Session 3 - Windsor - Shareholders wealth maximisation

Question 1

Define “Shareholders wealth maximisation” (SWM)

Answer 1

The immediate operating goal and the ultimate purpose of a public corporation is and should be to maximise return on equity capital

Question 2

What is a public corporation ?

Answer 2

It is simultaneously private property, a nexus of contracts, a government licensed and traded securities registrant, a social benefits entity and a locus of stakeholders relationships.

Question 3

At law, officers and directors have fiduciary duty to safeguard the financial interests of the shareholders. The SWM-principle can be stated in 2 forms :

Answer 3

1. the stronger form : within any set of legal and ethical constraints, the corporate objective is and should be strictly SWM. Corporate social responsibility (CSR) is wealth-decreasing altruism unless it yields future positive returns to the firm.
2. The weaker form : the corporate objective should be primarily SWM - admitting CSR and interests of non-financial stakeholders

Question 4

Name the 3 objections to a strong SWM formulation of the corporate objectives

Answer 4

1. Business ethics functions as a set of supra legal constraints on managerial conduct to avoid wrong acs and social harms
2. CSR is a justification for corporate contribution of social goods in addition to legal compliance and business ethics
3. Stakeholders theory argues that any business must be a multiple-constituency and a social entity

Question 5

Name the 3 ways the SWM-principle can be dangerous

Answer 5

1. Management may undertake illegal actions to increase stock prices
2. Management may trade future economic value for short-term earnings target
3. Market for corporation control may not discipline managers but rather exert strong pressure to maximise earnings

Question 6

Name the 3 dimensions for justification for SWM

Answer 6

1. Descriptive dimension
2. Instrumental dimension
3. Normative dimension

Question 7

Explain the descriptive dimension of SWM

Answer 7

Management has strong fiduciary duty on behalf of shareholders, established by law and enforced by the market for corporate control

Question 8

Explain the instrumental dimension of SWM

Answer 8

It concerns the prescriptively best approach to managing a public corporation on behalf of shareholders, and handling the interests of multiple shareholders

Question 9

Explain the normative dimension of SWM

Answer 9

Duties, responsibilities and rights of various stakeholders, with attention to the fiduciary and stewardship roles of management

Question 10

What should a business strive do ?

Answer 10

Financial economic theory : maximise market value, maximise social welfare (utilitarianism - normative dimension)

Question 11

The SWM-principle is prescriptive, explain

Answer 11

It is a proposed standard of conduct for company officers - It is dominant and convenient. In the practice, company officers must have some discretionary judgment.

Question 12

The business corporation is a wealth-seeking corporation. Give the 2 minimum conditions for the activity to continue over time

Answer 12

1. The business must be legitimate

2. and value creating

Question 13

What did Chen et al (2007) find out ?

Answer 13

The worse performers (firms) in the social domains of environmental issues and product safety are more likely to make charitable contributions.

Question 14

Give the 4 critiques from stakeholder theory

Answer 14

1. It is possible that better relation with primary stakeholders could increase shareholders’ wealth, while CSR activities not related to primary stakeholders could decrease it .
2. The average relationship between corporate social and financial performance is basically neutral or middle positive and limited CSR activities are not likely to endanger corporate earnings materially.
3. CSR activities are profitable, only they are not markedly profitable.
4. CSR initiatives may serve to enhance or protect corporate reputation an an intangible asset, affecting market value.