Ethical obligation of companies - maximise shareholder wealth vs. socially and environmentally responsible

Essay by leannlsmUniversity, Master's June 2004

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4a) The only ethical obligation of companies is to maximise shareholder wealth.

In such a free economy, the companies do have an obligation to use their resources usefully and engage in activities designed to maximise the wealth of shareholders, so long as it stays within the rules of the game. Since the companies buy the goods and services they need for production and sell it to the buyers, the profit really represents the net contribution that the firm makes to the social good, and the profit should therefore be made as large as possible. Under the proper assumptions profit maximisation is also indeed efficient in the sense that it can achieve as high a level of satisfaction as possible for consumers. (Shaw & Vincent, 2001)

Although the argument that the firms should aim simply to maximise their profits has some force since any mechanism for enforcing social responsibility upon firms must of course reckon with a profit motive; it does not mean that it is the only obligation of companies to operate as a business.

In pursuit of short-term gains of an unethical nature, the companies can seriously damage their long-term viability, even while attempting to maximize the wealth of current shareholders. This is because when companies ruthlessly rub out their rivals in order to pursue profit maximisation, they have not been ethical. They pollute the environment, defraud the stakeholders, produce unsafe products and concerned about nothing other than the 'bottom line'. (Boatright, 2003) These unethical actions cans seriously deteriorate the relationships that have been built between community and the firm. Illegal actions aiming to maximize the shareholders' wealth may put both the shareholders and the firm at risk, subjecting them to fines and other legal ramifications. Moreover, under the forces of competition that are sufficiently vigorous and the...