Maximize Shareholder Wealth or Corporate Social Responsibility?
Posted on : 29-01-2010 | By : Miguel A. Llano | In : Personal
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Today I went back to the Rochester Institute of Technology E. Philip Saunders College of Business for a panel discussion on the ethical implications on “Maximizing Shareholder Wealth” that was put on by the Graduate Management Association. I initially went back to see some old friends, professors, and staff, but I walked out with my mind running. I wanted to share this experience with all of you and get you thinking as well.
The first class that I took when I was getting my MBA was an accounting course. The professor told us time and time again that the goal of any company is to maximize shareholder wealth. This statement was drilled into our minds and was even a question on the midterm. This seems pretty simple to understand. A business would not be started unless there were profits to be gained by entering the market. The business’s goal, in turn, is to generate as much profit as it can, thereby maximizing the shareholders wealth.
One of the last classes that I took was on the topic of Business, Government and Society. In this class we looked at the macroeconomic and microeconomic approach to how a business is run and how the government and society also plays a role in the corporate decision making process. Fifty years ago, any corporate donation, whether in-kind or monetary, would have been deemed as having direct negative effect on the shareholders’ wealth. The rise of Corporate Social Responsibility and the Triple Bottom Line truly reflects a change in thinking that a corporation has a responsibility to more than just his shareholders.
This is where the discussion got interesting. One professor used an example from a national retailer that had a mission statement that was focused on providing a better life for its customers. On the other hand, this national retailer also just shut down 10 distribution centers because of under productivity. Now this has a direct impact on society with the loss of hundreds, if not thousands of jobs, and the resulting drop in spending due to the lay offs. On the other hand, this also provides a way for a business to right size and maximizes shareholder wealth in the long run. Interestingly enough, you never see a company’s mission statement that states: “Our goal is to make our owners rich by increasing the stock price.”
So what is the point that I am getting to here? I am not exactly sure. I think that the topic of discussion is very timely and could result in some very high level thinking.
What are your thoughts on this topic? I would love to hear from you!
Miguel — This is a timely post as the graduate course I’m teaching now will take up this topic today! I think there’s always been a balancing act of sorts between stakeholder expactations and corporate social responsibility (CSR). Research has shown that a large majority investors take an organization’s CSR into consideration before deciding to invest in it. I think an interesting aspect of your question is how organizations manage CSR in the face of criticism – and still keep an open dialogue with their stakeholders. Consider what is occuring with Toyota at the moment (defective accelerator pedals). The challenge for Toyota is how they will deal with maintaining that effective dialogue in an ethical and transparent manner while maintaining the positive aspects of its brand. It will be interesting to watch how they manage walking that fine line. Thanks for the post and question.