Question

We have learnt that the financial manager's or the firm's goal should be to maximize shareholders' wealth by maximizing the value of the stock. However, does this goal conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects such as customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored?

For example, think about the environmental regulation violations by Volkswagen, and more recently by Fiat Chrysler. Why do you think the managers and employees did something that was definitely illegal? Was the goal of "stock value maximization" their motivation? Did their actions help to boost the company's stock? In the short run? In the long run? How did a ruined reputation affect the company's stock value? Read more about it here:

Answer 1

The ultimate aim of a company is to create value for all the concerned stakeholders. This should be done within the legal, regulatory and compliance structures. Thus it benefits all in the long term.

Now since we are talking about maximising value for all stakeholders, an important part of the same are shareholders in the company. It is the shareholders who are ultimately the owners of the business. It is ideal for a company to follow ethical practices to maximize shareholder value. This helps the company maintain consistency in its working. It also improves and enhanced its brand image and public trust in the company.

However off late there have been lot of incidents relating to use of unethical practices to maximise shareholder wealth. These incidents had also occured in the past. Also when one talks about maximising shareholder wealth it is ultimately an outcome of business expansion and growth. Thus this would definitely impact employees, the environment in which the company functions, the general society and its trust in the company.

One such unsavoury incident was done by regulatory violations by Volkswagen and recently by Fiat Chrysler. Stock value maximisation is something which is inherently in the minds of management executives when these incidents happen. This is because there is an artificial price rise in the stock when a beautiful picture of something is shown. The markets go all hunku dory about the innovation and achievement of the company. This thing if done ethically would benefit the company in the long run. However this when done unethically leads to irreversible damages. The management cashes out when there is a temporary rise in stock prices. It sits safe even if the stock reverses when the news of wrongdoing hits the market.

The company loses its brand value, it loses trust and most of all, all the money it had spent all these years to build a certain level of trust in its customer takes a bad hit. To rejuvenate the brand again is a very hard task.