Question from Fundamentals of Corporate Finance book page 29: It is sometimes suggested that instead of seeking to maximize shareholder value and, in the process, pursuing profit, the firm should seek to maximize the welfare of all its stakeholders, such as its employees, its customers, and the community in which it operates. How far would this objective conflict with one of maximizing shareholder value? Do you think such an objective is feasible or desirable?
I am almost finished with my MBA and I am still not sure how to answer this question. The concept of shareholders providing investment capital is tied directly to the creation of wealth for both parties. At first glance, the answer is simple – companies need to focus on creating wealth which is tied to maximizing shareholder value. My caveat to this is that it needs to be longterm shareholder value. The company is not responsible for fast wealth creation that ultimately destroys the company. The company is responsible for making smart investments that will ultimately payback the investor with interest.
My Financial Management class has taught me that there are lots of ways to try to forecast the future longterm payback and sometimes something that looks good on paper isn’t good for anyone. My Corporate Governance class taught me that taking care of other shareholders can sometimes lead to greater profit for investors – although this seemed to be an even trickier thing to forecast.
One of my professors argued that a company is a collection of people. As we would expect each individual to live by a certain moral guide we should also expect the collection of people to live by a moral guide. Case in point: I would expect my office mate to pick up their trash, why would I not expect the company to clean up a site it damaged?
This is where I get stuck. Every scenario is complicated and sometimes it feels like there are only bad options. I want to think that honesty and straight forwardness could help any leader find another option. I am not naive enough to think that the moral option or even the least worst option is not going to cost lots of money and could take the company down. In that case, is it moral to lose the investors’ money?
It is so easy to go in circles on this one. I believe that each human has to act in the interest of the greater good. Unfortunately, there is not a common understanding of the greater good.
I just talked myself into a circle. I shall think about this more because I do feel that companies should be focused on more than shareholders but I have grown up expecting so little of companies that I am having a hard time imagining a real world where companies did focus on more than the bottom line.