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Ethics and Firm Goals: Can our goal of maximizing the value

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Ethics and Firm Goals: Can our goal of maximizing the value of the 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?

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Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior?

Every public company has a goal of maximizing shareholder value. If they didn't, they likely would not be in business for a long period of time. Many of the massive accounting frauds that we have heard about over the years have started because management gets nervous about shareholder value. Management sees that the return is less than expected, and begins thinking of ways to raise shareholder value. Unfortunately for companies, particularly companies that are doing poorly, the numbers are the numbers. There is no ethical way to raise shareholder value, or maximize the ...

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Ethics and Firm Goals: Can our goal of maximizing the value of the 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?

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Goals of financial management, the nature, function, and purpose of stock exchanges, importance of share price information.

Shareholders wealth maximization

The goal of the firm, and therefore of all managers and employees, is to maximize the wealth of the owners for whom it is being operated. The wealth of corporate owners is measured by the share price of the stock, which in turn is based on the timing of returns (cash flows), their magnitude and their risk. When considering each financial decision, alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to increase share price. Because share price represent the owner's wealth in the firm, share price maximization is consistent with owner-wealth maximization.

Although shareholder wealth maximization is the primary goal, in recent years many firms have broadened their focus to include the interests of stakeholders as well as shareholders. Stakeholders are groups such as employees, customers, suppliers, creditors, owners and others who have a direct economic link to the firm. Employees are paid for their labor, customers purchase the firm's products or services, suppliers are paid for the materials and services they provide, creditors provide debt financing that is to be repaid subject to specified terms and owners provide equity financing for which they expect to be compensated. A firm with a stakeholder focus consciously avoids actions that would prove detrimental to stakeholders. The goal is not to maximize stakeholder well being but to preserve it.

The stakeholder view does not alter the shareholder wealth maximization goal. Such a view is often considered part of the firm's social responsibility and is expected to provide maximum long-run benefit to shareholders by maintaining positive stakeholder relationships. Such relationships should minimize stakeholder turnover, conflicts and litigation. Clearly, the firm can better achieve its goal of shareholder wealth maximization with cooperation of (rather than conflict with) its stakeholders.

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