Question

It is often assumed that the goal of the firm is to maximize profits for its owners, the shareholders. Is the firm’s goal of profit maximization always in society’s best interests? Be sure to defend your answer and cite your sources.

Answer 1

Nowadays, it appears that it is necessary in wide level to focus on philosophy with the orientation on

the sustainability of economic growth, which necessarily requires new trends in corporate governance.

Focus on profit maximization disregarding questions thorough identification of all entities involved in

the formation of values and monitoring their interests is in contrast with the idea of corporate social

responsibility and causes the socioeconomic inequalities in the society.

Pre-industrial society was characterized by inequality in the origin i.e. the inequality of wealth and

income. The onset of industrialization has unleashed human dependence on its origin and draws it to

reach success in the process of work, production and trade. It has created a strong asymmetry of

power between the capital and labour.

Social inequality was an expression for unequal access to resources, where minority controlled the

means of production and the majority only their workforce, which resulted in a conflict of classes. For

culprit of social inequalities have been denoted private property rights

Post-industrial society caused by a fundamental transformation of the global economy, particularly by

the phenomenon of globalization. It has also brought new concepts of equality respectively inequality

in society. Sharp contrast of the globalization of economic and state structures is individualization of

destiny of a man. Individuals are pulled out of the classes bonds; thereby they lost the support of their

traditional social networks. This creates sort of capitalism without classes with individualized social

inequalities

At the present, excessive focus on maximizing profits and economic aspects of development, whether

at the level of individual or national companies or the global economy, caused stated socio-economic

inequalities. It has hit its limits and has proven to be unsustainable, what has led in recent years to the

obvious global economic crisis, which only confirmed the devastating impact on the economy and

society and immense need for orientation to the questions thorough identification of all entities

involved in the formation of values in the transformation process of the company and monitoring their

interests in the process of distribution generated values

Although value maximization is a normative requirement, it is not necessarily the principle that

managers should use to guide and justify their decisions. For example, communicating with and

motivating employees, suppliers and partners is a difficult task that requires paying attention to the

sensitivity of the various parties. Since people are often moved by ideas of reciprocity and good

personal relations, it turns out that if we tell all participants in an organization that its sole purpose is to

maximize value, we would not get maximum value for the organization

In many cases, then it would be most profitable for managers to adopt the strategy and language of a

Idel theory. In these cases, value maximization would require that

managers think and act as stakeholder that theorists recommend, since this is the course of conduct

that will, in fact, lead to the highest profits.

A central question to rise is why value maximization? Why the company focuses only on maximizing

profit and not on its role in society being aware of the connection between its profitability, ethical and

environmental standards of the company in the long term?

Corporate social responsibility brings a new perspective to the societal role of enterprise, while

recognizing the relationship between profitability, ethical and environmental standards of the company.

The position of companies in society is a subject of constant change.

People today do not perceive the company only as producers or suppliers of the products that reach

only for maximizing profits, but they assume that the company will meet the requirements of the other

areas as well, such as the legal environment and that it will support development of other activities

beneficial for the society.

Promoting the corporate social responsibility principles will improve the relationship between

businesses, public authorities and companies, non-governmental organizations, as well as

representatives of citizens and the citizens themselves. This is reflected in the cooperation with the

government and non-governmental organizations, where this effect does not depend on the authority

of the relationships on the market.

There is a certain principle of solidarity based on shared interests and values (the existence of cross

sector partnerships). It leads to engagement in public policy, and to shared management and

implementation of projects in the society.

The concept of social responsibility means thus accepting responsibility of enterprise for all of its

economic, legal and ethical activities. Corporate social responsibility expresses a complex (economic,

legal and ethical) responsibility of a particular enterprise for its actions that will affect all of its

stakeholders but other people as well. Enterprise cannot completely predict all the consequences of

their acts, because it always operates in an environment of limited information sources. Program of

social responsibility does not require impossible things from businesses, but it calls to consider the

consequences of their actions on the basis of current technology, science, humanities and knowledge

relevant to a given procedure.

Through corporate social responsibility, businesses reaffirm their principles and values, both in their

processes and operations and in their interaction with other social actors. Corporate social

responsibility is generally voluntary in nature and refers to activities that exceed a mere compliance

with the law. The social and environmental responsibilities of enterprises may reflect the changing

expectations of society. For example, what enterprises consider convenient practices today may

become indispensable ones tomorrow.

In addition, it is expected that different social actors interested in the activities of a certain enterprise

will prioritize different social and environmental demands, which may contradict or compete with one

another at times.

From a welfare point of view, promoting corporate social responsibility can be an alternative or

complementary way for regulation to confront market failures. Regulation is costly; it has limitations

originating from asymmetric information and political constraints. It also has a limited impact over

global public goods (global warming, Amazon deforestation, biodiversity loss, or child labour).

Corporate social responsibility can reach where national regulations fall short and have a great impact

on our wellbeing.

Since there is a great heterogeneity of theories and approaches of corporate social responsibility, in

the following picture, there is a brief summary of theories and related approaches to discussion of the

corporate social responsibility.

while the importance of profits cannot be ignored, earning profit cannot be the only objective of the business; it has to achieve other economic and social objectives too. The sole aim of earning profit has the following effects on a business :

Ignores the interest of workers :

Labour is one of

the most important factors of production. Profit maximization by-passes the interest of workers in the way that they do not get fair remuneration and hence are not motivated. In the absence of motivation, they will not work upto their full potential. Resultantly, quality and standards of the products and services will deteriorate and will ultimately lead to losses.

Ignores the interest of customers : Customers are

very important for every business in the sense that without their existence, even thinking about business is merely a dream. Profit maximization by-passes their interest because goods/services are over priced which ultimately leads to reduction in this number of customers, reduction in quantity of sales and thereby reduction in profits.

Ignores the interest of society:

Profit maximization

overlooks the interest of the society in which it works. It may propel a businessman to indulge in unfair trade practices like hoarding, black marketing, etc.

Ignores long-term interest of the business itself :

Profit maximization may be the objective for the : short-term, but in the long-term it may lead the business to a dangerous position where it could become very difficult for the business to even survive.