Management Case
Essay Preview: Management Case
Report this essay
Introduction
Management have the primary responsibility for acquiring funds needed by a firm and for directing those funds into projects that will maximize the value of the firm for its owners. Effective financial decision-making requires an understanding of the goal of the firm. What object should guide business decision making, that is a question being argued for years. What should management try to achieve for the owners of the firm? There is a thinking that the primary objective of management is to increase the wealth of shareholders and owners. In the 1970s, worlds famous economist Milton Friedman argued that the sole purpose of business is to maximize profit. With the help of such action, the whole society could be benefitted by the way of increasing employment. In this essay, the thesis that the primary objective of management is to increase the wealth of the shareholders and owners will be discussed in the following parts.
In order to make the essay more clearly, here comes to some definitions of some concept. Management: The planning, organizing, leading and controlling of human and other resources to achieve organizational goals effectively and efficiently. The shareholder wealth is defined as the present value of the expected future returns to the owners of the firm. Market value is defined as the price at which the stock trades in the marketplace, such as on the New York Stock Exchange.
Shareholder wealth maximization objective is the primary goal
Warren Buffett, CEO of Berkshire Hathaway, an outspoken advocate of the share- holder wealth maximization objective and a premier “value investor,” says it this way:
Our long-term economic goal . . . is to maximize the average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.
In order to achieve the shareholder wealth maximization goal, managers should seek to maximize the present value of the expected future returns to the owners of the firm. Shareholder wealth is measured by the market value of shareholders common stock holding. Thus, the total shareholder wealth equals the number of share outstanding times the market price per share. When financial manager assess a potential investment in a new product, they examine the risks and the potential benefits and costs. If the risk-adjusted benefits do not outweigh the costs, they will not invest. Similarly, managers assess current investments for the same purpose; if benefits do not continue to outweigh costs, they will not continue to invest in the product but will shift their investment elsewhere. This is consistent with shareholder wealth maximization and with the allocate efficiency of the market economy. Therefore, why maximizing the wealth of shareholder is important can be discussed in the following three points.
First, this objective explicitly considers the timing and the risk of the benefits expected to be received from stock ownership. Similarly, managers must consider the elements of timing and risk as they make important financial decisions, such as capital expenditures. In this way, managers can make decisions that will contribute to increasing shareholder wealth.
Second, it is conceptually possible to determine whether a particular financial decision is consistent with this objective. If a decision made by a firm has the effect of increasing the market price of the firms stock, it is a good decision. If it appears that an action will not achieve this result, the action should not be taken.
Third, shareholder wealth maximization is an impersonal objective. Stockholders who object to a firms policies are free to sell their shares under more favorable terms (that is, at a higher price) than are available under any other strategy and invest their funds elsewhere. If an investor has a consumption pattern or risk preference that is not accommodated by the investment, financing, and dividend decisions of that firm, the investor will be able to sell his or her shares in that firm at the best price, and purchase shares in companies that more closely meet the investors needs.
For these reasons, the shareholder wealth maximization objective is the primary goal in financial management.
Corporate social responsibility
The fundamental economic role of business is to make profit and to maximize shareholders wealth. Therefore, this primary objective is carried out in the society. Firms Operations are not performed in a vacuum but in an environment. Business Organizations are open system that must interact and respond to the environment. The performance of the Firm therefore is influence by the environment. The environment of business is made up of all the elements that are relevant to an organizations operation though outside its control. This means that to survive in business environment, firm must anticipate, interact, act and react to environments to utilize the opportunities (maximizing Shareholder wealth) and avert the threats of not getting involve in(corporate social responsibilities) protect the interest of the societies.
Corporate social responsibility (CSR), also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance, CSR is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its support to law, ethical standards, and international norms. The definition of CSR used within an organization can vary from the strict “stakeholder impacts” definition used by many CSR advocates and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or public relations departments of an organisation, or may be given a separate unit reporting to the CEO or in some cases directly to the board. Some companies may implement CSR-type values without a clearly defined team or programme.
Consequently, business would embrace responsibility for the impact of its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, CSR-focused businesses would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honouring of