Question

Topic 1 - The Financial Manager and the Company - Text Chapter 1

Issue #1 Included with the Topic 1 discussion was the issue of recognising the interests of company stakeholders.

Required: a) Comment on whether the issue of stakeholder recognition, conflicts with the overriding financial management objective of the maximisation of owner (shareholder) wealth.

b) Why is it often stated that companies looking after the interests of all stakeholders is ‘good’ corporate governance? Include in your discussion what is meant in this context by corporate governance.

Answer 1

A. Stakeholders recognition is inclined towards protection of the interest of all the stakeholders in the organisation and it will be helpful in overall value maximization of the company in the longer perspective because it is not narrow centred at profit maximization as profit maximization will be just focusing at undertaking all such projects whether that will be ethical or not, and will maximize the profits of the company in the short run.

Issue of stakeholder recognition will be leading to conflict with the overriding financial management objective of maximization of the shareholders interest because it will be only undertaking such projects which will benefit overall stakeholder of the organisation and it will not be just centred towards maximization of the shareholders wealth, so various projects which will be just profit generating but not values generating in the long run will be not undertaken by the company and it will direct collide with the interest of this shareholder because share holder will always want all such products which will maximize the profit and recognition of stakeholder interest and will be prohibit adaptation of all such products which will be damaging the stakeholder interest so they both are conflicting in nature.

B. it is often stated that company who are protecting the interests of all the stakeholders in the organisation is a good company having a better corporate governance because corporate governance will be focused at it management of the company in such a way which will be protecting the interest of all the stakeholders in the organisation, and it will also undertake all such projects which will maximize the interest of cmpany in the long run so corporate governance will be a combination of all the rules and regulations by which business will be regulated and controlled and they will be trying to protect the interest of companies stakeholders and they will maximize the value of the company in the long run so they will be trying to adapt to the ethical standard by incorporating the interest of all the stakeholders in the organisation.