Question

Please provide comments and short answers to the following statements.

1. Companies are now more aware of the environmental and social impacts that resulted from their operations and start to consider these factors into their decision- making process, in addition to the traditional financial considerations. In your opinion, does such practice support or contradict the goal of the firm to maximize

   shareholder value? Justify your answer.

2. Since it is assumed that human being will try to maximize their wealth, then the

   interests of both the company’s shareholders and management will always be inline and goal congruence can easily be achieved.

Answer 1

Yes, companies are now more aware of the environmental and social impact of their operations. This goes back in time in Industrial revolution. Industrial revolution where a lot of manufacturing and financial services emerged. The manufacturing sector focused only on mass production which resulted in consumption of lot of natural resources follwed by excess consumption which started depletion of available natural resources.

Overconsumption of resources and realising high level toxic chemicals started affecting the environment and thus the life of the local residents.

Now a days company are more aware of the environmental and social because of enforcement by government.

This act of considering the environmental and social impact indeed has helped companies in following ways:

1. understand the consumer requirenment.

2. helped in close association with localities which helped create brand awareness and thus increase in Market size.

3. CSR activities conducted by the companies creates a bond with the customers and also creates a social impact, leading to increase in sales.

4. Companies that care about social and environmental impact on the people are seen as ethical companies, investors and stake holders are willing to associate themselves with ethical companies as it creates a sense of belongingness and security. This also impacts companies goodwill, increasing the value of its intangible asset, thus increase in the value of company.

As all these factors contribute in some or the otherway in growth and increased valuation of the company, shareholders value is also increased. As value of shares increases the wealth generation goal of the investor and the profit maximization goal of the company is also attained. The increased profit also suffice the management requirement leading to a complete satisfaction of every stakeholder of the company.