Question

Edmund Corporation recently made a large investment to upgrade its technology. Although these improvements won’t have much of an impact on performance in the short run, they are expected to reduce future costs significantly.

When would it be consistent with the manager’s fiduciary(maximize stockholder wealth) to accept the project? Further, can you describe a situation under which a manager may not accept the project even if it is consistent with his/her fiduciary responsibility? Make sure you clearly explain how it would be in the interests of the manager to do so.

Answer 1

As far as Edmund Corporation’s decision related to the investment in upgrading the technology is concerned, certain aspects of the business including reduction of the cost of the project overall over a period of time will definitely leverage the Technology driven business value to maximize the Shareholders wealth. As long as the investment in upgrading helps the business in long run, so it should be more focused upon maximizing the Stockholders wealth than focusing upon short term gains. Short term gains may or may not help the shareholders’ wealth maximization.
So it would be definitely the manager’s fiduciary to maximize the stockholders’ wealth, which is indeed dependent upon the growth of the company in the long run, and investing in Technology would definitely help in achieving the objective.
Now, there might be instances where the manager’s fiduciary may not accept the project with investment in upgrading the existing technology even if it maximizes the overall wealth for the Shareholders. Since all the projects are not same in terms of overall life cycle, investment objectives, the capital structure, cost of capital, the project budget, etc. and the expectations of the manager’s fiduciary responsibility may be more focusing upon the net gains to the Investors – investing with a purpose to earn more profits within short period of time. Sometimes, the purpose or the objective of the project can be generation of more revenue/profits in short run to reinvest in the projects of long run to maximize the wealth. Since the overall objective of investing is to maximize wealth for stockholders, manager’s fiduciary may sometimes accept the projects which primarily are aimed at generating more profits in short run to be retained or reinvested in long term projects for growth purpose, to maximize the overall wealth for shareholders.