Context of Corporate Finance and Profit Maximization †Free Samples

Question: Discuss about the Context of Corporate Finance and Ethics. Answer: Introduction In the context of corporate finance, a companys success is measured by the shareholders wealth. It has gained paramount importance in the current scenario as it leads to goodwill of the organization. The extent to which the shareholders are enriched is often termed as shareholder value maximization. In direct terms it refers to the dividends paid to the shareholders and the capital appreciation, but indirectly it involves a lot of factors like management actions and strategic analysis on areas like cost of capital, etc that indicates the amounts the shareholders would have earned if they had themselves invested the amounts in assets bearing similar risks. Therefore, stakeholders are primarily concerned with the organization that provides a huge wealth maximization (Hemmer Labro, 2008). As the level of competition is increasing on one hand and the significance on shareholder value maximization is highlighted, on the other hand, it is becoming increasingly difficult for companies to o perate both viable and ethically. Here comes the distinction between doing well and doing good. As the drive for fast money has led to a number of corporate scams, various laws and regulations have been introduced during the recent years to ensure the ethical performance of the corporate houses. From time to time there have been scandals that have jolted the corporate arena and such problems occurred either due to the flaws in the ethical standards or due to the lust for the creation of wealth. It has been noted that the lust for the creation of wealth leads to deterioration of service and more emphasis is done on the concept of money making (Benabou Tirole, 2010). These conflicts are discussed with the help of cases and situations of ethical dilemma faced by companies. It is, therefore, imperative that the company must operate in a manner that creates shareholder wealth and looks after the ethics too. Is Value Maximization always ethical? The prime goal of the management is to increase the profit by maximization of profits. Wealth maximization of the shareholder and profit maximization must go hand in hand. The discussion from the past indicates that the manager should contain immense attention on the shareholder wealth maximization. It is important for the firm to entertain the customers, suppliers and other stakeholders as if it fails to take a step in this regard then it might fail in the attempt. Value maximization must be stressed upon with immense concern as it generates goodwill for the business and leads to benefits over a period of time (Carol et. al, 2016). While most companies run businesses ethically, there are a few others that resort to unethical practices. In the lust of creation of wealth, many corporations try to break the ethical ground. There have been many instances when the companies tried to break their ethical stand to earn wealth. However, the same cannot be considered as ethical. The line between doing profitable business and doing ethical business is very thin, the line sometimes gets crossed by companies in their efforts to maximize profits (Patterson, 2000). A CEOs job is to maximize the revenue streams for shareholders demanding higher Return on Investment but again the balance between the cost of pushing for profits and being an ethical organization has to be weighed. With the increasing transparency, shareholders are becoming more knowledgeable towards the ethical considerations of the companies. In the long run, it can be seen that most profitable companies have run on ethical practices during their formative years (Paradise Rogoff, 2009). Thus ethics play an integral part and usually create a positive image and reputation for the company. A company that runs the operation on an ethical ground helps to earn a positive image and attracts the stakeholders. Shareholder wealth gets maximized automatically as investors wish to invest in such companies. The number of stakeholders associated with the company gives an impression of the wealth maximization of the company (Bhattacharya Sen, 2010). Thus it can be concluded that due to companies resorting to unethical practices, shareholder wealth maximization is not always ethical, companies resorting to ethical practices have a longer standing than unethical companies. The bottom line is that value maximization is not always ethical but there are ethical ways of achieving value maximization in the practical sense. Hence, it is the duty of the managers to drive the company in the correct path and create a situation that will help to deliver as per the prediction. Wealth maximization must be the objective but should not be done at the cost of other factors. The managers must ensure implementation of strong ethical standards that helps in creating a positive environment where the operations are in tune to the regulatory framework (Kruger, 2015). It helps to maximize wealth and even serves the stakeholders at large. Conflict between doing well and doing good Doing well indicates that the company is performing in line with the applicable laws and regulations with adequate professional knowledge, experience, and expertise. The public will accept this work due to high quality and excellence. Monetary considerations are high and shareholder gains are also appreciable. Therefore, doing well is a positive scenario for the company as it indicates a strong performance. Doing good need not be always for monetary consideration as the intention to benefit the society and the community at large takes a primary place. The intentions are noble with a motive to set things right in the society (Edwards, 2015). Thus there is more focus on corporate social responsibility and sustainable business wherein profit motive is not primary. Thus the conflict here is that profit is the primary motive in doing well whereas service is the primary motive for doing good. Conflicts arise in business practices that are aimed at profit maximization. It is about making money and making a change in the society. The trade-offs and struggles between doing well and doing good have to be weighed (Rebel, 2016). The interests are not the same in both cases, making it difficult to face the challenges that lie ahead. It is a comparison between socially responsible organizations and a few irresponsible ones (Albuquerque et. al, 2013). It is also similar to the comparison between the profit making decisions and demands of social transformations. In the midst of these conflicts, the current and practical scenario is indicative that markets are having a significant role to play in the social change. There is no threshold for increasing the happiness or well-being of the individuals in the society, but providing a basic minimum income level i n line with the increasing inflation and general price index should be the motive in both the cases. Thus there are conflicts between doing well and doing good with reference to the way businesses are run and a number of profits generated. Government regulations tilting towards Doing Good in case of Conflicts A company is a separate legal entity and the board of management is a functioning body appointed by the shareholders for looking after the day to day affairs of the business. But with the increasing greed of the Board and shareholders, companies have resorted to fraudulent and illegitimate ways of earning fast money which has given rise to a few important legislations; the most specific ones are the Sarbanes-Oxley Act and Dodd-Frank Act (Blokhin, 2015). With the due passage of time, there has been an immense change in the ethical standard of the company and this has been done considering the objective of wealth maximization. Therefore, rules and regulations have been framed so that the investors are not duped. Sarbanes-Oxley Act was passed in the year 2002 to protect the investors from fraudulent accounting and reporting by corporations. There are strict mandates with reference to financial disclosures and adequacy of internal controls. Management certifications are obtained on all significant areas like the accuracy of financial statements thus strengthening the corporate oversight. Investors need to know that the financial information they are relying upon is truthful and verified by independent third parties. Disclosures relating to off-balance sheet items and obligations, significant financial matters are also in place (Rebel, 2016). There are costly implications like penalties in the form of fines and also imprisonment for the violations. Sarbanes-Oxley Act was a major landmark and it came into operation after a long list of scandals (Kacperczyk, 2009). It stresses to provide a boost to the audit committees, the establishment of internal control tests, financial statement accuracy, et c. Further, it stresses penalties when it comes to fraud and even provides how the firms should operate. The main stress of the act is to strengthen the audit committee and changes the financial scenario significantly. Dodd-Frank Street Reform and Consumer Protection Act was enacted in the year 2010. The great recession led to financial losses and risky market performance. The Act aimed to make financial systems more accountable and transparent, to prevent institutions from becoming too big to fail and to end the government bailouts funded by taxpayers and to end the risky and abusive financial practices (Mangena, 2007). There are monitoring and restructuring of companies that have become financially risky or weak. Thus the efficiency and accuracy of companies are enhanced. It can be thus seen that in both these regulations mandatory provisions with reference to ethical business, financial transparency and disclosures are enacted and there are strict provisions on violation of the same. Profit maximization is not the motive of these acts and thus it is tilted towards doing good rather than doing well in business (Donius, 2010). A case for the interrelationship of ethical decision making by corporate management and the profitability of the firm A company under the brand name, Honeywell Ltd. Successfully brands itself as an ethical and sustainable organization in the footwear and related accessories industry. Their Code of conduct specifies the requirements of various laws and regulations and the certifications to meet the minimum obligations regarding labor working conditions, environment safety, etc. They are working actively and closely with organizations like UNICEF to prevent child labor and also effectively tackle issues to ensure that there is no hoarding of natural resources (Bertilsson, 2017). Due to these factors, it is being widely recognized as a nature nurturing brand with significance for ethics and sustainability. But as the size of the organization develops, it is fairly a difficult task to operate ethically in all areas; among different countries and cultures. As business expansion is primarily aimed at profits maximization, off late it has violated a few of its own drafted laws and regulations by employing child labor in a few areas and growing racial discrimination among employees. Fingers were being pointed out at the Management and the Union was not allowed in the factories. This growing unrest led to the downsizing and slashing of employees (Denning, 2011). Apart from this, a few of the employee benefits were withdrawn which leads to a poor morale in the workplace. This can have devastating results. It is unethical to slash the employee expenses in an attempt to increase profits, but corporations resort to this method as it is quick, effective and proven. Apart from this, marketing and advertisements play an important role in a companys success. But in an attempt to maximize profits, companies often struggle with what is ethically right and wrong. In this case, too, Honeywell had targeted children in advertisements to attract customers and used unethical marketing strategies to draw customers. Lawsuits have been filed by a few consumers in response to the false claims made during the marketing. Adhering to environmental laws and regulations often proves to be costly with the growing size of the business. In this case, too, Honeywell wanted to grow its profits due to which it was increasing pollution and making unauthorized use of the natural resources. The claims made by the company were that environmental laws penalize only excessive environmental damage and not moderate or mild damage (Bertilsson, 2017). Quality is one significant area where the company can compromise to increase its profits by still selling the products at the same price (Julia Elizabeth, 2010). But as the customers become aware that Honeywell has crossed the line and entered into unethical business, it is a loss of trust, reputation and market share for the company. It leads to slow growth and reduced revenue (Bauer Hann, 2010). Therefore, it is a clear-cut indication that the stakeholders need to be given due weight so that the company can retain the old ones and attract the new ones. The compromise in quality can happen but to a certain extent because after it is exposed it becomes for the company to operate in the same manner. Thus the difference between doing well and doing good business is noticed. As long as Honeywell Ltd. Was operating locally, it was doing good business but once it went for global expansion, it shifted to doing business well in the drive to increase profits. In such cases of dilemma and interrelationship between doing well and doing good, corporations have to think long term and shun the idea of short-term profitability. The corporations must vouch for the profit in the long run. The long run scenario must be looked upon as it drives the overall momentum of the business. However, if the company stress upon profitability in the short run then it is bound to make a hasty decision and engage in activities that might not go well with the functioning of the company and ruin the overall goodwill (Patterson, 2000). A lot of companies stand out as examples of having done good business and yet being successful over years (Hong Kacperczyk, 2009). It is not possible for a company to remain in the doing well or doing good compartment throughout its existence as these are interrelated and companies tend to swing between these two on a situational basis. Thus there has to be a trade-off and a balance with corporations striving to do good business mos t of the time. Conclusion From the above analysis and discussion, it can be concluded that the incorporation of the concept of ethics is a complex and tricky matter, profit maximization is seen as a motivator. The major stress is on the concept of ethics because an organization with improper ethics finds it difficult to sustain for long. As ethics and profit maximization have to co-exist, the success of this interrelationship depends upon the profit potential of ethics. Companies are willing to act ethically as long as it satisfies its other goals of cost reduction and increasing profitability. Being branded as an ethical organization is a competitive advantage for the company which will ultimately lead to higher profits and shareholder value maximization provided there are the time and patience to wait for the same both by the shareholders and the company. An ethical company tends to have a positive image and enjoy a strong goodwill. Therefore, the company should stress on ethical standards and the recent up dates in the field of corporate governance have provided an apt example that corporate governance is the need of the hour. An unethical business will not be able to sustain in the long run. References Albuquerque, R, Durnev, A, Koskinen, Y 2013, Corporate social responsibility and firm risk: theory and empirical evidence, Boston University. Benabou, R Tirole, R 2010, Individual and Corporatefinance Social responsibility, Ecnomica vol.11, pp. 1-19 Bauer, R Hann, D 2010, Corporate environmental management and credit risk, Maastricht University. 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