Question

5 paragragh answer : 6. ESSAY QUESTION: What does it mean to say that managers should maximize shareholder wealth "subject to ethical constraints"? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?

Answer 1

Managers can maximize shareholders wealth in multiple ways that might be detrimental to other stakeholders/minority groups etc which might be considered as unethical. Managers often focus on temporary boost of shareholders wealth just to boost their performance for the given year without focusing on the long-term effect of the same on the company.

A very simple example to depict this scenario is the 2008 Lehman Brothers crash that occurred which caused global recession. This arose because financial institutions in the US gave mortgages to borrowers who had poor credit just to boost profits. In the short term, the profits of these institutions did boost, but later led to a market crash which sent shivers all across the global.

Unethical means could include:
1) Earnings management to boost revenues in a particular year to meet analyst expectations or boost performance.
2) Accounting frauds or manipulating stock prices.
3) Losing focus on what the customer want. eg: cutting production cost by using low quality materials.
4) Impacts on environment. Eg: not disposing wastes properly causing air/water pollution.
5) Hampering employees by cost cutting, long hours of work, or irregular payments.
6) Tax evasions or manipulating books to show losses to avoid paying taxes.

These are just few examples on how managers can use unethical practices to maximize shareholders wealth. But I think this should give you the picture on what I'm trying to convey.