CHAPTER 1: THE CORPORATE GOALS

Learning outcomes

Identify the goals of corporation and understand why shareholders’ wealth maximization is preferred over other goals.

Understand the potential problems arising when management of the corporation and ownership are separated

Discuss the issues underlying social responsibility of the corporation

Corporation

What is corporation?

Separate legal entity that has been incorporated through a legislative or registration process established through legislation

Have legal rights and liabilities that are distinct from their employees and shareholders

Main Goal of The Corporation:

To maximize the wealth of shareholders

Shareholder = Any individual / corporation that legally own a share of stock in any corporation. They are granted several privileges to the corporation

Shareholder’s WealthMaximize

shareholder’s wealth

Shareholders are able to enjoy more

products and services

Shareholders have more

‘cash in hand’

Dividends Capital gains

Maximize value of the firm

Goals of the Corporation

Maximize sales Minimize costs Maximize profits Avoid financial difficulty / bankruptcy Survive Be environmental friendly Achieve good employee – employer

relations

The Agency Theory

Agency RelationshipSeparation of management and

the ownership of the firm

Agency ProblemWill management act in the

interest of shareholders?

Solutions to Agency Problem

1. Provisions in the Companies Act, 1965

2. Selling shares and threat of takeover

3. Information flow

4. Linking Management remuneration to improvements to shareholder’s wealth

Social Responsibility of the Corporation

Management concept whereby companies integrate social and environmental concerns in their

business operations and interactions with their stakeholders

Giving back to the community

McDonald’s CSR Community involvement can create

brand loyalty, promotes pride and respect

Provide assistance (free food, water, other help) for earthquakes, hurricane, floods and other traumatic events.

30% of franchise owners are women. McDonald’s purchase over $3b worth of goods and services from women supplier.

Purchased more than $4b worth of products made from recycled materials

Social Responsibility of the Corporation

The relationship between shareholder wealth maximization and social responsibility for the firm?

Attract capital Provide employment Offer benefits to its community

Sometimes certain socially actions does not provide any profit to the company. ie pollution control projects

End of Chapter 1