Question

In your view, does the objective of stockholder wealth maximization lead to ethical behavior? Explain why it might and why it might not.

Answer 1

No, the objective of stockholder wealth maximization does not always lead to ethical behavior.

As we know that resources at the disposal of an organization are scarce. Hence the organization and its managers have to make a judicious use of the scarce resources and hence the scarce resources are directed towards net value creating activities. Managers are mere agents of the stockholders and it is the stockholders who are the principals of an organization. While single mindedly pursuing the objective of stockholder wealth maximization managers are sometimes forced to or encouraged to take unethical steps. For instance there are times when managers make unethical adjustments in their books of accounts. These adjustments are known as window dressing or cooking up of the books. The objective of such an unethical step is to maximize the value and the wealth of the shareholders even if it entails taking some unethical and illegal accounting measures.

As per the ethical principle of utilitarianism an ethical decision is one which maximizes the benefits for the largest number of people. The objective of stockholder wealth maximization will not be considered ethical under the principle of utilitarianism as it will only benefit the shareholders. The interest of other stakeholders likes employees, vendors, suppliers, and in some cases even customers are ignored.

Organizations have a certain responsibility towards the environment and the society on which it is reliant to further its business. In the pursuit of the objective of stockholder wealth maximization companies fail to acknowledge their responsibilities towards the society and the environment and this makes some of their action unethical. For instance last year large multinational cola beverage companies were found guilty of unethically exploiting depleting ground water in some of the third world countries to manufacture their beverages. These companies were using ground water in areas where the ground water reserves were already low and fast depleting. Still they heavily used the reserves to draw water and manufacture their cola beverages. The single minded pursuit of stockholder wealth maximization blinded these companies towards their ethical obligations and responsibilities.