Can our goal of maximizing the value of stock conflict with other goals, such as
ID: 412673 • Letter: C
Question
Can our goal of maximizing the value of stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Think of some specific scenarios to illustrate your response. When dealing with a not-for-profit what sort of goals would the financial manager have and how might the above topics be different or the same?
Explanation / Answer
Ensuring the sustainability of the business is the first and foremost ethical duty for any business. Ethics in a business do not limit themselves to CSR, but maximizing the stakeholder’s value is also deemed as an ethical duty for a business. We have seen examples of companies like Enron, WorldCom, Adelphia, and Tyco, where too much focus on maximizing stock value led the company’s management to indulge in unethical or illegal activities. But the issue there was not merely their focus on stock value maximization, but their myopic focus on the same. Ethics and ethical business doesn’t need their focus to shift from maximizing the stock value, rather they need to focus on stock value maximization but not in solidarity but inclusively, ensuring their decisions are not going to negatively affect the stock value in the long term. To ensure long term focus, unethical and illegal activities cannot be supported to justify of stock value maximization.
The goals of financial management is to maximize stock value for the company, but unethical or illegal decisions crop in when the focus is shortsighted and long term share value impact of the decisions are not taken into consideration.
Not-for-profit organization pursue social and/or political mission, so there goals are not similar to that of for-profit organizations like increasing the market value of their equity. Their goals are to offer their services at the minimum possible cost or expense to the society, thus ethical framework and ethics focus enables them to achieve this goal by maximizing the benefit to the society through their decisions and actions. As a financial manager in a not-for-profit firm though, the goal is still of maximizing the value of their equity, and hence, ethical focus is essential to their long term focus on equity enhancement.