Question

What does it mean to say that managers should maximize shareholder’s wealth “subject to ethical constraint”? What ethical considerations might enter into decisions that result in cash flow and stock prices affects that are less than they might otherwise have been? What recourse do shareholders have to keep CEO’s ethical? Would you only buy stocks in companies that meet your ethical standards?

Answer 1

Managers main objective is to maximize the wealth of shareholders but the issue arise when some unethical practices are used to inflate the shareholders value because ethical companies survive in the long term , in short term unethical practices might lead better results by doing insider trading, manipulating financial statements etc, but in long term this practices do nothing more than tarnish the image of the company.

.Ethically sound managers would not sacrifice the well being of other human beings or environment for higher profits. They will follow do this by being in legal, regulatory and ethical boundries.

For example ,in case of enron scandel non ethical practices by managers by used to manipulate the stock price, in short term shareholders value increased but in the end , they had broke the law , that landed them in jail with length prison time.

Ethical considerations about doing the right thing, rectifying the mistake when noticed ,and caring also about the end user, environment , and consequences and benefits of the product as whole rather just about profits.

Like when  Volkswagen lied about the fuel efficiency of their vehicles or Fixing Samsung’s Galaxy Note 7 because it has caused multiple injuries due to its exploding batteries. But they could have prevented this recall of three million phones by adjusting the design of the product.

Unfortunately, bad ethics affect the financial results and profitability of the company. Unlike companies who hold themselves accountable and obey the law, other companies fail to maintain their integrity and seek to gain every bit of profitability by cutting much needed corners. Managers need to manage the standard of ethics maintained in your company. Consequently, this means that marketing, sales, operations, finance, manufacturing, etc., all need to adhere to a strict code of ethics to gain huge value. If one leg of the company falls short of these standards, the whole company falls.

Managers have a duty to act in the best interest of shareholders but they can' t be blamed for losses of company , but if they use unethical practices , this losses will be worse , because people will loose confidence in the management of the company , Shareholders should define the aim , mission and objectives of the company quite clearly to the management , and should expect that they adhere to strict ethics policies .

Company bylaws should also mention intolerance of any unethical practice by the management.

Shareholders should also conduct regular board meetings and be informed by the management decisions frequently and can help them make more ethical decisions.

Shareholders could also replace people who are not ethically fit for the company.

I would see the returns , performance , and risk associated with company before investing in it . But most importantly i would see the image and ethical standards of that company , like IBM is an ethics centric organisation , it cares about its customers,environment , employees etc plus it is also an innovation company with huge profits and success for last 50 years , So being ethical helps in long term .