Question

A) Baumol: From his experience as a consultant to large firms Baumol found that managers are preoccupied with maximization of the sales rather than profits. Several reasons seem to explain this attitude of top management.

1) There is evidence that salaries and other (slack) earnings of top managers are correlated more closely with sales than with profits.

2) The banks and other financial institutions keep a close eye on the sales of firms and are more willing to finance firms with large and growing sales.

3) Personnel problems are handled more satisfactorily when sales are growing. The employees at all levels can be given higher earnings and better terms of work in general. Declining sales, on the other hand, will make necessary the reduction of salaries and other payments and perhaps the lay-off of some employees. Such measures create dissatisfaction and uncertainty among personnel at all levels.

4) Large sales, growing over time, give prestige to the managers, while large profits go into the pockets of shareholders.

5) Managers prefer a steady performance with ‘satisfactory’ profits to spectacular profit maximization projects. If they realize maximum high profits in one period, they might find themselves in trouble in other periods when profits are less than maximum.

6) Large, growing sales strengthen the power to adopt competitive tactics, while a low or declining share of the market weakens the competitive position of the firm and its bargaining power vis-a-vis its rivals.

B) What is the role of banks in the economy?

C)  Is it ethical for tobacco companies to sell a product that is known to be addictive and a danger to the health of the user? Is it relevant that the product is legal?

D)  Should boards of directors consider only price when faced with a buyout offer?

E)    Is it ethical to concentrate only on shareholder wealth, or should stakeholders as a whole be considered

F)   Should firms be penalized for attempting to improve returns by stifling competition (e.g., Microsoft)?

Answer 1

QB: Role of banks in the economy.

Accoring to banking regulation act, banks are the institutions meant for accepting deposits and lending money to custmers along with promoting various banking financial products like bancassurance, Public provident fund, national saving certificate, etc.

Banks in the economy regulate money flow by updating cash reserve ratio, statutory lending ratio, banks rate, interest rate time to time.it is all decided by the central bank of india.

World's main financial institution world bank manages the banking structure and finance of all counties banks. It provides fund to country in very needy time or for any developemental requirement.

It controls the inflation which is essential factor for growth of any country.

QC: Tobacco is not illigal product to sell or for marketing by some ciggarette manufacutring companies like Marlbouro, ITC companies in india. It is not fully unethical to do business. But there is some restriction in this business and for the this said companies as per the Tobacco control act 2005 which entails that tobacco should not be given to minors. Free tarde of this business is some what restricted. Tobacco should only be sold to adults .   The tobacco controls act put some specific restriction for public health.

QD: Should boards of directors consider only price when faced with a buyout offer?

Ans: Buyout is the process in which structure of company totally changes. The company do this for overall development keeping eyes upon the employees , staffs and other stakeholders. It is unethical for company to do only for the price that give benefit only to shareholders but not stakeholders. It should consider both stakeholders and shareholders benefits while doing this type of corporate restrcuturing activities.

QE: Is it ethical to concentrate only on shareholder wealth, or should stakeholders as a whole be considered ?

Stakeholders are employees, governement, society at large,owners, customers, Creditors etc.The comapny or corporation has close relationship with these entity as it follows the goernement rules and regulation, act for the benefit for custmers, it gives intrest to creditors.

Moreover company has some corporate social responsibility CSR activities for which it do some activities for betterment of society and community where its major business operation exist. Company's wealth maximisation achieved when it takes steps for both shareholders and stakeholders and that can increase its stock value. Hence it is unetical to concentrate only upon shareholders wealth rather than stakeholders.

The company should consider shareholders and stakeholders as whole for wealth maximisation.

QF: Should firms be penalized for attempting to improve returns by stifling competition (e.g., Microsoft)?

Competition is always there, without competitive advantage a company can't sustain or grow its share value. The company is required to increase its sale and do marketing, advertising in order to mobilise its growth.

Company makes products and services for the target customers to satisfy their needs and consumption. If the product and services hurt the custmers or any complaint about company is trying to cheat customers by providing low quality product and services to increase its sale, then the company is penalised for attempting to improve returns by stifling competitions.

So the company must try to preserve its brand image by providing well high quality products rather than hurting customers , otherwise it is penalised.