The Concept of Investment and Maximization of Wealth - Essay Example

? ESSAY Table of Contents Table of Contents 2 Question 3 Question 2 4 Question 3 5 Question 4 7 Work Cited 9 Question The stakeholder theory upholds that the managers have duty towards the employees, creditors, and other stakeholders. This means that the mangers have to make sure that the rights of the employees, creditors and the creditors are protected at any cost. This theory gives more importance to the fiduciary relationship between the principle and the agent. The managers are the principles and the employees, creditors and stakeholders are the agents (Austin 539-540). The principle is supposed to protect the interest of the agents. Sometimes the agents like the employees, creditors and the stakeholders want the managers to look beyond just protecting their interests and help them maximize the wealth, besides acting as protector of the interests. This concept or the need to maximize the wealth of the stakeholder that arises is part of the shareholder model (Bagchi 447-462). The shareholder model ensures that the managers do everything to make sure that the wealth is maximized as much as possible. The two types of model cannot remain side by side or go hand in hand. The managers have to choose to settle between either maximization of the shareholder wealth and the overseeing that the rights of the creditors, employees and the stakeholders are protected at any cost. This can be explained with the help of the following example. In order to increase the shareholder value following the shareholder model, the managers take debt which increases the chances of bankruptcy (Bougheas 233-263). If the debt fund is able to generate the required return, then the company can pay for both its shareholders as well as the creditors. On the other hand the extra debt increases the chances of agency cost. The agency is thus obliged to pay for the extra debt and puts the agency in a risky position. So choosing to maximize the shareholder value the managers have put the employees, stakeholders, and the employees into a crisis. In reality the management or the principle is expected to make sure that whatever decisions that are taken by them, the oath taken to protect rights of the interests are not jeopardizes at any cost. The concept of investment involves maximization of wealth and that is what shareholders keep looking for in any investment. The adoption of the stakeholder concept comes in direct confrontation with wealth maximization concept. Without maximization of wealth, there is no point to invest. So I agree that the stakeholder theory sounds goods in social theory but does not work in practice. Question 2 I agree that the cost/benefit analysis sometimes lead to flawed ethical results. Cost benefit analysis involves weighing the cost of carrying out an object with its subsequent benefits. Most of the time the comparison is done by indicating the margin by which benefits outweigh the cost. Human beings have the tendency of measuring the benefits by the level of human satisfaction achieved (Deborah 879-911). Since the ultimate aim of all such endeavour is uplift of human satisfaction level, so all the benefits are measured in the light of human satisfaction. It may happen that the achievement of such results or benefits may come in direct confrontation with ethics. For example in constructing a company there is a cost/benefit analysis. The costs include the capital and manpower, and the benefits include the long term service of the company towards the society. Very often the managers as well as economists fail to note the cost of ecological imbalance. It is in our own interest that the environment be protected since wanton destruction of ecology is in fact a serious unethical practice. This little fact is however overlooked in the cost/benefit analysis math. Corporate sustainability helps a company to improve the consumer and employee for a long term basis. It helps to create green strategy. This strategy is developed keeping in the focus the natural environment surrounding the company. The natural environment surrounding the company includes the social environment, economic environment, cultural environment. The inclusions of these environmental factors help a company achieve more agility to compete effectively. Other benefits that are achieved through corporate sustainability are increased revenue, reduced expenses of energy, reduced expenses of wastes, reduced consumption of water and other materials (Lavitt 21-46). The other values include increased productivity in employees, reduced expenses in hiring and attrition, and decrease in the operational risk. These values are all measurable in terms of index and values. The other type of values, which are non measureable are increase in transparency. Question 3 According to the Edward Freeman’s model of Stakeholder Analysis, the values that are created for customers, suppliers, employees, communities, and financers get destroyed some times. A business is all about maximizing the profits for shareholders. This concept may not be relevant any more in the present time. As for example, the recent global financial meltdown that took the world by surprise showed that despite knowing that maximization of shareholder wealth is the ultimate aim, a company can suffer financial troubles and bring losses to the shareholders (McWilliams 707-724). Thereby the only thing that is achieved is the destruction of wealth rather than its appreciation. So the objectives of the executives, is to maximize the value of the shareholders without settling for any tradeoffs. The tradeoffs may happen between value maximization and minimization of the stakeholder risks. There is relationship between the stakeholders and the Corporate Social Responsibility. The stakeholders sometimes judge the company based on the activities for the social causes. This is because of the reason that the company is supposed to contribute to the social causes besides maximization of the shareholders wealth. If a company is able to generate the required revenue to pay for the shareholders as well as contribute for the society, then it is assumed that the company is in a better off position than others who does not carry out corporate social responsibility. In the context of corporate social responsibility, there have been various kinds of actions taken by the shareholders. The role of the social responsible investment funds can be sited as an example here. These funds have a special purpose. These funds take into account the social and environmental factors into consideration besides analyzing the financial performance when selecting the companies for investment (Murphy 518-524). These funds have considerable use among the institutional investors like pension funds in Europe and USA. Yes there may be conflict in executing the fiduciary duties of the management and the board of directors to maximize shareholder of the management. The conflict arises due to absence of understanding and communication. One of the most typical sources of conflict between the management and the board is data conflicts, interest conflicts, structural conflicts, value conflicts, relationship conflicts. The management has sometimes trouble articulating the aims and the objectives to the board effectively (Reid 169-174). The management is supposed to maximize the value of the shareholder and the means chosen or the strategies chosen for the purpose may not be approved by the board. For example the management may resort to debt funding for its easy availability for any project. The board may disapprove the management’s decision. The board is always concerned with the general well being of the company besides the shareholder wealth maximization. The management may at times become too much engrossed in maximizing the personal gains and benefits. This leads to serious problems. For example over ambitious CEO can put the company is financial delinquency if the strategies are premature in nature. Question 4 The cruise liners will be benefitted by dumping the defective water in the inner city. The illegal dumping of the waste water affects the natural marine life of the region. The local commerce which is dependent upon the marine life of the region will be affected. For example the local commerce like the local fisheries, local fish market and the hotels and restaurants which are dependent upon the marine will also be affected (Austin 539-540). The affect acts in a multiplier way. That is the downslide of any one part of the commerce system leads to the downfall of the other bodies linked to the system. If the present policy continues then the cruise liners will be able to exercise their rights fully. As per the present policy there are no provisions of law to stop the unabated dumping of waste water in the sea (Lavitt 21-46). So there is no such right awarded to the cruise liners to carry out such act. In this case it means that the cruise liners have acquired an illegal and illegitimate right to carry out such dumping. The local residents surrounding the islands will be able to exercise the rights by shipping the defective water. The cruise liners will have illegitimate rights ignored by shipping the defective water. The moral problem is that the cruise liners acted in ways to protect their own interests, without thinking about the consequences. The economic benefits can be realized with a rich marine life. The rich marine life will supply the local fisheries and the local fish market with increased and diverse types of marine products. The high supply of the marine products will decrease the cost of the fish products in the local market. This will attract more and more tourists to the region. This will in turn boost the tourist-commerce of the region. The legal requirements are formulation of laws and regulations that prohibit the dumping of sea water. The ethical duties can be performed by an international watchdog who will always make sure that the interests of all parties both the cruise liners as well as the islanders are preserved. Among the 3 areas, economic, legal, and ethical, the return, the yield from the economic has the highest yield. Work Cited Austin, Scott, “The Fiduciary Principle.” CAL. L. REV 37.1 (2008): 539-540.Print. Bagchi, Alaknanda, ‘‘Training Intensity and First Labor Market Outcomes of Apprenticeship Graduates.’’ International Journal of Manpower 25.7 (2010): 447-462.Print. Bougheas, Sanders, ‘‘Early Career Mobility and Earnings Profiles of German Apprentices: Theory and Empirical Evidence.’’ Labour 18.4 (2004): 233-263.Print. Deborah, DeMott, “Beyond Metaphor: An Analysis of Fiduciary Obligation.” DUKE L.J 15.3 (1988): 879–911.Print. Lavitt, Miller, “Computer Based Self-Help Groups for Sexual Abuse Survivors.” Social Work with Groups 7.11 (2007): 21-46.Print. McWilliams, Anderson, “Raising rivals' costs through political strategy: An extension of resource-based theory.” Journal of Management Studies 3.9 (2009): 707-724.Print. Murphy, Beth, ‘‘The Promise of Workplace Training for Non-College Bound Youth: Theory and Evidence from German Apprenticeship.’’ Discussion Paper 15.3 (2012): 518-525.Print. Reid, Eearling, “Informed Consent in the Study of On-line Communities: A reflection on the Effects of Computer-Mediated Social Research.” The Information Society 4.7 (2006): 169-174.Print. Read More