Rebecca Blair 10366217 EBF2 Liam Hourihane

Maximisation of shareholder wealth is the process by which the managers of a firm or company invest in new projects, maximise profits from existing products and services, control costs, and essentially attempt to add value to the company through the process, which is eventually reflected in the price of the stock. These activities lead to increases in the Net Asset Value and Equity per Share.

Milton Friedman’s maxim states ‘the business of business is business’ and that the ‘only social responsibility of business is to increase profit’. Businesses which follow this approach argue that it is not the duty of the business to be concerned about social welfare and indeed this may well detract from the primary means by which the company should be contributing to society; that is by operating in an efficient economic matter.

Alternatively some businesses take the view that working cooperatively in an environment, paying attention to and contributing positively to environmental and community needs, creates a more sustainable operating situation for the long term pursuit if busines goals (such as profit maximisation) Cadbury’s is a good early exapmle of an organisation that held this view and much of today’s human resource models in the UK and Ireland owes a lot to the progressive policies of this organisation. Ideas that staff should be well treated; products should not be harmful and that the company should reinvest back into the society in which they operate has had clear benefits got organisation’s like Cadbury’s for over a century.

There are different factors to consider that affect the importance placed on society’s welfare by the manager, and why they might choose to be interested in the well being of society at large; these considerations are: The economy and survival, reputation and long term sustainability and the law and ethics.

1. The Economy & Survival

The amount of importance placed on the wellbeing of society at large differs depending on each operatin economic environment. In a high-income economy the importance placed on the welfare of the society is vastly larger to that of a low-income country. Therefore the concerns of a manager in a high income country such as Sweden (GDP 5.38 2011 - source http://data.worldbank.org), will vary from those of a manger in a low income, struggling economy such as Sierra Leone (GDP 0.02 2011 - source http://data.worldbank.org). The reason for this variance is that the needs of the opposing societies are so different. For example, in a low-middle income country, a manager’s main concern is not wealth maximisation for the good of the society, but to make enough profit to survive. At some point there is a need to prioritise business survival over social responsibility. When wealth is maximised in a high-income economy, shareholders make a profit. This is generally a large surplus to what they require to survive. Therefore they are more able to decide to reinvest this disposable income, and they may choose to reinvest or donate in an ethical manner which is beneficial to society and thier operatin environment.

Using an example from social science “Maslow’s Hierarchy of Needs” (Abraham Maslow) clearly demonstrates that human behaviour is influenced by differing needs. His concept of human motivation states that people are motivated to fulfil basic needs before moving onto other more advanced needs. The hierarchy is displayed as a pyramid, with the most basic of needs (physiological needs, such as food, shelter, survival) at the bottom and the very final need, at the top is ‘Self-actualisation’, e.g. making a change for the better of others. Before the need to self-actualise can be met, one must meet all the previous needs. Businesses operating in low income economies may not have the motivation to strive for more progressive ideas such as long term sustainability and reinvestment in broader social welfare. Conversely managers working in stable economies are able to consider building long goals into their strategies.

2. Reputation and Long Term Sustainability

Managers who are aiming to maximise shareholder’s wealth may take in interest in ethical issues as a means of maintaining a good reputation for the company within the market place. The recent rise in the publicity surrounding ethical issues, such as the environment, discrimination and equality, has encouraged companies to maintain ethical standards as means of promoting positive relationships towards their organisation and therefore their products. In a market place where investors and market participants show concern for society’s welfare, this provides and incentive for the manager and the company itself to maintain ethical standards in order to enhance its reputation. If there is a demand for products and services that are manufactured and produced ethically, then the supply of these will increase. The manager that responds to this demand may actually increase shareholder wealth further as a result. In this case the “ethical belief” is a commodity to make investing in the company more desirable. This aspect of corporate conduct is explored in the concept ‘Reputation Capital’. Reputation Capital is thought to be a non-cash remuneration for efforts made and this in turn commands respect in the market place where capital is generated. Reputation Capital is viewed as a corporate asset that can be managed and accumulated in order to maximise shareholder wealth. Hence, in the case of reputation, it is important that managers are concerned with the welfare of society. For example, the high levels of obesity and illnesses associated with being overweight have caused a heightened awareness of the dangers of fast food. McDonald’s, a popular fast food chain, came under fire regarding it’s cheap, unhealthy menu. McDonald’s chose to overhaul there image and provide healthy options, using only locally produced products and biodegradable packaging. By doing this they maintained there reputation in the market place in order to sustain there popularity.

3. The Law and Ethics

Compliance with the numerous laws and regulations creates another incentive for businesses to act in a socially acceptable way. It is in the interest of managers to abide my these laws in order to avoid prosecution and serious damage to the business’s reputation.

An example of the negative impact on an organisation is the recent scandal surrounding GlaxoSmithKline pharmaceutical company. They were found guilty of bribing doctors to prescribe medicine for unapproved uses, charged with fraud and fined three billion dollars. This will clearly have long term effects on the company’s reputation and long term profitability.

Compliance with regulation is essentially creating an environment of trust between the organisation and it’s customer (something GlaxoSmithKline do not have now). Customers come from the society and therefore by extension it is in an organisations best interest to maintain good standing within the broader society, in order to maximise profit.

In answer to the question “should managers be interested only in the maximisation of shareholder wealth or should they be also interested in the welfare of society at large?” it is necessary to assess the position against three main conditions: The economic cycle of the business; the desire for sustained development and a strong reputation; and the need to comply in order to build trust with customers and the broader environment/society. Clearly, it makes sense in a modern globalised context to seek to maintain a balance between the the above three conditions and the difficult job of making and extending profits. This is the challenge facing all businesses in an ever increasingly competitive business world.