interests with those of shareholders. When the self-interest of managers is tied to the wealth of the shareholders, they are likely to make decisions that are only aimed at short term gains by the organization.
Such an approach might have dire consequences for the organization and the society at large. For example, the financial crisis of 2008 which led to a global recession has been blamed on top managers allowing self-interest to prevail over any other concern. Emphasis on increasing shareholder wealth can cause risky behaviour by management and this might damage the corporation.
The best interest of the shareholder group is not always served by profit maximization by management and therefore, the shareholder value ideology can lead to negative impacts on the well-being of the company and its investors (Stout 2012).
Stout elaborates that an organization has various classes of shareholders and their needs and interests vary depending on their degree of investment and interests. While some may be concerned in the short-term earnings of the company, others might be interested in the long-term performance of the organization.
The view that management should only seek to increase shareholders wealth is based on the wrong assumption that increase in share price is proof of greater economic efficiency by the company in question. Stout (2012) forcefully asserts that the performance of a business cannot be measured through any one single metric. By focussing on share price and ignoring other variables such as capitalization, board structures, and equity to name but a few, a wrong assessment of the company is bound to be made.
Focussing on increasing profitability might discourage investment and innovation therefore harming the employees and the customers of the organization. Holmstron and Kaplan (2001) declare that managers who view themselves as representatives of the corporation and not the shareholders are likely to maintain a long-term vision of the company and therefore take steps to ensure its growth and stability.
Management needs to avoid being obsessed with increasing the wealth of shareholders and owners in order to serve the best interest of the shareholder group.
Focus on shareholder profitability will cause an organization to ignore the needs of the non-shareholder entities and this might be detrimental to the organization’s future. Organizations are affected by factors that are internal and external to them. Albright (2008) highlights the importance of the organization to have a good understanding and demonstrate sensitivity to the needs of its environment.
There is a strong interdependence between the corporation and stakeholders such as customers, suppliers, creditors, the media, and activists. Management is therefore forced to balance the interest of shareholders with those of the other stakeholders in order to create a win-win situation from which everybody can benefit.
Shareholder wealth maximization will negatively affect the economy of a country since it might lead to reduction in production and the raising of prices by managers in a bid to increase profits (Solo 2000).
This is especially the case if the organization holds a monopoly in the industry. As a monopoly, the corporation has the discretion to restrict production and raise prices without fear that the competitive forces will oblige it to react to the demand-supply forces.
If the management in such a monopolistic organization holds strong shareholder-primacy view, his only concern will be to increase profitability. This will be achieved by lowering production in order to create excess demand and then raising prices.
The manager could also lower the employment in order to reduce the production cost incurred by the company. All these factors will hurt the economy of the nation since it will lead to reduced production. The expansion of the company will also be deterred if the managers are only concerned with increased profitability. Emphasis on profits has led to many layoffs and mergers, which have driven the stock prices of company’s up at a considerable social cost.
The American workforce has been the worst affected by the shareholder primacy norm practiced by many top executives. Grossman (2005) reveals that in the past two decades, over 45million Americans have been laid off as corporations downsize in order to increase their profitability by raising stock prices. Stout (2012) observes that managers who have weak shareholder wealth maximization norms are more likely to concentrate in increasing sales and industry expansion instead of aggressively trying to increase profitability.
The manager whose primary objective is not to increase the shareholders wealth will invest in larger firms and build new factories in order to increase the production capacity of the organization. This will result in an increase in social wealth. Emphasis on shareholder wealth maximization will be detrimental to the economic well-being of the society.
The purpose of the organization is not only to make money for the business owners but also to fulfil other social functions which include ” secure jobs for employees, better quality products for consumers, and greater contributions to the welfare of the community as a whole” (Stout 2002, p.1989).
This is in line with Dood’s assertion that the business corporation is “an economic institution which has a social service as well as a profit-making function” (Stout 2002, p. 1989). If management is only concerned with shareholder interests, they will not make an effort to fulfil the obligations of the organizations to the society.
Green (1993) explains that when the primary objective of management is confined to increasing shareholders and owners’ wealth, they cannot dedicate resources or managerial time to worthy causes since this will be deemed as embezzlement of organization resources. Shareholder primacy therefore makes it impossible for management to fulfil other social functions and therefore ensure business success.
A more prudent approach would be for management to try to maximize the “sum of all the returns enjoyed by all of the groups that participate in firms” (Stout 2000, p.1198). Such an approach would stop managers from taking actions that result in the maximization of wealth of shareholders in the short run while negatively affecting all the other participates in the firm.
The shareholder wealth maximization norm is outdated since it refuses to acknowledge the importance of adopting socially responsible practices for the welfare of the business (Grossman 2005). Focus on shareholder profit maximization will lead to the removal of social factors that might reduce shareholder wealth. In today’s business environment, the financial performance of an organization is increasingly interconnected with its social performance.
While organizations could in the past ignore the needs of the non-shareholders and still survive, the current environment is forcing companies to align their interests with those of the society order to ensure their future survival.
The last few decades has witnessed an increase in the importance attributed to Corporate Social Responsibility (CRS). CRS. Stout (2012) observes that an emphasis on CRS by European companies has enabled them to compete favourably with the American multinationals that have dominated the global market for decades.
Adopting the shareholder primacy theory will therefore hurt the overall performance of the business since management will fail to satisfy social interests. Grossman (2005) best articulates this by stating that “in order to truly maximize profits a company must engage with social interests” (p.575). Managers should seek to not only produce good returns for investors but also provide good work conditions for the workforce and serve the community by making quality products and being a good corporate citizen.
Management has a moral and ethical obligation to consider the interests of all stakeholders in their decision making (Boatright 2006). These obligations include a guarantee to honour agreements and contracts, honesty, and legitimacy in conducting business to name but a few. Shareholder primacy might cause management to ignore its moral obligations when they do not contribute to an increase in the profitability of the corporation. Managers can ignore ethical obligations that and agreements that are not codified in laws.
The public confidence in corporations is significantly lowered by the culture of profit at all costs (Jenster & Hussey 2001). For an organization to function effectively, it needs to gain the confidence of the market. This confidence will increase the chances that people will be willing to invest in the corporation or endorse its products.
Arguments in Favour of Shareholder Primacy
The major reason given by advocates of shareholder primacy is that the corporation belongs to its shareholders and due to this ownership; their interests should be put first (Holmstron & Kaplan 2001). Friedman best advocated this school of thought in his 1970 essay where he noted that managers are agents who have promised to serve the shareholders who have entrusted them with their property (Green 1993).
Management is therefore bound to act diligently in the best interest of the owners. Stout (2002) reveals that this argument is flawed since shareholders do not in actual fact own the corporation but rather own stocks which means that they their ownership is limited. Boatright (2006) agrees with this by noting that shareholders do not own the corporation in the same way that a person could own a house or a vehicle. The alleged ownership refers to the bundle of rights that these group has.
Shareholder primacy is based on the premise that more profits will lead to the creation of wealth for individuals that will in turn benefit society (Husted & de Jesus 2006). This argument holds true since creating wealth for individuals makes the community dynamic and people are able to engage in more economically productive endeavours.
A look at the prominent economic systems of the world supports this since the capitalistic ideology which favours the capital contributors in the society is the most successful and vibrant system in the world. Placing emphasis on profits leads to strong performance by the corporation. Husted and de Jesus (2006) observe that strong industrial performance is beneficial to the society.
Proponents of shareholder primacy argue that profit seeking will result in more efficient utilization of resources by management in order to increase productivity and in the end, offers the greatest benefits to the society as a whole. While it is true that shareholder primacy will result in higher returns, this wealth is not distributed to a large number of society members.
Instead, it is concentrated within a few disproportionately wealthy members of the society. The argument that shareholder primacy will benefit society by creating wealth for many individuals in the society is therefore not entirely true. With this consideration, Grossman (2005) suggests that corporations owe an obligation to society to at least be good corporate citizens and provide some social services even if these might decrease their profits.
Social responsibilities imposed on business may hamper business growth and render it unable to operate (Husted, BW & de Jesus 2006). Friedman argued that management “possess neither the authority nor the moral right to divert shareholders’ profits for the welfare of the general public” since they are merely agents of the stockholders (Grossman 2005, p.574). Advocates of shareholder primacy reinforce this argument by asserting that it is not right for the society to impose welfare obligations on the corporation.
If individual stockholders choose to use their profit for worthy causes, they can do this but the choice should not be made by managers who have been appointed to run the company. While market forces should be the main determinant of how the corporation reacts, the corporation has an obligation to the society. Businesses have to conform to the basic rules of the society and avoid seeking only profits.
Stakeholders assume significant risk by investing their resources to the firm and for this reason, their financial interests should be the primary objective of management. Individuals who invest in corporations do this in the hope of achieving greater returns in business than they would if they engage in business activities independently.
Boatright (2006) states that the prospect of significant financial benefits is what makes individuals with economic assets voluntarily agree to contribute their assets to production in an organization. Shareholders are likely to suffer from personal losses if the corporation fails. This is because they are the people who have invested money into the organization.
Since shareholders agree to take up significant risk in investing in the corporation, it is appropriate for the managers to work towards ensuring that these risk takers obtain high levels of profit from their shares. Risk taking does not give the stakeholders all the power over the corporation. While the other stakeholders might not take the risk, their involvement facilitates the profitability of the organization. Their concerns should therefore also be addressed.
Conclusion
This paper set out to dispute the accepted financial axiom that the primary objective of management is to increase the wealth of shareholders and owners. The paper has demonstrated that the shareholder wealth maximization concept does not serve the best interests of the society as a whole. It has shown that the assumption that shareholder primacy and other party’s interests coincide since the maximization of stockholder wealth improves the welfare of society is wrong.
It has revealed that the view that companies with rising share prices are economically efficient is flawed since business performance should not be measured through a single metric. Weak shareholder wealth maximization norms have also been observed to be healthier for the economy of a nation since they can have the impact of increasing national wealth through increased production.
Voices have over the last two decades been raised against the shareholder primacy model advocated by Friedman. Corporate managers are increasingly required by the society to consider the interests of more than just the shareholders and owners of the company. This paper has demonstrated that corporations are faced with expectations not only from their shareholders but also from their employees and the society.
They must therefore act in a manner that takes into consideration the needs of non-shareholder actors. A corporation that addresses societal needs has a greater chance of succeeding and therefore increasing the value for its stakeholders. Management should therefore overcome its predisposition to only focus on the needs of the shareholders and make decisions that appeal to the needs of all the relevant stakeholders.
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The main objective of doing business is to gain profits. This is what keeps firms in competition. The main beneficiaries of profits include shareholders, employees and the society.
There should be innovation and creativity. This is meant to ensure that a firm makes profits in the modern world of business that is characterised by stiff competition. Thus, the management not only serves to ensure profitability, but also promote growth and expansion.
When a firm identifies a new market, it produces a product that meets the needs of the market without replacing the existing product. This is what results in continued expansion and growth. Continued growth and expansion are a form of economic growth to the whole society.
Therefore, a firm should ensure that the societal needs are met as it achieves its profits. The profitability of a company is closely related to the positive impacts that it should generate in the community.
Therefore, the management should bear in mind that the growth and profitability of a company are a responsibility to the owners, shareholders and the community. This paper will discuss the role of management in achieving profits for owners and shareholders.
It will relate the benefits of these profits to employees, society and the general economic development of the nation. The management should also focus on the economic benefits expected by the rest of the stakeholders. This is meant to ensure that shareholders gain maximum profits.
Wealth Creation and Economic Development by Management
The business objective of making profits has been integrated with other factors to discourage corporate greed that may be harmful to society. For instance, while a company focuses on making lots of profits, it should be ethical, obey the law, and exercise corporate social responsibility.
This way, the issue of wealth creation benefits shareholders as much as the other stakeholders (Bejou, 2011). Some organisations are known to exercise mechanistic social responsibility projects. These do not distinguish between the obligatory roles and those that are discretionary (Cosans, 2009).
This is evident in the way majority of the business rankings are interested in who made the most profits, how fast a certain organisation has grown, and who gives the executives the most pay. Such factors leave out the community and do not recognise the role that local communities play for companies to register big profits.
This is unfair given that it is the communities that provide markets, convenient locations, and a good environment for these businesses. A firm’s self interest should not override the corporate social responsibility.
Corporate social responsibility provides an opportunity for firms to work with the communities and make a difference in their lives. This can be achieved through exercising integrity, supporting human rights, and minding about the welfare of others in and out of the organisation.
Firms should be responsible for the impact of their operations on stakeholders. They should strive to ensure that their operations have a positive impact on the lives of those around them.
This provides equilibrium between the company’s goals and objectives and meeting the needs of the communities (Bejou, 2011).
Ireland (2003) stated that business growth and wealth creation are closely related. Growth is used by firms as a tool for creating wealth through building economies of skill and gaining market power.
When this happens, firms gain additional resources that translate to a competitive advantage. Similarly, increased wealth allows a firm to allocate more resources resulting to increased growth. This form of interdependence is critical to new market entrants who need to create wealth rapidly.
It calls for strategic management to ensure that firms do not overlook the importance of benefiting the community while creating wealth. Therefore, great emphasises should be put on creating customer value as a way of attracting a bigger market share.
Apart from developing superior products and adjusting market prices, a good reputation by the society can serve as a competitive advantage. This can be enhanced by developing good relations with communities, employees, suppliers and other stakeholders. When wealth creation focuses on the shareholders, it leads to bias.
This is because shareholders are just one of the stakeholders in the firm. Corporate governance that is solely interested on the shareholders is morally unjustified.
Moral responsibility should not be viewed as an obstacle towards rapid wealth creation. It should be a strategy of establishing good business relations that are profitable in the long run (Boatright, 2006).
Economic growth does not need to be large so as to be effective in the long term. Small scale growth over a short period can translate to economic gains that make a lot of difference to recipients. Such gains are highly observable in the long term, and it is impossible to ignore them.
For example, the US economy experienced a continuous economic growth rate of 1.8 per cent over a period of 130 years. This was between 1870 and 2000. This resulted in the growth of GDP from $3,340 to $33,330. Through this growth, the US population gained the best living standards, technology, infrastructure, health care, and a good life.
Similarly, in an organisational setting, small positive gains in profits can result to impressive economic growth in the long run. Therefore, managers should strategise for the plans and decisions that will earn the organisation income continuously. Wealth creation should be a long term goal that can be achieved by creating value in the business.
Management should focus on the strategies that add value to the firm. Traditionally, it was believed that growth came as a result of accumulated capital, productivity in labor and an effective macro economic management. Today, this has changed, and firms are now focusing on innovation and creativity to stay ahead of competitors.
Working closely with customers and communities as stakeholders is a strategy of creating value for the products. If customers see the value that the organisation brings into their lives, they are likely to develop interest in the organisation.
Such benefits include employment opportunities, projects that improve their social skills and products that improve the quality of their lives (Ahlstrom, 2010).
Corporate Social Responsibility
Shaw (2009) identified the main aim of doing business as profit making. However, this requires a human touch on the business goals to ensure that a firm does not overlook the societal needs while concentrating on profit generation.
The value that a society attaches to an organisation is not entirely based on the products. In this case, it also depends on the way the organisation relates with the communities. Corporate social responsibility should be included in the company’s vision and mission. It should be reflected in the business culture, strategies and daily operations.
The main objective of corporate social responsibility is to improve the society’s quality of life by reducing or eliminating suffering. Communities suffer from poverty, in adequate security, pollution and even health related issues.
When a firm is incorporating the needs of the society in its goals, it should also consider that its activities do not bring more suffering (Husted & Salazar, 2000). The management has a responsibility to the company owners to conduct business as per the owner’s interests.
This means that they should generate as much wealth as possible while following the basic societal rules. These rules can either be integrated into law or the general ethical custom. For instance, engaging in pollutant activities without considering the welfare of the adjacent communities can result in decreased value from customers.
The owners expect that the management will take care of such issues while still holding the main objective, which is to maximise profits. Social, corporate responsibility is introduced to provide an interactive session with the communities.
This is meant to ensure that the management does not go against societal expectations. Through this form of interaction, the organisation can identify the society’s needs and expectations. It also builds a good business relationship which benefits both the community and the organisation (Cosans, 2009; Smith, 2003).
The corporate social responsibility exercises should focus on ensuring that they offer global social skills that support the society’s needs in the long term. Some projects may be short term and may not help the communities to become self reliant, they should focus on projects that will give communities some social skills.
An improved economic situation for the communities translates to increase spending that comes back to the firm as increased sales. The employees working in these firms are also part of the communities and should be granted a good working environment that supports freedom.
If firms create a culture that promotes responsible practices in the place of work, it can balance profitability with the responsibility to its employees. These values should be included by forms as part of their essential motives to ensure that there is no bias towards the company’s interests (Bejou, 2011).
Management should have a responsibility to all the stakeholders and not just limited to the shareholders. All parties that are affected by a firm’s corporate policies and practices should be included in a firm’s social and corporate obligations. This includes the community members and the employees (Woiceshyn, 2012).
It is evident that firms that exercise a great deal of social responsibility experience better financial performance and have a better correlation that results into better business performance in the long run (Cosans, 2009). Firms should elect officials who are interested in promoting a collective interest.
This is meant to balance between profit maximisation and maintaining good corporate relations. Firms that organise for corporate social responsibility projects are likely to experience market power over the other firms. Increased social output is reflected in the way a firm acquires income as a result of increased social expenditure.
At times, the social output extended towards the community may not produce instant results based on the income achieved. However, a firm’s image changes over time based on the number of activities in the firm.
Maximum benefits obtained from the social output occur at the point where the firm has extended the maximum possible social output. The process is gradual, and results are mostly determined by the level of involvement that a firm portrays to the community.
On the other hand, firms that engage in wasteful activities experience a decreased market share and reduced market competitiveness (Wright&Bruining, 2008).
Balancing Between Shareholder Management and Stakeholder Management
In the past decades, senior management has experienced pressure from the investors causing them to focus significantly on creating wealth for shareholders. This has resulted in the emergence of performance metrics that are based on the value of firms to the society.
The inclusion of the needs of stakeholders in the planning process is the first step towards ensuring that a company grows its value in the markets. In the first place, there are the capital market stakeholders who include financiers and shareholders.
These are the owners who contribute to the establishment of an organisation, and their main goal in this venture is to gain profits and grow wealth. The second class of stakeholders is the product market stakeholders. They include customers, communities and suppliers.
They play a sensitive role of ensuring that a firm produces its products at a lower cost and gains a market for its products.
The organisational stakeholders, who are mainly employees, also serve a role to ensure that the organisation runs sustainably and provides the right products to the markets (Woiceshyn, 2012).
The value achieved by an organisation from business is defined differently by stakeholders. Shareholder value makes the basic component of business, and this enables a business to thrive. This is what provides long term agility for an organisation.
Customers and the community are also stakeholders. They offer the medium term liquidity which promises a future for the business depending on the response that they give concerning the value of the products.
Employees and partners provide the operational cash flow, which ensures that the organisation stays in operation as an enterprise. The three main classes of stakeholders are equally important and interdependent.
This requires that firms must establish two way communications that help them balance their self interest with altruism. Firms should also balance advocacy with accommodation.
This can only be realised if the interests of the firm and those of the stakeholders are given equal priorities. In this case, both the stakeholders and the firm should compromise for a win-win situation while respecting the needs of each other.
This can also be achieved using the stewardship theory in which people put the needs of others first. This includes organisations that devote themselves towards meeting customer and employee needs before their own self interest.
Employees who are satisfied tend to be productive and are willing to sacrifice their time and energy to achieve better results. This amounts to greater productivity that indirectly meets the profitability of the organisation (Wilcke, 2010).
The social capital theory can also be applied as a way of balancing stakeholder needs with share holder needs. In this theory, all parties in the organisation endeavor to work for the benefit of the organisation and not their own interests.
When individuals concentrate on meeting the interests of the organisation, they achieve a personal satisfaction whereby they meet the organisational targets and even exceed them. In this case, an individual delights in the ability to serve the organisation to its satisfaction.
In so doing, the output increases and the organisation gains profits. Consequently this leads to increased resources. The shareholders should also be involved in this theory. This will give them an opportunity to focus on how much more they can offer to the firm and focus on the expected results.
This will lead to increased profitability because they are likely to allocate considerable resources that imply growth and productivity. There exists a positive link between an involving stakeholder management and improved financial performance.
A firm’s profitability depends on the ability of the organisation to create and distribute resources. In this case, each of the stakeholder groups is regarded as part of the organisation’s stakeholder system. An imbalance may occur if one of the stakeholder groups lags behind the rest.
For instance, if the product market share underperforms, then there is the risk of registering decreased sales. This may lead to losses or even bankruptcy.
Therefore, each of the stake holder groups is significant in the growth and the continuity of an organisation. They should receive equal attention while laying out performance strategies (Keim& Hillman, 2001).
Value creation is a strategy that is being used by organisations to gain a competitive advantage. Good relationships with consumers and primary stakeholders result in continued participation in the firm’s activities. Managing such relationships leads to intangible resources that are socially complex.
These promote a firm’s ability to stay ahead of the competitors in terms of value creation. When consumers and society attach a value towards a firm, they become loyal. This ensures growth and continuity of an organisation (Fraser &Simkins, 2010).
Value creation is along term strategy and can be achieved by developing structures that help employees to resist short term financial activities. For example, the social, corporate responsibility projects that aim at making profits without giving the community members skills that promotes self reliance.
Value creation requires activities that are embedded in the community’s way of living and promote their economic abilities (Keim& Hillman, 2001). End users attach a lot of value to organisations that recognise their role in the firm’s growth and productivity.
When customers are involved in decision making through feedback or interactive discussions, it creates more interest. This is a good strategy that promotes sales growth and value, which is a resource for long term growth and continuity (Beurden, 2008).
Conclusion
Wealth creation by stakeholders is determined by the economic gains that other stakeholders experience. The traditional view of business as a sole profit making venture for the stakeholders has changed. Today, organisations are focusing on value creation as a strategy of gaining a competitive advantage.
This value is created among customers, employees and the community in general. When employees obtain satisfaction from work, they produce better results and customers are enticed by an organisation that minds about their welfare.
Continuous small scale economic growth amounts to impressive economic gains in the long term. Therefore, value creation through the stakeholders is the best strategy that an organisation can use to maximise its profits.
For the management to satisfy the needs of shareholders, it has to give the needs of other stakeholders a priority too. This will ensure that the needs of all stakeholders are considered for the success of the organisation.
Bejou, D 2011, ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, vol. 10, pp. 1-6.
Beurden, PV 2008, ‘The Worth of Values – A Literature Review on the Relation Between Corporate Social and Financial Performance’, Journal of Business Ethics, vol. 82, pp. 407-424.
Boatright, JR 2006, ‘What’s Wrong—and What’s Right—with Stakeholder Management’, Journal of Private Enterprise, vol. 21 no. 2, pp. 106-116.
Cosans, C 2009, ‘Does Milton Friedman Support a Vigorous Business Ethics?’Journal of Business Ethics ,vol. 87, pp. 391-399.
Fraser, J &Simkins, BJ 2010, Enterprise risk management: today’s leading research and best practices for tomorrow’s executives, J. Wiley & Sons, Hoboken, N.J.
Husted, BW & Salazar JJ 2000, ‘Taking Friedman Seriously: Maximizing Profits and Social Performance’, Journal of Management Studies, vol. 43, no. 1, pp. 75-91.
Ireland, R D 2003, ‘A Model of Strategic Entrepreneurship: The Construct and its Dimensions’, Journal of Management, vol. 29, no. 6, pp.963-989.
Keim, GD & Hillman, AJ 2001,’Shareholder value, stakeholder management, and social issues: what’s the bottom line?’Strategic Management Journal, vol. 22, pp.125-139.
Shaw, WH 2009, ‘Marxism, Business Ethics, and Corporate Social Responsibility’, Journal of Business Ethics, vol. 84, pp. 565-576.
Smith, C 2003, ‘Corporate Social Responsibility: Whether or How?’California Management Review, vol. 45, no. 4 pp. 52-76.
Wilcke, RW 2010, ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, A Journal of Political Economy, vol. 14 no. 4, pp. 187-209.
Woiceshyn, J 2012, How to be profitable and moral: a rational egoist approach to business, Hamilton Books,Lanham, Md.
Wright, M &Bruining, H 2008, Private equity and management buy-outs. Edward Elgar, Cheltenham.
The main objective of doing business is to gain profits. This is what keeps firms in competition. The main beneficiaries of profits include shareholders, employees and the society.
There should be innovation and creativity. This is meant to ensure that a firm makes profits in the modern world of business that is characterised by stiff competition. Thus, the management not only serves to ensure profitability, but also promote growth and expansion.
When a firm identifies a new market, it produces a product that meets the needs of the market without replacing the existing product. This is what results in continued expansion and growth. Continued growth and expansion are a form of economic growth to the whole society.
Therefore, a firm should ensure that the societal needs are met as it achieves its profits. The profitability of a company is closely related to the positive impacts that it should generate in the community.
Therefore, the management should bear in mind that the growth and profitability of a company are a responsibility to the owners, shareholders and the community. This paper will discuss the role of management in achieving profits for owners and shareholders.
It will relate the benefits of these profits to employees, society and the general economic development of the nation. The management should also focus on the economic benefits expected by the rest of the stakeholders. This is meant to ensure that shareholders gain maximum profits.
Wealth Creation and Economic Development by Management
The business objective of making profits has been integrated with other factors to discourage corporate greed that may be harmful to society. For instance, while a company focuses on making lots of profits, it should be ethical, obey the law, and exercise corporate social responsibility.
This way, the issue of wealth creation benefits shareholders as much as the other stakeholders (Bejou, 2011). Some organisations are known to exercise mechanistic social responsibility projects. These do not distinguish between the obligatory roles and those that are discretionary (Cosans, 2009).
This is evident in the way majority of the business rankings are interested in who made the most profits, how fast a certain organisation has grown, and who gives the executives the most pay. Such factors leave out the community and do not recognise the role that local communities play for companies to register big profits.
This is unfair given that it is the communities that provide markets, convenient locations, and a good environment for these businesses. A firm’s self interest should not override the corporate social responsibility.
Corporate social responsibility provides an opportunity for firms to work with the communities and make a difference in their lives. This can be achieved through exercising integrity, supporting human rights, and minding about the welfare of others in and out of the organisation.
Firms should be responsible for the impact of their operations on stakeholders. They should strive to ensure that their operations have a positive impact on the lives of those around them.
This provides equilibrium between the company’s goals and objectives and meeting the needs of the communities (Bejou, 2011).
Ireland (2003) stated that business growth and wealth creation are closely related. Growth is used by firms as a tool for creating wealth through building economies of skill and gaining market power.
When this happens, firms gain additional resources that translate to a competitive advantage. Similarly, increased wealth allows a firm to allocate more resources resulting to increased growth. This form of interdependence is critical to new market entrants who need to create wealth rapidly.
It calls for strategic management to ensure that firms do not overlook the importance of benefiting the community while creating wealth. Therefore, great emphasises should be put on creating customer value as a way of attracting a bigger market share.
Apart from developing superior products and adjusting market prices, a good reputation by the society can serve as a competitive advantage. This can be enhanced by developing good relations with communities, employees, suppliers and other stakeholders. When wealth creation focuses on the shareholders, it leads to bias.
This is because shareholders are just one of the stakeholders in the firm. Corporate governance that is solely interested on the shareholders is morally unjustified.
Moral responsibility should not be viewed as an obstacle towards rapid wealth creation. It should be a strategy of establishing good business relations that are profitable in the long run (Boatright, 2006).
Economic growth does not need to be large so as to be effective in the long term. Small scale growth over a short period can translate to economic gains that make a lot of difference to recipients. Such gains are highly observable in the long term, and it is impossible to ignore them.
For example, the US economy experienced a continuous economic growth rate of 1.8 per cent over a period of 130 years. This was between 1870 and 2000. This resulted in the growth of GDP from $3,340 to $33,330. Through this growth, the US population gained the best living standards, technology, infrastructure, health care, and a good life.
Similarly, in an organisational setting, small positive gains in profits can result to impressive economic growth in the long run. Therefore, managers should strategise for the plans and decisions that will earn the organisation income continuously. Wealth creation should be a long term goal that can be achieved by creating value in the business.
Management should focus on the strategies that add value to the firm. Traditionally, it was believed that growth came as a result of accumulated capital, productivity in labor and an effective macro economic management. Today, this has changed, and firms are now focusing on innovation and creativity to stay ahead of competitors.
Working closely with customers and communities as stakeholders is a strategy of creating value for the products. If customers see the value that the organisation brings into their lives, they are likely to develop interest in the organisation.
Such benefits include employment opportunities, projects that improve their social skills and products that improve the quality of their lives (Ahlstrom, 2010).
Corporate Social Responsibility
Shaw (2009) identified the main aim of doing business as profit making. However, this requires a human touch on the business goals to ensure that a firm does not overlook the societal needs while concentrating on profit generation.
The value that a society attaches to an organisation is not entirely based on the products. In this case, it also depends on the way the organisation relates with the communities. Corporate social responsibility should be included in the company’s vision and mission. It should be reflected in the business culture, strategies and daily operations.
The main objective of corporate social responsibility is to improve the society’s quality of life by reducing or eliminating suffering. Communities suffer from poverty, in adequate security, pollution and even health related issues.
When a firm is incorporating the needs of the society in its goals, it should also consider that its activities do not bring more suffering (Husted & Salazar, 2000). The management has a responsibility to the company owners to conduct business as per the owner’s interests.
This means that they should generate as much wealth as possible while following the basic societal rules. These rules can either be integrated into law or the general ethical custom. For instance, engaging in pollutant activities without considering the welfare of the adjacent communities can result in decreased value from customers.
The owners expect that the management will take care of such issues while still holding the main objective, which is to maximise profits. Social, corporate responsibility is introduced to provide an interactive session with the communities.
This is meant to ensure that the management does not go against societal expectations. Through this form of interaction, the organisation can identify the society’s needs and expectations. It also builds a good business relationship which benefits both the community and the organisation (Cosans, 2009; Smith, 2003).
The corporate social responsibility exercises should focus on ensuring that they offer global social skills that support the society’s needs in the long term. Some projects may be short term and may not help the communities to become self reliant, they should focus on projects that will give communities some social skills.
An improved economic situation for the communities translates to increase spending that comes back to the firm as increased sales. The employees working in these firms are also part of the communities and should be granted a good working environment that supports freedom.
If firms create a culture that promotes responsible practices in the place of work, it can balance profitability with the responsibility to its employees. These values should be included by forms as part of their essential motives to ensure that there is no bias towards the company’s interests (Bejou, 2011).
Management should have a responsibility to all the stakeholders and not just limited to the shareholders. All parties that are affected by a firm’s corporate policies and practices should be included in a firm’s social and corporate obligations. This includes the community members and the employees (Woiceshyn, 2012).
It is evident that firms that exercise a great deal of social responsibility experience better financial performance and have a better correlation that results into better business performance in the long run (Cosans, 2009). Firms should elect officials who are interested in promoting a collective interest.
This is meant to balance between profit maximisation and maintaining good corporate relations. Firms that organise for corporate social responsibility projects are likely to experience market power over the other firms. Increased social output is reflected in the way a firm acquires income as a result of increased social expenditure.
At times, the social output extended towards the community may not produce instant results based on the income achieved. However, a firm’s image changes over time based on the number of activities in the firm.
Maximum benefits obtained from the social output occur at the point where the firm has extended the maximum possible social output. The process is gradual, and results are mostly determined by the level of involvement that a firm portrays to the community.
On the other hand, firms that engage in wasteful activities experience a decreased market share and reduced market competitiveness (Wright&Bruining, 2008).
Balancing Between Shareholder Management and Stakeholder Management
In the past decades, senior management has experienced pressure from the investors causing them to focus significantly on creating wealth for shareholders. This has resulted in the emergence of performance metrics that are based on the value of firms to the society.
The inclusion of the needs of stakeholders in the planning process is the first step towards ensuring that a company grows its value in the markets. In the first place, there are the capital market stakeholders who include financiers and shareholders.
These are the owners who contribute to the establishment of an organisation, and their main goal in this venture is to gain profits and grow wealth. The second class of stakeholders is the product market stakeholders. They include customers, communities and suppliers.
They play a sensitive role of ensuring that a firm produces its products at a lower cost and gains a market for its products.
The organisational stakeholders, who are mainly employees, also serve a role to ensure that the organisation runs sustainably and provides the right products to the markets (Woiceshyn, 2012).
The value achieved by an organisation from business is defined differently by stakeholders. Shareholder value makes the basic component of business, and this enables a business to thrive. This is what provides long term agility for an organisation.
Customers and the community are also stakeholders. They offer the medium term liquidity which promises a future for the business depending on the response that they give concerning the value of the products.
Employees and partners provide the operational cash flow, which ensures that the organisation stays in operation as an enterprise. The three main classes of stakeholders are equally important and interdependent.
This requires that firms must establish two way communications that help them balance their self interest with altruism. Firms should also balance advocacy with accommodation.
This can only be realised if the interests of the firm and those of the stakeholders are given equal priorities. In this case, both the stakeholders and the firm should compromise for a win-win situation while respecting the needs of each other.
This can also be achieved using the stewardship theory in which people put the needs of others first. This includes organisations that devote themselves towards meeting customer and employee needs before their own self interest.
Employees who are satisfied tend to be productive and are willing to sacrifice their time and energy to achieve better results. This amounts to greater productivity that indirectly meets the profitability of the organisation (Wilcke, 2010).
The social capital theory can also be applied as a way of balancing stakeholder needs with share holder needs. In this theory, all parties in the organisation endeavor to work for the benefit of the organisation and not their own interests.
When individuals concentrate on meeting the interests of the organisation, they achieve a personal satisfaction whereby they meet the organisational targets and even exceed them. In this case, an individual delights in the ability to serve the organisation to its satisfaction.
In so doing, the output increases and the organisation gains profits. Consequently this leads to increased resources. The shareholders should also be involved in this theory. This will give them an opportunity to focus on how much more they can offer to the firm and focus on the expected results.
This will lead to increased profitability because they are likely to allocate considerable resources that imply growth and productivity. There exists a positive link between an involving stakeholder management and improved financial performance.
A firm’s profitability depends on the ability of the organisation to create and distribute resources. In this case, each of the stakeholder groups is regarded as part of the organisation’s stakeholder system. An imbalance may occur if one of the stakeholder groups lags behind the rest.
For instance, if the product market share underperforms, then there is the risk of registering decreased sales. This may lead to losses or even bankruptcy.
Therefore, each of the stake holder groups is significant in the growth and the continuity of an organisation. They should receive equal attention while laying out performance strategies (Keim& Hillman, 2001).
Value creation is a strategy that is being used by organisations to gain a competitive advantage. Good relationships with consumers and primary stakeholders result in continued participation in the firm’s activities. Managing such relationships leads to intangible resources that are socially complex.
These promote a firm’s ability to stay ahead of the competitors in terms of value creation. When consumers and society attach a value towards a firm, they become loyal. This ensures growth and continuity of an organisation (Fraser &Simkins, 2010).
Value creation is along term strategy and can be achieved by developing structures that help employees to resist short term financial activities. For example, the social, corporate responsibility projects that aim at making profits without giving the community members skills that promotes self reliance.
Value creation requires activities that are embedded in the community’s way of living and promote their economic abilities (Keim& Hillman, 2001). End users attach a lot of value to organisations that recognise their role in the firm’s growth and productivity.
When customers are involved in decision making through feedback or interactive discussions, it creates more interest. This is a good strategy that promotes sales growth and value, which is a resource for long term growth and continuity (Beurden, 2008).
Conclusion
Wealth creation by stakeholders is determined by the economic gains that other stakeholders experience. The traditional view of business as a sole profit making venture for the stakeholders has changed. Today, organisations are focusing on value creation as a strategy of gaining a competitive advantage.
This value is created among customers, employees and the community in general. When employees obtain satisfaction from work, they produce better results and customers are enticed by an organisation that minds about their welfare.
Continuous small scale economic growth amounts to impressive economic gains in the long term. Therefore, value creation through the stakeholders is the best strategy that an organisation can use to maximise its profits.
For the management to satisfy the needs of shareholders, it has to give the needs of other stakeholders a priority too. This will ensure that the needs of all stakeholders are considered for the success of the organisation.
Bejou, D 2011, ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, vol. 10, pp. 1-6.
Beurden, PV 2008, ‘The Worth of Values – A Literature Review on the Relation Between Corporate Social and Financial Performance’, Journal of Business Ethics, vol. 82, pp. 407-424.
Boatright, JR 2006, ‘What’s Wrong—and What’s Right—with Stakeholder Management’, Journal of Private Enterprise, vol. 21 no. 2, pp. 106-116.
Cosans, C 2009, ‘Does Milton Friedman Support a Vigorous Business Ethics?’Journal of Business Ethics ,vol. 87, pp. 391-399.
Fraser, J &Simkins, BJ 2010, Enterprise risk management: today’s leading research and best practices for tomorrow’s executives, J. Wiley & Sons, Hoboken, N.J.
Husted, BW & Salazar JJ 2000, ‘Taking Friedman Seriously: Maximizing Profits and Social Performance’, Journal of Management Studies, vol. 43, no. 1, pp. 75-91.
Ireland, R D 2003, ‘A Model of Strategic Entrepreneurship: The Construct and its Dimensions’, Journal of Management, vol. 29, no. 6, pp.963-989.
Keim, GD & Hillman, AJ 2001,’Shareholder value, stakeholder management, and social issues: what’s the bottom line?’Strategic Management Journal, vol. 22, pp.125-139.
Shaw, WH 2009, ‘Marxism, Business Ethics, and Corporate Social Responsibility’, Journal of Business Ethics, vol. 84, pp. 565-576.
Smith, C 2003, ‘Corporate Social Responsibility: Whether or How?’California Management Review, vol. 45, no. 4 pp. 52-76.
Wilcke, RW 2010, ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, A Journal of Political Economy, vol. 14 no. 4, pp. 187-209.
Woiceshyn, J 2012, How to be profitable and moral: a rational egoist approach to business, Hamilton Books,Lanham, Md.
Wright, M &Bruining, H 2008, Private equity and management buy-outs. Edward Elgar, Cheltenham.
Businesses must enhance their competitiveness so as to remain relevant and successful in the market. Additionally, maximizing shareholders’ stocks is helpful in indicating how businesses progress. Shareholder’s wealth is total market worth of a business in regard to common stocks. It is obtained by multiplying the market price (price trading at market place) of each share by the outstanding common shares.
The long-standing objective of a business is to increase shareholders’ wealth. This comprises all earnings of the concerned shareholders. It is important to understand various aspects of shareholders’ wealth in the business realms. Thus, when a firm decides to increase the wealth of its shareholders, it is important for managers to analyze the future effects of such practices (Brigham & Houston 2009 p. 324).
However, it is vital to understand whether maximizing the wealth of shareholders should be the main objective of the management. Precisely, this paper focuses on whether the management of any business should augment the wealth of shareholders and owners.
Should the primary objective of management be to increase the wealth of shareholders and owners?
According to Milton Friedman, the main purpose of any business is to make profits for its shareholders and owners. In addition, he points out that businesses that involve themselves in other ventures would eventually be less competitive. This would offer smaller number of benefits to its shareholders, workers and the society in general.
When a business does not make profits for longer duration, its capital reserves and sources of funds would decrease sooner. Thus, the company would not be able to carry out its businesses appropriately (Ahlstrom 2010 p. 21).
This shows how important it is for a business to make profits and increase its shareholder’s wealth. Additionally, it is crucial to provide shareholders/owners with other viable benefits. Precisely, they should gain fully from their investments.
However, businesses should provide more benefits than just returns to their shareholders. Consequently, these businesses offer economic development, opportunities for employment as well as substantial advances in the lives of individuals. The newer products that are available in the market today are as a result of more innovations and inventions of corporations as they try to solve the problems in the society.
Therefore, the main objective of businesses should not only be making profits to its shareholders and owners but making innovations that solve societal problems (Bejou 2011 p. 5). Actually, these innovations will provide more benefits to the owners besides solving societal problems than just making profits.
In addition, inventions will bring to the market products that are not only affordable to most people but also products that are superior and more useful to customers. Most people anticipate businesses to offer these benefits. If the public prevent businesses from making innovations and developments, there could be far much adverse effects in the long-run.
Truly, even just an insignificant decrease in progress over a period of time could really decrease the possible benefits that corporations can provide to the society. This is a vital provision when considered critically. Businesses of varying sizes should focus vastly on societal issues besides corporate levels.
Various provisions of Corporate Social Responsibility demand firms to offer more benefits to the society than just making profits for their shareholders and owners. For example, companies involved in the manufacture of drugs try to make medicines accessible to people from poor countries.
If their main objective is to make more profits to their shareholders and owners, they could possibly lose viable ethics and service to the humanity. Therefore, organizations should establish, ratify, and embrace various aspects of Corporate Social Responsibilities (CSR) should be to offer solutions to the problems of their customers rather than just focusing more on making profits.
This is the fundamental relationship between a corporation and the society (Van Beurden & Gossling 2008 p. 414). Essentially, this will enable a society to develop a good rapport with companies.
Besides, the sensitive demands and anticipations of the society on large businesses have augmented cultural provisions and living standards. Many of these nations have low living standards. It is important to understand that various aspects of stakeholder’s wealth. This is a considerable provision.
In today’s society, there is so much coverage of what is happening in the world by media and technological advancements. This has enabled a quick and extensive disclosure of any suspected company abuses in even the parts of the world that are considered most remote.
Therefore, even though corporate social responsibility persists being very vital, there are more pressures from the society for consideration of corporate social responsibility today.
The most important attention for most businesses is the risk of their reputation. This is amplified by the more discernibility as well as condemnation of the practices of the companies, especially by the non-governmental organizations. Therefore, it becomes very necessary for a company to uphold their corporate social responsibility rather than just concentrating their efforts in making profits to its shareholders and owners.
Most people would appreciate working in corporations with stronger ethics. Concurrently, investors will find it easy to invest in companies with sound corporate standings. Obviously, organizations that are socially responsible are distinct from the rest within the same industry.
Preserving the standings of a business and product image has become so vital for businesses due to increasing market competition. Moreover, the images and standings of companies have become more exposed. This implies that companies could get penalized by their customers for whatever they do that is not considered appropriate or socially responsible (Husted & de Jesus Salazar 2006, p. 82).
In seeking to make more profits to its shareholders and owners, a company may lose its values and reputations. This could make it lose its customers and get penalized. Thus, it would not be appropriate for a business to focus only on making profits and ignore its social corporate responsibility.
The management of businesses has to defer the wishes of the shareholders and they must also obey the ethical practices of the company. Making profits should not be the ultimate goal of a company. Actually, the main reason why businesses would want to make profits is to satisfy the desires of their shareholders.
Even though this calls for more focus in making more profits to the shareholders and owners, the management of a business has a responsibility to analyze and deliberate on other factors while making company decisions. Therefore, it would be inappropriate to say that the primary objective of a company should be to increase wealth to its shareholders and owners.
The management therefore needs to identify areas that should be integrated into the company’s strategy and values. This defies solitary needs to make profit. Evidently, organizations should aim beyond making profits to its stakeholders. This will ensure that they satisfy both the desires of the shareholders and owners while at the same time minding about their corporate social responsibility.
For instance, shareholders and owners of a business would not want the business to involve itself in making a product that would lead to destruction of human lives at the expense of making profits.
There are many instances where the consequences of the decision made are not clear. Thus, the management of a business should evaluate the kind of decisions they are making would have adverse effects in spite of bring lots of profits to its shareholders.
The company shareholders and owners should not dictate the decisions of the management simply because the company belongs to them.While seeking to make profits and increasing shareholder’s wealth, businesses must follow the fundamental norms in the society.
This puts the management of a business in a great responsibility to ensure that the company does not go against the core values regardless of how much return the activity is likely to bring to the shareholders. Certain judgments may be required in areas that are ethically leaden and their ethical consequences can be determined together with other aspects such as low profits.
Others would just be illegal and are not allowed morally such that they should not even be allowed in the first place.Companies should consider adopting internal efforts in trying to ensure that theycomply with the ethical norms as part of their corporate social responsibility (Wilcke 2004, p. 203).
If each and every business adopts the principle that their main objective is to create wealth to the shareholders and owners, what is likely to happen? According to some people, corporations may commence involving themselves in activities that could cause harm to the society if they could only increase wealth by doing that. They would come up with policies that go against the norms of the society.
Other people advocate that companies would evade doing harm to other businesses by making sure that they do not develop their interests to the detriment of others. However, contemplating over this principle, possibly, corporations would begin to think more deliberately about their responsibilities to carry out as a business entity.
Actually, while making decisions, the company management has to consider the impacts of their decisions on all the parties that are either affected positively or negatively. They then have to incline to the interests that bear more weight. Therefore, the notion that the primary objective of businesses should be making profits to its shareholders and owners provides a different idea of company ethics.
In this case, the management emphasizes on executing certain responsibilities, which also includes increasing wealth to its shareholders and owners, as well as complying with the ethics that safeguard different parties from any harm.
It is suggestible that businesses might be unethical if they only adopt the principle of increasing profits to their shareholders and owners. Besides, some businesses overlook the authenticity of the governmental and regulatory frameworks. There are agencies mandated to regulate the activities of corporations.
Other people also stress the competitive hazard posed on a company by business unselfishness attributable to the waste-preclusion property of faultless competition and contestability.
In impeccably competitive marketplaces or even those in which liberty of entrance makes defective markets perfectly contestable, an obligatory company will be unable to gain market share to more competent rivals if it involves itself in wasteful acts.The market spontaneously recognizes any expenditure by the company that is assumed only to imply good works as an activity of absolute wastefulness (Smart & Megginson 2008 p. 562).
Such kind of wastefulness diminishes the competitive of a business and finally this would result into insolvency or overthrow by a more effective companies. If a company is able to willingly take corporate social responsibility advancements that are not focused on increasing profits, it is because they have some kind of market power it enjoys.
It is agreeable that organizations should make profits to their shareholders and owners. To be able to meet this objective, they utilize resources/production factors including land, capital, as well as labor. Consequently, they must provide considerable returns to their stakeholders (Schwartz 2011).
The manner in which companies manages and put these resources to use will determine greatly the extent of the main company objectives. This is because the existence and development of the company depends upon the firmness of the society where it conducts its operations. In terms of ethics, the company is aware that its commercial activities may possibly have constructive or destructive externalities that could impact on the welfares its stakeholders.
In case these externalities have destructive effects, the consequential financial, societal, ecological or even political problems need the intrusion of an autonomous supervisor (Cosans 2009, p. 396). The supervisor will work to ensure that both the firm and the stakeholders find the most favorable solution to their problems.
For instance, when a firm causes pollution of an environment, the government as an independent party, may levy taxes on energy use or necessitate that companies observe particular standards of emission. This will ensure that companies internalize the pollution charges incurred by others.
This indicates that even though companies would want to create profits for its shareholders, they still have corporate responsibilities that cannot be disregarded (Craig 2003, p.63). Therefore, to say that the primary objective of a company is to increase wealth of the shareholders is incorrect since there are obligations that should be observed.
Most ecological and societal complications affect the welfare of a business directly. If the company causes environmental pollution, it could be penalized or even worse, closed down. Alternatively, if the company is unconcerned about the poverty that exists around it, there could be upsurge dangers of social instability in a state. In turn, this can surge the economic costs of the company and lessen their margin of returns.
Again, if the company does not pay much attention to trainingto its workers, which is importantor to superiority of education in the society where it obtains its employees from, its productivity may become compromised. In the long run, its competitiveness as well as the margin of the profits could be minimized.
Thus, companies may be put under pressure to advance in social products to be able to endure or develop. This is completely in line with the gauge of social performance as required by the expectations of the society or law.
Essentially, the corporate social responsibility movement puts an extra weight to the influence of humans on the aims of a business to make profits. A business is considered to be creating wealth to if it observes regulations, ethics and is a decent commercial inhabitant (Friedman 2006).
Nevertheless, a lot of research done on corporate social responsibility in many publications shows that corporate social responsibility still does not have a strong definition, theoretical grounds and binding experimental findings.
In addition, there is a missing link between the activities of companies and their assertions that they care. However, the major complications of the corporate social responsibility are that it is automatic, firm and it does not differentiate between the mandatory and optional actions.
More often than not, corporate social responsibility is used to improve business image via infrequent assistance and therefore to counter criticisms of unregulated hunt for making more profits. It can be argued that corporate social responsibility, all in all, has not had the capability of impacting the social environment as some could have individuals’ deliberated (Shaw 2009, p. 571).
For instance, a corporation that was ranked at the top two years ago by a prominent raking company is currently under federal investigation. This is because, it is suspected to have been involved in the abuses of moral and legitimate standards that have been set by the government (Bacher 2007).
Most of the prominent rankings simply pay more attention to which corporations made the highest amounts of profits, their speed of developments, which corporations paid the highest amounts of salaries to their management and which ones had the most wonderful equipment.
It is irrelevant whether the managers of the corporation operate the business to a point of breaking down leaving their stakeholders penniless and vagrant. Probably, it would be necessary for adopt the principle that the primary objective of a business is to create more wealth to its shareholders and owners.
However, the core responsibility of the management of a business should be to increase wealth to its shareholders and owners (Kotler & Lee 2005). This obligation emanates from the fact that shareholders and owners have invested a lot of money into the business with the hope to get more money from them.
Some times in the past, businesses were managed by their own shareholders and owners. With time, evidences show that management mechanism of most businesses broke off from their ownership. This is true to most businesses today, where the management has to be at the forefront in making decisions on behalf of the shareholders.
Conclusion
It is crucial to provide agree that businesses are established to provide good returns to their shareholders and owners. However, there are numerous provisions regarding this. Firms should provide more benefits to their stakeholders and the society at large. It is recommended that the management of a business should have more societal and ethical responsibilities beyond increasing the wealth of its shareholders and owners.
As illustrated earlier, businesses are mandated to determine the obligations and duties of employees. Additionally, they must consider various aspects of corporate social responsibility as indicated earlier.
This is helpful as they try to achieve their legal obligations. It will also help them operate a successful corporate and increase wealth to their shareholders and owners. Precisely, organizations should provide their shareholders and owners with profits and other considerable provisions. The society and other stakeholders should also gain remarkably based on the provisions of CSR.
List of References
Ahlstrom, D 2010, ‘Innovation and Growth: How Business Contributes to Society’, Academy of Management, vol. 1 no. 1, pp. 11-24.
Bacher, C 2007, Corporate Social Responsibility, GRIN Verlag GmbH, München.
Bejou, D 2011, ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, vol. 1 no. 10, pp. 1-6.
Brigham, E & Houston, J 2009, Fundamentals of Financial Management. Cengage Learning, New York, NY.
Cosans, C 2009, ‘Does Milton Friedman Support a Vigorous Business Ethics?’ Journal of Business Ethics, vol. 1 no. 87, pp. 391-399.
Craig, N 2003, ‘Corporate Social Responsibility: Whether or How?’ California Management Review, vol. 45, no. 4, p. 52-76.
Husted, B & de Jesus Salazar, J 2006, ‘Taking Friedman Seriously: Maximising Profits and Social Performance’, Journal of Management Studies, vol. 43 no. 1, pp. 76-91.
Kotler, P & Lee, N 2005, Corporate social responsibility: doing the most good for your company and your cause, Wiley, Hoboken, NJ.
Schwartz, M 2011, Corporate social responsibility: an ethical approach, Broadview Press, Peterborough.
Shaw, W 2009, ‘Marxism, Business Ethics, and Corporate Social Responsibility’, Journal of Business Ethics, vol.86, no. 1, pp. 565-576.
Smart, S & Megginson, W 2008, Corporate Finance, Cengage Learning EMEA, New York, NY.
Van Beurden, P & Gossling, T 2008, ‘The Worth of Values – A Literature Review on the Relation Between Corporate Social and Financial Performance’, Journal of Business Ethics, vol. 82 no. 2, pp. 407-424.
Wilcke, R 2004, ‘Appropriate Ethical Model for Business-Critique of Milton Friedman’s ’Thesis’, The Independent Review, vol. IX, no. 2, pp. 187-209.
Limited information is found on how economic enterprises can incorporate business ethics and social responsibility as a means through which their primary objective of shareholder wealth maximization is achieved (Hawley 1991, p. 714).
This lack of ethical considerations seems to be not only confined within the academic sphere but there is evidence of it taking a toll in the realm of corporate practice in the economy. Enterprises have ignored the ethical concerns in strategizing on how they will achieve their goal of wealth maximization.
Through their total disregard of ethical issues, corporates are assuming that the mere pursuit of the wealth maximization goal meets the social responsibilities that could possibly be expected from any entity. However, there has been limited research and analysis of the ethical foundations and the perceived implications of the goal of shareholder wealth maximization.
This paper seeks to analyze to what extent the corporate world incorporates business ethics and social responsibility in pursuing their primary objective of maximizing the shareholders’ wealth and how this pays back in terms of increased returns to the shareholders.
It highlights the main differences between the goal of profit maximization and that of wealth maximization and the role played by market forces in the pricing of stocks within the shareholder wealth maximization paradigm. It argues that empirical and theoretical evidence on this subject will most usually lead to overlapping interpretations (Smith 2003, p. 58).
Share Holder Wealth Maximization
Since Milton Friedman’s largely criticized position that “the social responsibility of business is to increase its profits”, the ethical aspect in the maximization of shareholder wealth has been given a wide consideration. In order to build a logical analysis of this notion, it is of paramount that we understand the crucial link between the two distinct goals of a corporation, i.e. Wealth maximization and profit maximization.
While the two may share some similarities, they are also characterized by various inconsistencies as analysed by Solomon in his work, (Solomon 1963, p. 2). For instance, profit maximization as an objective best suits a traditional macroeconomic market which is characterized by minimal uncertainties; the entrepreneur is the main decision-maker, the shareholding is fixed and determines within a given period.
This kind of business structure is especially of great utility in analyzing the variables, i.e. Prices of raw materials and end products, production level etc., which occupies a central position for any corporate whole. According to Winch (1971, p. 14), profit maximization goes hand in hand with the ethical goal of the utilitarian mode of resource allocation.
Contrary to the microeconomic world, proper allocation of resources is very integral to a corporate entity in regard to its financial dealings (Beurden & Gossling 2008, p. 412). This difference in terms of the central focus of each establishes new fundamentals which the profit maximization paradigm declines to involve itself with.
For example, this whole new structure separates the entity’s decision making from its ownership and places it in the hands of a separate and distinct management body. As this happens, uncertainties on the future earning capability of the firm sets-in when capital stock features in as a variable to be determined too.
The goal of wealth maximization is developed by maximally utilizing the utility maximization strategy, i.e. management, being agents of the shareholders are required to maximize the projected utility of the shareholders’ wealth.
If for instance wealth is the main argument in the utility of the shareholder, maximizing the anticipated utility of the wealth of the shareholder reduces the core objective of the entity as maximization of shareholder wealth.
To this end, the ethical concept of a corporate finance adopts the same approach as that of microeconomics as use of utility maximization incorporates characteristics of the utilitarian ethic (Shaw 2009, p. 569).
Conversely, the introduction of an element of the future, uncertainty, separated decision making structure creates complications in utilitarian allocation of resources. When even this basic objective cannot be achieved, it only holds strong for the argument that wealth maximization is incapable of providing a feasible ethical foundation for a corporate entity.
Nevertheless, some essential features of wealth maximization are not included in the utilitarian resource allocation framework. For instance, the wealth of the shareholder is directly linked to the price of capital stock and in extension, the mode through which marketing for ownership claims contains elements of ethical concerns by the entity (Wilcke 2004, p. 198).
Working on the assumption that the main objective of an entity is wealth maximization, various issues can be identified. For instance, since wealth maximization is completely dependent on market forces in order to create a strong value for the ownership of the firm, a question arises whether these market forces bring about stock prices incorporating the value of the social responsibility of the firm.
To answer this question, we need to determine to what extent security prices reflects information on a firm’s ethical concern. Unfortunately, if this debate continues, it will take us to the more irresolvable question of what the world perceives as constituting proper ethical behaviour.
It even gets more complex when management, as the agents of shareholders, gets into the picture and we are faced with the question of whether shareholders would count management actions as constituting acceptable ethical behaviour (Cosans 2009, p. 396).
Determining Share Prices
Determination of security prices is a fundamental concern of corporate finance. Through efficient market hypothesis, the price of securities is a reflection of the information available to investors when making investment decisions.
Through the market hypothesis, we can attempt to analyze the ethical impacts of the wealth maximization goal. For example, if wealth maximization is to meet a specified ethical standard, the price of securities should incorporate information containing ethical elements.
In order to succeed in this, we need to first set an ethical standard. Then empirical tests will be carried out based on the changes in prices of securities and determine the impact of ethical issues on the market prices.
The analysis will be made based on the assumption the main goal of the management is maximization of shareholder’s wealth (Husted & Salazar 2006, p. 83). The hypothesis could also test on separate aspects, for example when a certain firm has been known to exhibit differing degrees of adherent to ethical issues.
But this latter hypothesis will present various challenges. For example, there may be a situation whereby an organization allows management to engage in both socially acceptable behaviour as well as unethical acts which are perceived to result into positive effects.
This may occur where the returns of the illegal acts are significant as compared to the costs to be suffered when such acts come to light such as litigation costs, fines and other penalties, reduced goodwill, etc. there could also be other mitigating factors such as the ability to keep the illegal activities as well hidden company secrets or by putting up strategies for timely damage control when such activities come to light.
Besides, even when using efficient market hypothesis, it is hard to tell whether if an alternative course of action was taken it would have resulted in a different price change pattern. For example, it would be difficult to determine whether the unethical behaviour was a reflection of the ethical failures of the wealth maximization goal or that management diverted from practices consistent with wealth maximization objectives.
This debate is premised on the idea that the efficient market hypothesis, by its very nature is characterized by joint hypothesis, i.e. price determination models are usually implied. Such an assumed model of price determination if it dictates that we assess a particular ethical issue, then a null hypothesis of the efficient market hypothesis requires that unethical act would violate the primary goal of wealth maximization.
According to Treynor (1981, p. 7), management should address financial demands of the different factions within the organization if it is to emerge as a successful entity. These factions include customers, employees, suppliers and other stakeholders.
The wealth maximization goal requires that in pursuing its objectives, a corporation should take into consideration the interests of all the stakeholders of the organization, not just the shareholders. Thus we can use this argument to say that wealth maximization encourages the adoption of socially responsible business behaviour.
The crucial connection between wealth maximization and the efficient market hypothesis can be well illustrated using the classical corporate theory. This theory proposes that a firm would most likely invest in a project projecting positive net present value.
The variables used to calculate the projected cash flows is based on the performance of the firm which has been theorized by the management where it may have or may have not incorporated ethical behaviour.
Here, the price of securities will be based on the management’s assessment of the market. Including social responsibility and ethical behaviour in calculating the projected cash flows will be in line with wealth maximization where such considerations are reflected on the prices of securities.
Empirical Considerations
As we have noted above, empirical evidence does not help us determine whether pursuing wealth maximization will amount to a socially responsible and ethical managerial behaviour.
It requires us to define what constitutes proper ethical behaviour and since ethical issues are complex in themselves, it will create conflicting opinions on the subject. Nevertheless, we can draw from the few theoretical and empirical studies relating to the impact of socially responsible behaviour on the price of stocks.
In this light, it has been argued that price fixing has the potential to increase new entrants into the market industry leading to higher competition and thus diminishing returns (Waldman 1988, p. 78). Therefore, if the wealth maximization is the main objective, price-fixing is aimed at offsetting losses in profit by offering a lower discount rate facilitated by a reduced business risk leading to a higher net profit margin.
Yet, if this is not the end result, then price fixing will ultimately have the effect of reducing shareholders’ wealth. Research has shown that disclosing a legal action intended to correct corporate price fixing has resulted in significant negative returns (Skantz et al. 1990, p. 159).
On this basis, while the reduced returns could be the market’s punitive costs for behaving unethically, it could also have arisen from a perceived increased business risk which has nothing to do with ethical issues.
This is further evidence of the difficulties encountered in attempting to use market data to determine whether pursuing wealth maximization leads to ethical outcomes. Since the reduced returns arose because the market became aware of the unethical behaviour and not because of engaging in the actual price fixing, a question arises as to what information was originally included in the prices.
If the original share price were impacted by information on the firm’s engagement in price fixing, then the reduced returns could mean that the entity needs to adopt a risky, highly competitive, reduced profit margin business policy.
Here, the anticipated litigation costs arising from court cases will be expected to have been discounted into the stock prices. However, if price fixing was done in secrecy, then news on a legal action would lead to price adjustment to reflect the resulting costs of unethical act, which would include the lost goodwill. For this, the costs that would be involved in adopting a more competitive strategy are already reflected in the price.
The probability of reaching different conclusions using the same piece of evidence has been found in other areas of our present concern. There is evidence that in making investment decisions, investors do indeed rely on the information available on social responsibility (Patten 1990, p. 581).
Other sources reveal superior investment performance of previously divested portfolios, though these results could have resulted from a combination of factors as opposed to mere social concerns. This may be explained in a number of ways.
For example, following the net profit value method, the corporate financial theory holds that slight changes in either the projected net cash flows or the perceived discount rate impacts on the returns of capital stocks. Therefore, the grand performance of the divested funds may have resulted from a continuing increased risk or a weakening expected corporate performance as opposed to any ethical issues concerned.
This argument can also be applied to the impact of ethical behaviour on investment in the nuclear industry. It has been found that markets place a lower value on nuclear firms at 20% as compared to other industries (Fuller at al. 1990, p. 124).
On careful consideration, the results reveal that perceived risk changes could have contributed to the valuations observed. Thus this leaves us with the option that social responsibility concerns could have had a positive effect on the whole affair.
As witnessed above, untangling the effect of a certain activity on the prices of stock has its own complexities. Besides, we have to give room for the possible assumption that management may not be pursuing wealth maximization.
There is significant evidence that often times, management has been known to unethically chase their own selfish ends especially if they are in conflict with shareholder wealth maximization (Findlay & Whitmore 1974, p. 28).
This will give rise to additional agency costs which the shareholders will incur to monitor management activity and in effect, will lead to reduced returns. When agency costs are involved the equation becomes even more complicated as we need to now to assess the effect of agency costs on the security prices.
Evidence of price fixing can be used to explain how agency costs bring-out a whole new interpretation of the empirical data. For example, working on the assumption that there is no diverging information, the stock market values its own stocks from the assumption that wealth maximization is the main objective of the firm.
On this basis, announcement of a legal action could produce reduced returns because of the additional costs incurred in monitoring the activities of the management and not because of the unethical behaviour.
Therefore, without a way of determining what kind of information was included in the original share price, major difficulties arise in trying to assess whether a certain pricing activity was impacted on by social responsibility behaviour. This raises the requirement for exercise of caution in interpreting the results of any given Empirical Study.
The effect of agency costs may also help in the analysis of study results obtained for other perceived unethical activities, more so in the area of mergers and acquisition whereby there are insider dealings by the management. Of particular relevance is the case of hostile takeovers.
Drawing from debates on what constitutes ethical behaviour (Jones & Hunt 1991, 839), we can base our argument on the assumption that hostile takeovers are unethical. As such, it would appear that, ethical behaviour is being rewarded in this scenario.
This is because, ordinarily, the returns of the target group increase significantly while those of the hostile bidders become negative to zero following the announcement of the intended takeover, (Franks & Harris 1989, p. 238).
Further, due to the existence of agency costs, the use of ‘poison pills’ or ‘shark repellants’ by target management will most probably result in negative returns on the part of the target shareholders (Meulbroek et al. 1990, p. 1113).
So do these results support the argument that ethical considerations on hostile takeovers are evidenced in stock prices? Unfortunately, this evidence raises even more questions rather than answering them.
For instance, given the potentially negative returns suffered by bidding shareholders, it would not be appropriate to say that the management bidders are pursuing wealth maximization for their shareholders, thus increasing the likelihood of incurring agency costs.
On the other hand, it is likely that the bidding management only pays high prices to the target group innocently since the target bid premium payable is in most cases given back through wage concessions. Besides, the ‘unethical’ bidders will most likely be the targets in the future other than the bidders who helped increase the firm value.
Thus from this conflicting evidence, it is only the unethical takeover activities that are properly reflected in the ultimate prices of stock. Undoubtedly, this is as a result of the obvious reduction in firm value that is a unique feature of the anti-takeover strategies.
Conclusions
This paper has argued that wealth maximization as an objective will naturally adopt the ethical expectations inherent in its particular niche of operation. The best indicator of management’s performance is the price changes of the entity’s stocks in the capital market.
Though management decisions could incorporate ethical concerns, it is the security market to determine whether these decisions are in accordance with wealth maximization goal through a valuation of stocks. Thus, this raises the question of to what degree is ethical behaviours reflected in the prices of securities?
This question requires a careful study on the implications of unethical behaviour to the ultimate stock prices. But this presents a problem in that there is no established procedure on how to determine what does or does not constitute ethical behaviour, among other difficulties.
For instance, assuming that stock markets rewards certain business ethical behaviour through attractive prices of securities, it does not automatically follow that when one pursues wealth maximization it will result into a socially responsible corporate behaviour.
However, enterprises would most likely choose this path by choosing to believe that as long as actions are geared towards wealth maximization, then they are ethical and, therefore, justifiable. With this, changing management policy may become a big challenge since even reduced securities prices may not be adequate market sanctions.
Thus even if it was determined that managerial decisions need to incorporate ethical considerations, market forces will not be sufficient to induce this. From this we can conclude that pursuing wealth maximization for the shareholders will definitely not result to a socially responsible corporate behaviour.
However, evidence shows that the pursuit of wealth maximization could deter an entity from engaging in illegal activities. For example, a negative pattern of security price changes is noted whenever it is revealed that an entity has been engaging in illegal activities.
Generally, it would appear reasonable to conclude that the stock market presumes that entities try to avoid engaging in illegal activities because of the possible incidental costs that they may suffer from engaging in such activities.
References
Beurden, P & Gossling, T 2008, ‘The Worth Of Values – A Literature Review On The Relation Between Corporate Social And Financial Performance’, Journal Of Business Ethics, vol. 82 no.1, pp 407-424.
Cosans, C 2009, ‘Does Milton Friedman Support A Vigorous Business Ethics?’ Journal Of Business Ethics, vol. 87 no.1, pp 391-399.
Findlay, M & Whitmore, G 1974, ‘Beyond Shareholder Wealth Maximization’, Financial Management (Winter), vol. 1 no1, pp. 25-35.
Frank, J & Harris, R 1989, ‘Shareholder Wealth effects of Corporate Takeovers. The U.K. Experience 1955-1985’, Journal of Financial Economics, vol.1 no.2, pp. 225-249.
Fuller, R, Himman, G, & Lowinger, T 1990, ‘The Impact of Nuclear Power on the systematic Risk and Market value of Electricity Utility Common Stock’, Energy Journal, vol. 2 no1, pp. 117-113.
Hawley, D 1991, ‘Business Ethics and Social Responsibility in Finance Instruction: Abdication of Responsibility’, Journal of Business Ethics, vol. 3 no.2, pp. 711-721.
Husted, BW & Salazar, DJ 2006, ‘Taking Friedman Seriously: Maximizing Profits And Social Performance’, Journal Of Management Studies, vol. 43 no.1, pp 76-91.
Jones, T & Hunt, R 1991, ‘The Ethics of Leveraged Management Buyouts Revisited’, Journal of Business Ethics, vol. 3 no.4, pp. 833-840.
Meulbroek, L, Mitchel, M, Mulherin, J, Netter, J & Poulsen, A 1990, ‘Shark Repellents and Managerial Myopia: An Empirical Test’, Journal of Political Economy, vol, 1 no.4, pp. 1108-1117.
Patten, D 1990, ‘The Market Reaction to Social Responsibility Disclosures: The Case of the Sullivan Principles Signings’, Accounting, Organizations & Society, vol.1 no.5, pp. 575-587.
Shaw, W 2009, ‘Marxism, Business Ethics, And Corporate Social Responsibility’, Journal Of Business Ethics, vol.86 no.1, pp 565-576.
Skantz, T, Cloninger, D & Strickland T 1990, ‘Price-Fixing and Shareholders Returns: An Empirical Study’, Financial Review, vol.3 no.5, pp. 153-163.
Smith, CN 2003, ‘Corporate Social Responsibility: Whether Or How?’ California Management Review, vol. 45, no. 4, Summer, Pp 52-76.
Solomon, E 1963, The Theory of Financial Management, Columbia U Press, New York.
Treynor, J 1981, ‘The Financial Objectives in the Widely Held Corporation’, Financial Analysis Journal, vol.1 no.5, pp.5-15
Waldman, D 1988, ‘The Inefficiencies of Unsuccessful Price Fixing Agreement’, Antitrust Bulletin, vol.6 no.3, pp. 67-93.
Wilcke, RW 2004, ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, The Independent Review, vol IX, no. 2, pp 187-209.
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BT Financial Group is one of the largest investment companies specializing in the wealth management. Being the part of the Westpac Group, the company seeks to introduce the production and allocation of investment, retirement products, and superannuation (Our History, n. d.). Insurance operations also involve distribution of loans, deposits, and mortgage among the population.
Due to the fact that the BT Financial Group strives to advance living standards of aged people as well as increase the overall wealth of the population, it introduces as number of important measures and opportunities that can be implemented.
To be more exact, the company should increase professional advice, enhance and promote investment, advance the insurance schemes as more and more people plan to buy houses, introduce higher rates of investment products, and, finally, contribute to augmentation of margin loans among the population.
In order to meet the needs of older generations, the BT Financial Groups should engage more resources and strategies. The major emphasis should be made on a fee-for-service arrangement for advice introduced to customers in the sphere of investments and pensions, eliminating any possible conflicts while preparing an investment portfolio.
In addition, the company also implements changes to the sphere of professional standards to enhance the recruitment requirements and control specific frameworks for measuring the delivery of advice, where the major focus is made on meeting sophisticated product and service needs of clients (BT Financial Group, n. d.).
Margin lending is one of the leading operations enhanced by the company’s intention to protect and improve wealth of the Australian population (James, 2007, n. p.). In whole, this operation provides greater opportunities for the company’s development because it creates a stronger platform for meeting the customers’ needs and demands.
Beside higher quality standards of advising policies, the innovation approaches, particularly the newly established IT frameworks, will contribute to greater productivity and performance of BT Financial Group (Fan, 2011, n. p.).
Hence, the introduction IT capability maturity system can initiate the company into a new strategic level for creating added value and for focusing on the most problematic areas of the production process. The opportunity to increase productivity has appeared due to customers’ growing demands whose request can be better controlled and operated with the introduction of the above presented framework.
Threats
For carrying out certain operations and activities, BT Financial Groups faces certain challenges and threats among which are rapidly aging generations, difficulties in knowledge managements, customers’ security, decline in population growth, and introducing innovations.
For implementing the existing opportunities, high quality and professional advice provided by BT Company is essential for facing the problem of aging generation, which is the major threat to increasing wealth in Australia.
Despite the fact that Australia is considered to be one of the most developed economies, it is still experiencing dramatic aging of its population (McCrindle, 2007, p. 5). Hence, the average age of the Australians is about 37 years compared to 28 years in 1976. If the median age increases, it can have significant influence on society.
Insurance is another cornerstone of the company’s activities that needs to be considered and improved. The abundance of flood claims on the part of the BT’s clients has been a major threat to the managers, but the problem has been successfully overcome as the managers provided new mechanism for handling and controlling revenues and earnings despite the insurance payout increase (Woodington, 2011).
More importantly, rise flood claims have provided the company with a much more favorable ground for strengthening its positions.
Due to the development of small businesses in Australia, BT Financial Group has become more concerned with lending and borrowing being the major sources for carrying out small business transactions (BT Financial Group, 2011).
Indeed, the Australian business landscape tends to be overwhelmed with new opportunities for small-scale projects. Historical perspective analysis also shows that Australia is considered to be the country where the dominating place is given to small businesses (Landstrom, 2009, p. 115).
Attracting more customers is another challenge that needs to be overcome to increase the clientele percentage (Woodington, 2011). Particularly emphasis should be made on meeting customer needs and creating more values for customer via the external marketing process.
Way Forward
With regard to the opportunities and threats outlines above, the company should react in the following manner. First, in order ensure the quality standards and advice efficiency, the company also applies to a customer-centric approach for introducing innovations to investment and superannuation activities (BT Financial Group, n. d.).
In fact, this customer-oriented culture contributes to creating a favorable ground for penetrating to all departments and sections of the company and enhancing the knowledge management (Deschamps, 2008, p. 84). Second, BT approach also involves the advisers at the beginning of the research and development process to ensure that a key strategic investment is congruent with the company’s needs.
For ensuring the quality standards and advice efficiency, the company also applies to a customer-centric approach for introducing innovations to investment and superannuation activities (BT Financial Group, n. d.).
In fact, this customer-oriented culture contributes to creating a favorable ground for penetrating to all departments and sections of the company and enhancing the knowledge management (Deschamps, 2008, p. 84). More importantly, BT approach also involves the advisers at the beginning of the research and development process to ensure that a key strategic investment is congruent with the company’s needs.
Reference List
BT Financial Group (2011). Wholesale and Retail Clients. BT Financial Group Submission. Web.
BT Financial Group. Annual Review and Sustainability Report. Web.
Deschamps, J. P. (2008). Innovation Leaders: How Senior Executives Stimulate, Steer, and Sustain Innovation. US: John Wiley and Sons.
Foo, F. (2011). IT Framework Helps BT Tap Business Value. Australian IT. Web.
James, A. (2007). BT Financial Group Streamlines Information Gathering and Saves A $ 540,000 Per Years. LivePoint. Web.
Landstrom, H. (2009). Pioneers in Entrepreneurship and Small Business Research. US: Springer.
McCrindle, M. (2007). New Generation at Work: Attracting, Recruiting, Retaining and Training Generation Y. US: The ABC of XYZ.
Literature is intended to act as a mirror to society. Motivational books, which are part of this literature, have created their space in the literary world as encouraging sources of information. Hill (2005) wrote the book Think and Grow Rich against this background. Hill uses the book to motivate people to seek wealth, one of the most valued aspects of contemporary life.
One of the most positive aspects of the book is the vivid description used to motivate the reader. Any motivational text is required to provide instructions or advise in a sequential manner. Hill (2005) aptly makes use of this skill in the book. He uses several chapters to explain how one can get rich. The chapters illustrate a step by step sequence of how wealth can be acquired. As such, the organization is one of the attributes of the book that I liked.
Negative Aspects
Motivational books are used to bring hope to people who would otherwise be in despair. As such, it is essential that for texts to be brief. Hill (2005) has used more than 300 pages of motivation. One may argue that such a huge volume is necessary owing to the details required. However, a critical review reveals that the book has so many chapters that have overlapping information.
For instance, when the author mentions Desire as the first step, there is no need to have Self-Suggestion as the third step. One way of making the book a manageable read is by reducing or removing redundant chapters. The book fails to realize the need for conciseness. The failure is one of the things I dislike about Think and Grow Rich.
Memorable Principles
I find the book to be quite motivational in terms of the principles advanced. Hill (2005) suggests that the first step to riches is Desire. The step is the first memorable principle in the book. The author states that one must have an interest in acquiring riches. Secondly, the book presents faith as an important ingredient in the journey towards success. Hill (2005) suggests that devotion is the fuel needed to support the activities that yield wealth. An example of Abraham Lincoln helps to support the notion.
The third memorable principle is the issue of specialized knowledge. Hill (2005) asserts that organized and intelligently directed knowledge is a sure way of attracting money. The principle appreciates the place of education but introduces the aspect of specialization in one’s occupation. Specialization helps to sharpen one’s skills and improve their worth.
Applicable Principles
Most of the information in a text is only meaningful if it can find practical application in the life of the reader. Hill (2005) introduces the principle of organized planning. As an individual, I find this rule applicable to my day-to-day activities.
The organization is essential in ensuring constructive utilization of time as a resource. Realizing success is feasible when one has an organized master plan. The plan connects individuals with the people who will help realize their vision. Organized planning transcends other facets of an individual’s life. The manner in which the principle is depicted in the book makes it universally practical.
General Thoughts
The book is a motivational read. In terms of literary techniques, the author aptly uses their skills to enunciate their arguments in an understandable manner. In a similar motivational book, Harvey (2010) suggests that overcoming fear is the best way to realize success. Hill (2005) supports this argument towards the end of their text. In my opinion, I find the aspect of overcoming fear as the best way to conclude such a sequential motivational text.
References
Harvey, J. (2010). Achieve anything in just one year: Be inspired daily to live your dreams and accomplish your goals. New York: Amazing Life Press.
Hill, N. (2005). Think and grow rich. California: Tarcher.
Managerial decisions are vital in the business context. This is evident in the Rich Manufacturing’s scenario upon handling a thorough case study on the organization. Critical decisions usually help businesses to grow faster and enhance their market presence within the shortest time possible. The management crew at the Rich Manufacturing usually submits to the demands of the company by making drastic and critical decisions on matters that affect the business in the realms of its operations, marketing, and expansion strategies (Hoch, 2001).
This is helpful in various contexts due to its viability and appropriateness in the entire scenario. According to various sources studied in this context, it is has been the mandate of the management to ensure that the business operates prospectively and contextually in most of its endeavors. It is crucial to consider various aspects of this management provisions before rendering everything impracticable. The company has to make decisions on the pricing strategies, marketing tactics, expansion mandates, challenging situations, business progresses, and other practicable provisions in this context.
Ability to emerge with viable decisions is commendable within managerial systems (Swansburg, 1996). It is from this milieu that the entire business provisions lie with precision. Additionally, it has been the mandate of Rich Manufacturing to understand how the business operates and how critical decisions affecting the organization are addressed. It is important to enhance such business provisions in the Rich Manufacturing’s context indicated before.
There are various managerial decisions in the Rich Manufacturing, which are questionable despite their commercial provisions. It is important to enhance business prospects by assuming remarkable decision-making provisions on behalf of the company. This can dictate the progress of a given company in various contexts. Considerably, it has been the mandate of top managers in Rich Manufacturing to offer their expertise, wisdom, and other relevant aptitudes meant to emerge with critical business provisions for the prosperity of the organization (Hirschey, 2009).
Decisions made in Rich Manufacturing have to follow given protocols and provisions set by the company in order to embrace its virtues, criticality, consciousness, and strategic management provisions in the entire context. Such protocols are important in embracing decisiveness, novelty, creativity, and dynamism in various aspects of the decision-making provisions.
Additionally, ability to make various considerations in this context has made it possible to enact the required business prospects. It is crucial to understand these provisions in various business contexts. Managing to eradicate biasness in the managerial decisions is important when considered critically (Jiambalvo, 2007). It is the mandate of managers to judge decisively on various managerial issues considerable in this context. Additionally, ability to enhance managerial aspects is important. Rich Manufacturing has embraced criticality in decision making in order to remain relevant in the market and enhance its prosperity in the business realms (Maheshwari, 2005).
This has been possible due vital decisions made by its managers and other credible stakeholders in the entire business context. It is important to consider such aspects due to their critical roles in the entire business framework. This is important when considered with regard to Rich Manufacturing’s decision-making provisions and other relevant aspects in the whole context. Upon analysis, it is evident that the organization has always strategized its decisions so as to address the emerging business needs embraced by various organizations. Precisely, Rich Manufacturing has had critical managerial decisions meant to enhance its business prospects and prosperity.
References
Hirschey, M. (2009). Managerial economics. Ohio,OH: South-Western Cengage Learning.
Hoch, S. (2001). Wharton on Making Decisions. New York, NY: John Wiley & Sons.
Jiambalvo, J. (2007). Managerial accounting. New Jersey, NJ: Wiley.
Maheshwari, Y. (2005). Managerial economics. New Delhi: Prentice-Hall of India.
Swansburg, R. (1996). Management and leadership for nurse managers. Massachusetts, MA: Jones and Bartlett Publishers.