Question

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? Think of some specific scenarios to illustrate your answer.

Answer 1

Yes, the goal of profit Maximization can conflict with long term value creation. The subjects like employee's safety, environmental concerns, etc form a separate group of things to be looked at while judging the sustainability of the firm. The ESG framework is one such framework where in we look at the Environment, Social and Governance indicators as a measure of how effectively is the business being run. Factors like these used to be ignored initially but now they are accounted for both by the shareholders and the regulatory bodies as well. The conflict is majorly a conflict between a short term thinking and a long term value creation mindset. Suppose if a firm can extract and exploit resources from an area and they don't pay attention to the environmental factors as they would cost the company more. This would ensure higher profits in the short term but in the long term the company can get into regulatory troubles and might face a bigger reputational risk. Hence, if factors like ESG aren't taken into account, one can't think of sustainable growth.