Sunday, June 13, 2010

The Only Responsibility of Managers is to Maximize Shareholder Wealth

Critically discuss whether the only responsibility of managers is to maximize shareholder wealth.

There are two approaches that shape and influence the way managers prioritize and do things - the classical view and the socioeconomic view. The classical view "says that management's only social responsibility is to maximize profits". (Robbins etal. 2006, p.161) Milton Friedman (1970 p.6) asserted that "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." Friedman (1962, 1970) argued that managers' main responsibility is to operate the organization in the interest of the shareholders, the organization's true owners', by increasing financial returns. He reasoned that when managers decide on their own to use the organization's resources for ‘socialgood', they would be adding to the costs of doing business. These additional costs would then be at the expense of the shareholders, resulting in lower profits.

Robbins etal. (2006) also mention that those supporting the classical view fear that too much focus on social goals may dilute economic productivity. As the costs incurred by many socially responsible actions do not cover their costs, profits would be affected and costs would increase. This by no means implies that those who are in favor of the classical view are opposed to organizations becoming socially responsible - they just feel that "the extent of that responsibility is to maximize organizational profits for shareholders". (Robbins etal. 2006 p.161)

However, a major flaw with the classical view is that its focus tends to be on short term profit. A good example would be Manville Corporation in the United States: 50 years ago management decided to conceal information from employees that one of its products, asbestos, caused fatal lung disease. Chest X-rays results from employees were withheld from them. The rationale behind this was being able to save money and increase profits. Although this seemed to work for a short term period, in the long run the company was forced into bankruptcy in 1982 in order to protect itself from the increasing lawsuits in relation to asbestos liabilities. (Robbins etal., 2006) Manville had to set up a US$2.6 billion personal injury settlement trust fund in cash and bonds, and pledge a certain percentage of future profits in 1988 when it emerged from bankruptcy due to the overwhelming claims. As a result, on 1 April 1996 Manville Corporation permanently went out of business, with only the independent trust fund continuing to pay out asbestos settlements in its name....Read more>>

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