A Next Generation Finance Textbook Consistent with the Evolving Finance Paradigm

———Transforming Business Education to Create a Flourishing World,

One Textbook at a Time

Abstract

Current business education and the production/distribution/consumption system it supports are major contributors to the increasing unsustainability of our planet. A major reason for this situation is the current finance paradigm that directs for-profit businesses to set financial value maximization as the firm’s goal, and as a result, pay little attention to society’s environmental and social needs nor to the environmental or social damage they might be causing. One fundamental way to address this problem is by educating the next generation of business leaders to contribute to a sustainable/flourishing world. As a result, business educators and finance faculty in particular, have an exceptional opportunity to transform their teaching. While there are many ways for educators to change what and how they teach, one is to create and use new educational materials—including textbooks, materials that will be required if future business leaders are to be fully educated in sustainability. After a brief look at the framing and content of several of the widely-used introductory textbooks that support the current finance paradigm and the authors’ journey in writing finance textbooks, this paper describes a new textbook in progress consistent with global sustainability and a flourishing world.

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The transition from a paradigm in crisis to a new one from which a new tradition of normal science can emerge is far from a cumulative process, one achieved by an articulation or extension of the old paradigm. Rather it is a reconstruction of the field from new fundamentals, a reconstruction that changes some of the field's most elementary theoretical generalizations … When the transition is complete, the profession will have changed its view of the field, its methods, and its goals. Thomas Kuhn, 1962

The subject of corporate finance and the textbooks that are used to teach it are remarkably inconsistent with global sustainability. Whereas global sustainability calls for integrating and achieving the three primary needs of society—economic, environmental, and social—corporate finance pays scant if any attention to society’s environmental and social needs and focuses solely on economic performance. Although some core finance courses mention sustainability in passing, the majority of content is about the financial environment, financial-value-focused theory, and tools and techniques designed to increase financial value.

This paper reports on the need to develop new financial management textbooks that begin with the assumption that the role of all business enterprises is to serve society in multiple dimensions, not only economic, and will be aligned with the needs for a sustainable world. And, it reports on progress in creating one such book. It discusses the new book’s structure and content as well as the authors’ experience in using draft chapter outlines in teaching a new course titled “Finance in the Sustainable Organization” at Fordham University in the Spring 2018 term. Both the Spring 2018 course and the emerging new finance textbook build upon what we have learned from teaching graduate and undergraduate courses in finance for global sustainability every year since 2008. In a broader perspective, the paper considers how this textbook and other similarly focused textbooks can be used as vehicles for transforming not only finance teaching and research, but also all of business education and all of business practice.

This broader vision of the purpose of the firm creates new possibilities for for-profit companies many of which are fully consistent with adding economic value. The broader vision of the purpose of for-profit firms is a vision held by a great many of us across the world. It has recently been particularly well articulated in such writings as Pope Francis’ encyclical Laudato Si as well as in numerous other Jesuit and catholic writings and actions and in the commitments to social innovation and social enterprise found on many Jesuit and other university campuses. It underlies the resolution calling for a project to transform business education as a vehicle for transforming global business practice that was passed at the combined International Association of Jesuit Business Schools’ World Forum and Colleagues in Jesuit Business Education annual meeting in Nairobi Kenya on July 18, 2016.

This paper was initially presented in July, 2018 at a session at the combined International Association of Jesuit Business Schools’ World Forum and Colleagues in Jesuit Business Education Annual Meeting at Seattle University. It describes the process of writing and teaching the new textbook and presents the content we had developed as of the end of the Spring 2018 term. The paper begins by identifying the exceptional opportunity that business education, and particularly finance education has to contribute to a sustainable world and provides a context for

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what is to follow. Next, it looks at existing (traditional) finance textbooks—their framing and coverage—and describes how the coverage of the (semi-traditional) finance textbooks the authors have previously written differs from these traditional finance books. It then considers what a new textbook consistent with global sustainability might look like. The paper concludes with a report on our progress with the new textbook and our plan for moving forward. A major purpose of this paper and the Seattle presentation is to develop a network of partners in the process of creating new approaches to financial teaching and research that will contribute to creating a sustainable/flourishing world.

An Exceptional Opportunity

Business education has an exceptional opportunity to contribute to creating a sustainable/flourishing world. Unfortunately, business education has not yet seized that opportunity. Although the present global system of producing, distributing, and consuming the goods and services we need and want is destroying the capacity of the planet to support our own and other species, the teaching and research in virtually all business schools accept that system as appropriate and effective and work to provide the attitudes, values, beliefs, and tools to succeed within that system. Business schools, as a whole, do not educate students to commit to changing that system and to know how to do so. Given their support of maintaining an unsustainable global producing-distributing-consuming system, one might claim that business schools are “doing the work of the devil” and that we train our students to enrich themselves by destroying the planet’s capacity to support our own and other species and to feel good about themselves as they do so.

This paper accepts the perilous state of the planet and the future of our species as a given (Werner and Stoner, 2015; Stoner and Werner, 2018). It also accepts the perspective that the global system of producing, distributing, and consuming is a major, or more accurately the major, contributor to the perilousness of that state (Werner and Stoner, 2015; Stoner and Werner, 2018). The paper does not minimize the difficulty of changing—actually, transforming—that fully, powerfully, coherently integrated system, but, chooses not to despair at the enormity and difficulty of transforming that system. While there are many entry points to leverage the transformation of the current economic system, one place to start is in business education and within business education with finance teaching and research because, to a large extent, finance establishes the framework for all of business and all of business education (Werner and Stoner, 2015; Stoner and Werner, 2018). For the authors as business school professors, the transformation of business education is a particularly attractive leverage point, and a dramatically new finance textbook is a particularly attractive alternative, both because of the great influence finance education has on all business education, and because of the clear need for a new finance textbook to challenge, and hopefully start the process of overthrowing, the orthodoxy of established finance textbooks.

The new textbook we describe is intended to be usable in all finance courses, not just courses in sustainability focused programs. As a work in progress, we seek advice about the approach and content as well as partners interested in contributing to the book.1 In particular, we 1 The partnering process has occurred at a number of conferences, starting in 2003 with sessions at the Financial Management Association annual Meeting and the Academy of Business Education/Financial Education Association combined annual meetings, and most recently at the 2018 IAJBS World Forum. This article is part of that

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intend to encourage active and informed contributions from two, perhaps quite separate, “audiences.” First, we seek input from those who see the same need for transformation of finance practice and teaching that we see. But, very importantly, we encourage contributions from a second audience: those who do not see the need we and others see—those who actively support the current well-established network of assumptions, beliefs, and theories about finance’s role in society and the best way finance professors and practitioners can contribute to building a better (and hopefully sustainable) world. We are fully aware that when a well-established, dominant paradigm is challenged by the increasingly obvious failings of that dominant paradigm, as the finance paradigm is now being challenged, those who have worked successfully in the dominant paradigm will find it more than a little difficult to see both the failings of that paradigm and the possibility that an alternative paradigm might exist. We hope to inspire active and informed “push-back” from those who are convinced that the whole panoply of traditional finance/SWM-consistent framings and proposed actions should not and perhaps cannot be changed.

Through this paper and the textbook it describes, and through our other writing, speaking, and teaching activities, we hope to contribute to the conversation and ultimately to the necessary transformation. We also hope that this paper serves as an invitation and perhaps as a challenge to our colleagues to do what we are doing—in finance and beyond—reconsider business models, create new framings, design new courses, write new materials, etc. The Seattle University session invited, and this article invites, others to join the process of creating this particular textbook or creating similarly-focused textbooks in finance or other fields of business education and to work on transforming business teaching and research from part of the problem of global unsustainability to part of the solution in their own universities and beyond.

Context

There is a paradigm for the production, distribution, and consumption of the benefits of private enterprise that is widely accepted in business practice and in academic teaching and research throughout the world. One (perhaps “the”) core belief of this paradigm is that business enterprises make the maximum contribution to society when they act to maximize their financial value. Since the largest of these enterprises are typically organized as corporations whose financial value may be measured by the value of the corporation to its shareholders, the paradigm is commonly referred to as “Shareholder Wealth Maximization (SWM).”

Within the academy, finance textbooks accept SWM as the goal of the for-profit company without any critical discussion2 and proceed to present analytical and decision-making techniques that take SWM as a given. However, if SWM cannot be convincingly demonstrated to be the best (or only) way for business enterprises to make the maximum contribution to society, many aspects of financial analysis and decision making will have to change to be consistent with new views of finance that need to emerge. The perspective that the purpose of the firm is to serve all of society in ways that cannot be achieved by only attempting to maximize shareholder wealth and the realization that pursuing SWM might not adequately serve all of society and future generations present business schools with the exciting, and increasingly

continuing journey.2 A notable exception is the two textbooks written by the authors (Werner & Stoner, 2016; Werner and Stoner, 2018) that acknowledge that SWM is not the correct goal for business.

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urgent, opportunity to revise the way finance is taught. And, to teach the new finance, new finance textbooks will be required.

One well known expression of this broader focus of the purpose of the for-profit firm (and all productive organizations) is the “Triple Bottom Line” which calls for measurement systems that elevate environmental and social performance to be equal to that of financial performance.

There is good reason to reconsider how corporate finance is taught and the materials used to teach it. Existing systems of production, distribution, and consumption, guided to a large extent by current financial models, are breaking through the boundaries of a healthy Earth and are more and more unsustainable (Rockström, 2009; Fullerton, 2015). The world has entered a new geological epoch, the “Anthropocene” as a consequence of significant human impact on the Earth's geology and ecosystems. Among the most visible indications of adverse human impact are the dramatic increase in catastrophic weather events—hurricanes, tsunamis, tornados, floods, droughts, etc.—resulting from climate change due to atmospheric warming from greenhouse gasses, and the pollution of the world’s oceans due to plastic waste. There is every reason to believe that if we do not redirect our economic system, we will leave to our children and grandchildren a world that will be far less habitable than our current one and may not be habitable at all. As some have astutely and cleverly pointed out, “there is no Planet B.”

Traditional Finance Textbooks

Traditional financial management textbooks have settled on a framing of the business and finance world and on a selection of content that varies very little from book to book. Among the most widely used introductory finance textbooks are those by Brealey, et.al. (for example: Brealey, Myers & Allen, 2017), Brigham, et.al. (for example: Brigham & Ehrhardt, 2017), and Ross, et.al (for example: Ross, Westerfield, Jaffe, & Jordan, 2016).

These widely used textbooks begin with the framing that the goal of the firm is financial: maximizing the financial value of the company, that is, SWM. For example, on page 1 of chapter 1, Brealey, et.al. write:

“[Shareholders] usually share the same financial objective. They want the financial manager to increase the value of the corporation and its current stock price. Thus the secret of success in financial management is to increase value. … Corporate finance is all about maximizing value.”

When finance textbooks refer to maximizing value, it is financial value alone to which they are referring. And that is the message our students hear from us in our classrooms. On page 1 of their chapter 1, Ross, et.al, write:

“The purpose of the firm is to create value for … the owner

and, after a discussion of the corporate form, they add on page 12:

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“The appropriate goal for the financial manager can thus be stated quite easily: The goal of financial management is to maximize the current value per share of the existing stock.”

Brigham, et.al. write on page 9 of their first chapter:

“Shareholders are the owners of a corporation, and they purchase stocks because they want to earn a good return on their investment without undue risk exposure. In most cases, shareholders elect directors, who then hire managers to run the corporation on a day-to-day basis. Because managers are supposed to be working on behalf of shareholders, they should pursue policies that enhance shareholder value. Consequently, throughout this book we operate on the assumption that management’s primary objective is stockholder wealth maximization (italics theirs).”

All three of these author teams do have a concern about corporate behavior, but it has nothing to do with global sustainability. Rather it is the agency problem that concerns them, the possibility that management will not pursue SWM to the fullest. Brealey, et.al capture this concern, writing (also on their page 1):

“Managers are, of course, human beings with their own interests and circumstances; they are not always the perfect servant of shareholders. Therefore, corporations must combine governance rules and procedures with appropriate incentives to make sure that all managers and employees—not just the financial managers—pull together to increase value.”

A look at the coverage of these books reveals great similarity:

Introduction to finance Review of financial accounting and financial statement analysis Valuation techniques – time value of money, cost of capital, capital budgeting Risk measurement – portfolio theory and the capital asset pricing model Financial markets – characteristics, efficiency Capital structure – financial instruments, debt/equity mix Dividend theory Options and other contingent claims Current asset management

although some authors differentiate their books by including additional material such as:

Agency theory and corporate governance Financial planning - forecasting financial statements Behavioral finance Mergers and acquisitions, bankruptcy and reorganization

Because traditional finance textbooks have such a clear, unambiguous conceptual framing and statement of the purpose of the for-profit firm, their primary content is a set of tools and techniques to enable students to achieve SWM. What they do not contain is information on the context in which they are set and the assumptions underlying their philosophy. Among the

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important issues not considered are the development of financial thought including the philosophical and political background within which SWM emerged; the changing environment and accompanying demands of society and their implication for financial products, services, and practices; and the possible ways the practice of finance shapes an evolving world. Without at least some exposure to these topics, students do not develop the insight to criticize finance orthodoxy, to think ahead, nor to understand nor care about the possible negative impacts of finance on “real people.”3 As such, these textbooks provide an incomplete education in much the same way that a technical education without exposure to the liberal arts is incomplete, limiting, and potentially dangerous. Note that this is antithetical to a primary tenet of Jesuit education, “cura personalis,” and of all liberal arts education that sees people as complex wholes and recognizes the need for a broadly educated citizenry to create and sustain a democratic society.

Our Previous (Semi-Traditional) Textbooks

The first finance textbook by the authors, Modern Financial Managing: Continuity and Change, was written in the early 1990s and published by Harper Collins in 1995 (Werner & Stoner, 1995). Since we were primarily teaching in the graduate division of the Gabelli School of Business at the time, we targeted the book to an MBA student audience. In 2000-2001, we wrote a version of the textbook for undergraduates, Fundamentals of Financial Managing, by removing many of the more advanced concepts and putting that content into a series of “web appendixes” where it still could be accessed by instructors who wished to include them in their courses (Werner & Stoner, 2001).

We had two reasons for writing the first edition of Modern Financial Managing: a concern about the organization of existing introductory finance textbooks and our then recent research into managing for quality and productivity (frequently called Total Quality Management—tqm) and particularly how managing for quality and productivity was beginning to influence finance practice.

Our concern about the organization of existing introductory textbooks was that they were inconsistent in the way they presented parallel topics. For example: multiple topics in an introductory finance course include time value of money calculations—introduction to time value, security valuation, cost of capital, capital budgeting, evaluation of investments in permanent current assets—but it was difficult for students to see that the same techniques were being used. Creating further confusion, notation varied from chapter to chapter, even when denoting identical concepts and calculations. We found ourselves apologizing to our students for the textbook we had assigned and spending far too much course time helping our students get past the resulting misunderstandings. Eventually, we began to write our own teaching notes to overcome these inconsistencies, and these notes became the basis for quite a few chapters in the first edition.

3 One helpful step to connect finance to “real people” is Meir Statman’s recent book, “Finance for Normal People,” in which he argues that behavioral finance is transitioning from assuming that people are always “rational” in the narrowest of economic senses and therefore treating behavior that does not conveniently fit economic models as “non-rational,” the result of cognitive and emotional errors, to what he calls “second-generation behavioral finance” in which people are acknowledged to be more complex with multiple needs and wants (Statman, 2017).

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The second motivation for writing Modern Financial Managing emerged from our studies of the finance organizations within companies that were leaders in adopting tqm. In the mid-1980s, the Gabelli School of Business management faculty had begun to research and teach tqm which then became a focal point of our MBA program. By 1989, we were becoming aware of companies that were incorporating tqm into their finance operations, and in the Fall of 1989, we team taught the first of three exploratory MBA seminars in which we invited finance executives and quality management consultants to speak to our students about their efforts and experiences. Beyond our learning, there were three primary outcomes of the seminar: (1) we compiled our students’ term papers into our first book (Stoner & Werner, 1991) which was a report on the course and what we had learned. That book was subsequently translated into a Korean language edition (Stoner & Werner, 1994a); (2) we were asked by the Financial Executives Research Foundation, the research arm of Financial Executives International, to conduct follow-up studies (Stoner & Werner, 1993; Stoner & Werner, 1994b; Stoner & Werner, 1995); and (3) we concluded that it was important that introductory finance education include this material, so we made it an important part of the textbook by including a chapter devoted to managing financial processes for continuous quality improvement and multiple examples taken from our research.

Nevertheless, with all its new content and with our efforts to achieve better internal consistency, the first edition of Modern Financial Managing was relatively traditional in its approach to the financial goal of the for-profit firm. To the extent that we criticized financial practice our comments were directed toward maintaining a customer focus and toward a bit of humility—encouraging finance organizations to be team players and to work closely with other organizational units to achieve the company’s objectives. Our most radical content at the time was in the statement:

“The clear importance of finance’s work might lead to the conclusions that finance is more important than other business functions and the finance discipline is the most important of all business disciplines. Since (1) the goal of the firm has been assumed to be the maximization of stockholder wealth, and since (2) many decisions leading to that goal occur within the financial arena, and since (3) the achievement of that goal is gauged by financial measures, it may seem only natural that all other business functions should be viewed as serving finance. Some teachers and financial managers have yielded to this temptation. They feel accounting’s main function is to produce the data needed for financial decision making; accounting is criticized when its measures are not consistent with evaluating shareholder wealth. Marketing has to know when the costs of production and distribution exceed the benefits of serving the customer. Human resource management has to know when the cost of labor makes benefiting employees impossible.

“In some respects these advocates of finance are correct. Proper financial managing is critically important to the success of the business firm. Indeed, there are numerous examples of how a company that pays little or no attention to financial managing fares poorly. Cost control, good investment decisions, wise financing choices, and all the other financial managing analyses and decisions

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considered in this book remain key requirements for business success. And financial mistakes will often show up much faster and with greater impact than mistakes in other organizational functions.

“However, the revolutions in global competitiveness and quality management are teaching us that, in a much more important sense, finance is not uniquely important. Without the other components of the organization doing their work well, there is no work for finance to do at all. Failure anywhere else can also doom the organization. In this most important of all senses, all business functions are equally important. A well-run business is an integrated whole serving many clienteles. No one discipline dominates because the contributions of every part are necessary for success. For the value of the business to grow, all stakeholders must be served along several dimensions. A major challenge of the new century is to add many more financial managers to the ranks of those who combine a deep understanding of the value and importance of finance with a recognition of its role in supporting the contributions of other organizational functions.” (Werner & Stoner, 1995 p. 19-20)

It wasn’t until the third edition of Modern Financial Managing that we began to consider explicitly how a for-profit company might think beyond SWM. In Chapter 1, “What is Financial Managing,” we identified SWM as the “traditional finance goal” (Werner & Stoner, 2007, p. 12) and included sections on:

Concerns about Shareholder Wealth Maximization – outcomes for society (income inequality, failure to take socially responsible actions, poorly directed business activities), actions within the firm (a useful measuring stick?, creating the right image?, inspiring commitment?, encouraging ethics?)

Emerging new approaches that begin reintegrating societal and shareholder interests – a broader definition of the agency conflict, aligning goals throughout the organization (using process-focused goals, building on people’s integrity, focusing on cross-functional relationships), a sequence of goals (from customers to employees to neighbors with resulting financial value) (Werner & Stoner, 2007, p. 19-25)

Sustainability entered Modern Financial Managing in the 4th edition (Werner & Stoner, 2012). In that edition, Chapter 1 had a section on Global Sustainability including a discussion of the principles of the United Nations Global Compact. Also, the 4th edition contained examples of companies pursuing sustainability goals by including “Contributing to Global Sustainability” illustrations showing how financial activities can simultaneously enhance the environment and society. The 5th edition (Werner & Stoner, 2018) continued this practice.

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A New Textbook Consistent with Global Sustainability

To update the last sentence quoted above from our first edition in 1995, we might now say that:

“A major challenge of the 21st Century is to add many more financial managers to the ranks of those who combine a deep understanding of the value and importance of finance with an active commitment to manage finance in ways that contribute to sustainable/flourishing world.”

What might a new textbook, consistent with global sustainability, look like? What might be the framing of such a book?

First, the new textbook would, of course, start with a new framing for the purpose of financial management and the purpose of all productive organizations—to serve society, present and future generations. The text would need to cover many, perhaps all, of the same topics addressed in traditional finance textbooks, but the framing of the context in which those topics would be discussed would be different. Rather than being driven by SWM and the extensive supportive neoliberal narrative framing as are traditional finance textbooks, the treatment of the financial management function in the new textbook would need to be in the context of companies and other organizations actively contributing to a sustainable world.

This change of framing is likely to yield some new financial management tools that are not considered in traditional finance textbooks and to consider the use of traditional financial management tools for a considerably different purpose than simply maximizing shareholder wealth. The alternative framing would need to be stated quite explicitly to help the reader understand why traditional financial tools are treated differently and why the new financial tools are needed for the newly defined purpose of the organization.

One interesting framing decision that would need to be made in writing this text is the extent to which we address the reality that the great body of financial management practice, theory, and teaching is not focused on creating a sustainable world. Do we want to address the question of how do we want to get from where we are now to where we want to be in terms of our organizations and the world? One possible way of handling this question is to write the textbook as though it is reporting on the financial tools that are being used “in the ‘right now’ of that future where we want to be.” At the moment, our framing on this point seems to be pretty close to writing as though we are already there: “here are the tools and ways of thinking that will (might) be used in companies/organizations that are successfully managing themselves in a sustainable way in a sustainable world.” If we take that approach then we will have finessed for the moment the question of how do we get from the world in which finance is contributing to the destruction of the planet and our species to the point where finance is building a healthy planet and future for our species.

Although for the moment we do not seem to be addressing the financial transition/transformation topic in the emerging chapter drafts, our writing does report to some extent on how the tools we are dealing with used to be used in the “old” traditional financial management world (before the transition). We seem to find it useful to indicate how and why those tools are being used differently in financial management for sustainable world. If we

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continue to follow this approach, our doing so may help instructors and students see the similarities and differences in what we are doing in this textbook relative to what is done in traditional financial management textbooks.

Although it may be desirable to avoid speculation about how we might get to such a new, sustainable world, it might be useful to acknowledge the realities users of this book will face in 2019 or 2020. One way of being helpful to the reader might be to be quite explicit about the fact that all of us need to find ways to thrive in three different financial management and business practice worlds: (1) the world of business as usual: the current world of unsustainable ways of producing, distributing, and consuming, where the ultimate goal, at the point of actual decisions, is almost always “how can we increase today’s share price?;” (2) the slowly emerging world of ”amended (or tweaked) business as usual” where public homage is paid to the need for sustainable actions and where corporate actions that do less harm to the environment, to social justice, and to similar goals are actually taken consciously and intentionally (often with considerable fanfare) as long as they continue to contribute to maximizing shareholder wealth, and ideally, are even more profitable then actions that do more harm to the world; and (3) a world in which businesses and other organizations are thriving without harming our future and perhaps even contributing to the healing of the planet – the “world of managing for global sustainability.”

Ultimately, this new finance textbook is being written the way it is because of a number of factors. The single most important driving force for this new finance textbook is the set of obvious failings of our present producing-distributing-consuming system as has been noted above. Other factors that have influenced the shaping of this text are the increasingly obvious weaknesses of the assumptions and prescriptions for action of the current dominant neoliberal-narrative-based financial management assumptions and theories; challenges to that neoliberal political–economic narrative itself (including the uncovering of the source of the currently dominant neoliberal narrative); and the emergence of creative and innovative concepts, practices, and alternative approaches to managing finance and business for the well-being of society.

Shareholder Wealth Maximization and Emerging Alternatives

The development of SWM: The SWM paradigm has its roots in the eighteenth century philosophy of utilitarianism, the philosophy that maximizing well-being should be the goal of society.4 One way to increase well-being—at the time for most people and still today for many people—is through the acquisition of goods and services from businesses, and as Bentham’s contemporary Adam Smith concluded, the proprietors of the emerging small businesses of the Industrial Revolution would provide the societies they served with maximum goods and services at the lowest prices if they made their goal maximizing profits.5

By the end of the nineteenth century, however, business activity had grown and evolved to the point where for many firms it was becoming increasingly difficult to determine and calculate profits. They produced multiple products and services, operated in multiple locations,

4 Prominent among those philosophers was Jeremy Bentham who used the word “happiness” to operationalize the concept of well-being, writing: “It is the greatest happiness of the greatest number that is the measure of right and wrong” (Bentham, 1776, Preface). Modern economists tend to use the more general word “utility.”5 This is the famous “Invisible Hand” argument in The Wealth of Nations (Smith, 1776, Book IV, Chapter 2).

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and used multiple currencies. They acquired long-lived plant and equipment and purchased and sold on credit terms, actions that separated cash flow from economic profits, a difference that needed to be codified by formal accounting rules.

By the mid twentieth century, finance theorists had identified time value of money and risk as important topics, neither of which are included in the calculation of profits, so they sought a more inclusive valuation measure to quantify business success. For publically owned companies this new measure became the market price of the company’s common stock, the metric for SWM. Three academic observations in the 1970s—Eugene Fama’s work on capital market efficiency (Fama, 1970), Milton Friedman’s claim that the social responsibility of business was still to maximize their profits (Friedman, 1970), and the development of agency theory by Michael Jensen and William Meckling (Jensen and Meckling, 1976)—solidified this belief.

Assumptions underlying SWM: SWM is largely based on a series of assumptions about people and our planet. Among these assumptions are (1) a corporation’s shareholders are its owners in the same way that one might own a shirt or an automobile, (2) capital is the scarce resource for most businesses, (3) the world is abundant in natural resources, (4) human beings are entirely rational, (5) all voluntary economic transactions are positive for all parties concerned, and (6) governments will always set fair and appropriate ground rules. There are others. Yet, each of these assumptions has recently been challenged as unrealistic, or as no longer reasonable as our understanding of people and planet have evolved.

Weaknesses of SWM: In one respect, the pursuit of SWM appears to many observers to have been extremely successful. Great wealth has been created for many people in the last half-century when SWM framings became increasingly accepted in many countries. Of course, attempting to untangle the successes of capitalism as a broad economic approach from the contributions of the SWM framing of the purpose of the firm to those successes is not an easy task, if it is even possible to do so. However, it is clear to many that SWM, with its narrow focus on financial value, suffers in not easily recognizing nor accommodating to the impact businesses pursuing SWM have on environmental and social issues. There have been unintended and unwanted consequences of SWM, of which the most obvious is the damage being done to the planet’s capacity to support our own and other species. Evidence is accumulating that the planet is simply unable to continue to provide the resources required to fuel the current production–distribution–consumption system and to absorb the wastes that system continues to create. Climate change driven by global warming has led to melting polar ice caps, rising sea levels, ocean acidification, diminished air quality, and more frequent severe weather events. It has led to an increase in the incidence of infectious diseases, for example with malaria-bearing mosquitoes being found at altitudes and latitudes never before observed. A developing global shortage of fresh water is reducing crop yields and causing increased competition for water (Conserve Energy Future, undated; NASA, undated). Even the advances in health practices and disease eradication and increases in standards of living have not been free of contributions to the problem of global unsustainability. As many as 3 billion people may achieve Western-style middle-class living standards by 2050, with the attendant increased use of energy, other resources and waste creation. Although a positive economic outcome, this rising new middle class will place greater demands on the Earth’s resources, especially energy. If energy use were to double by 2050, which some projections suggest could happen, a 6ºC rise in global

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temperatures could result—very likely a catastrophic outcome (Global Warming, Our Future, 2016). Growing levels of income inequality and deprivation are contributing to social unrest, forced migration, isolationism and, terrorism. When human well-being is measured in terms other than consumption of material possessions, a variety of global indicators have not progressed significantly in the most recent decades—health, medical care, longevity, personal safety, inclusion, personal freedom, and, indeed, happiness (Helliwell, Layard and Sachs, 2016).6

Challenges to the neoliberal economic-political narrative advocating for an unfettered version of capitalism: One of the more fascinating aspects of finance and economic history is the set of fairly recent discoveries unconcealing how the currently dominant neoliberal, and partially libertarian, narrative came to dominate political and economic actions in the United States and to some extent beyond (Mirowski, & Plehwe, 2009; Mayer, 2016; Chomsky, 2017; Sroufe, Waddock, & Laszlo, 2017). The history of how this narrative became so influential in political and economic thought and action in the United States is particularly interesting and important because of the current consistency of much of traditional economic teaching and research with that narrative. And, of course, it is very important because of the inconsistency of that narrative with the creation of the sustainable and flourishing world that this new financial management textbook seeks to be in alignment with. Finance professors who are not well-informed about this aspect of the historical evolution of their field are missing major opportunities to contribute to the education of their students as well as missing interesting and promising research opportunities for their own work.

Emerging alternative approaches and influences: There are many leaders in the current rethinking about how finance and business can be conducted. Just a few of these are John Fullerton and his colleagues in the Capital Institute (capitalinstitute.org); the many members of the Humanistic Management Network (humanetwork.org); the very recently passed Lynn Stout who wrote brilliantly about corporate governance, fiduciary responsibility, and the lack of legal grounding and positive empirical results of pursuing the SWM cornerstone of traditional finance teaching and practice (e.g., Stout, 2012); and the team and network developing the alternative political-economic narrative under the title of the Meadows Memorandum (Meadows Memorandum, 2017). These contributors, and many more, are providing the authors of this new financial management textbook, and hopefully the authors of other such textbooks in finance and other fields, with valuable framings, insights, data, perspectives, and, very importantly, inspiration.

This financial management textbook is also influenced by the work of the Aspen Institute program on Business and Society led by Judith Samuelson and her colleagues; the Secretariat for United Nations-inspired Principals for Responsible Management Education (PRME) program currently being led by Jonas Haertle and his colleagues; the new initiatives of the Sustainability Accounting Standards Board being led by Jean Rogers and Jeffrey Hales with the support of Michael Bloomberg and Mary Schapiro; and, of course, the United Nations Sustainable Development Goals (SDGs) which we plan to feature prominently in the emerging textbook.

And perhaps most importantly, this new financial textbook well look the way it finally looks, in the first and subsequent editions, as a result of the many comments, contributions, and

6 The authors’ paper, “Sustainability and the Evolution of the Shareholder Wealth Maximization Paradigm” discusses the evolution and weaknesses of SWM in much greater detail (Werner & Stoner, 2018)

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suggestions of our students and colleagues, including those in our own and other universities and those attending conferences that we attend.

Progress Report and Moving Forward

The subtitle of our first textbook, now in its 5th edition was and still is “Continuity and Change.” This phrase describes not only one of our book’s more important messages, but also our approach to teaching and writing educational materials. All disciplines evolve. As time passes, we are always learning that some concepts remain useful while others are shown to be incomplete, incorrect, inadequate, or no longer consistent with societal norms and goals. Continuity and Change! As we write the new textbook, one of our most important decisions will be which concepts from our earlier books should we keep, which need modification, and which should we discard.

The other side of that coin is to decide which new concepts should we add. Which are now sufficiently useful and appropriate such that an introductory finance course would be incomplete without them? Which new concepts would help students better understand finance in today’s world? Which would be useful fodder for further thought and exploration?

We certainly do not have all the answers, or perhaps even many of the answers, to these questions, but we have identified places in our own and other existing textbooks where finance concepts and techniques need to be modified to fit our new framing that the purpose of the firm is to serve society’s environmental and social as well as economic needs. To this end, we have begun to outline the new textbook—a shortened version of that outline showing major topic headings appears as Appendix 1 to this paper. In writing this outline, we have followed our belief in Continuity and Change. After the Chapter 1 outline, each chapter’s outline is divided into “traditional content,” material to be taken and/or adapted from our current and other textbooks, and “new sustainability-related content,” new material to be added. For some chapters, we already have a good sense of what to add, for others we have yet to find appropriate additional material. We plan to include examples of companies that are finding economic value by pursuing sustainability goals (“Value from Values”) using the seventeen United Nations Sustainable Development Goals as a framework; Appendix 2 is a listing of companies and activities that seem to work for these illustrations.

Moving forward, we plan to spend the 2018-2019 academic year editing the material we will take from our current textbooks, writing the new material, adding examples and illustrations, and putting it together in a drat of the new textbook. We will beta test the new book during the Spring 2019 term in the next offering of the course Finance in the Sustainable Organization at the Gabelli School of Business.

Of course, a major part of this initiative will be efforts to involve and learn from colleagues in many places such as: other universities, for-profit business organizations, and not-for-profits in general and the Aspen Institute, PRME Secretariat, and SASB, in particular. The way we have been using emerging parts of the text in our classrooms automatically builds revisions into the text on a day-by-day basis as we receive constructive, and other, criticism from our students based upon their experiences with the text. Naturally, we are eager to find and work with colleagues who are interested in bringing sustainability concepts into their financial

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teaching and research, and colleagues who may be well ahead of us in doing so. From our side, what we have to offer are syllabi, drafts of chapter outlines, a schedule for when we anticipate reasonably solid individual chapter drafts will be available, associated and supporting readings that we have used and/or might recommend even if we have not used them in class, and we hope an emerging and evolving set of names for a growing network of like-minded professors and business colleagues.

We have worked successfully with a number of publishers over the years and will not be surprised if this textbook is published by Textbook Media Press, the publisher of the most recent editions of our financial textbooks. Although we may be a bit optimistic, we do expect to submit the full text to our publisher at the end of the 2019 Spring academic term.

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References

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Appendix 1 – Planned Chapter Contents

Part I – About Finance and Money

Chapter 1 – What is Financial Managing?1. What is finance?2. The purpose of organizations – to serve society

a. All organizations have a license to operate (implicit or explicit) from societyb. How organizations can serve society – economically, environmentally, socially

3. The role(s) of finance – supporting the organization’s goal 4. A brief history of finance’s conception of its role(s) – from the first Industrial Revolution,

to Managerialism, to the rise of finance as the dominant business discipline5. Shareholder Wealth Maximization (SWM) as the “goal” of the firm

a. Arguments advanced for SWMb. Problems with these arguments for SWM

6. Beyond SWMa. Aligning goals throughout the organizationb. A sequence of goalsc. The emergence of “global sustainabilityd. The UN Sustainable Development Goals (SDGs) as a powerful statement of

society’s goals7. This textbook

a. Our goal for the bookb. How this book is similar to yet different from other financial management

textbooksc. The content of this book – summary of chapters to come and key ideas

Chapter 2 – Data for Financial Decision Making Traditional content

1. The need for good and relevant data2. Accounting data – financial, managerial, tax accounting3. Non-accounting data – economic, about people (customers, employees), about

processes4. The need to compare numbers – traditional ratio analysis, benchmarking

New sustainability-related content1. Sustainability reporting – CRI??2. ESG data3. SASB data (and comparable data emerging in other countries)4. ESG ratios

Chapter 3 – The Value of Time

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Traditional content1. The relationship to time to financial value2. Evaluation techniques – present and future value, annuities, perpetuities, growing

cash streams, uneven cash flows New sustainability-related content

1. The relationship of time to non-financial value2. Selecting a discount rate for non-financial outcomes

Chapter 4 – Money Rates Traditional content

1. Interest rates – impact on time value, components, term structure, other rate structures (risk, tax)

2. Exchange rates – exchange rate systems, market quotations, spot and forward rates, business exposure

New sustainability-related content1. Implications for financial decision-making – choice of time horizon, locating

business activity, the case of pollution in China

Part II – Raising Money

Chapter 5 – Financial Planning Traditional content

1. The roles of planning and budgeting2. Percentage of sales forecasting3. Interpreting pro-forma financial statements

New sustainability-related content

Chapter 6 – Financial Instruments Traditional content

1. Short-term debt – trade credit, accruals, loans, capital market alternatives2. Intermediate- and long-term debt – term loans, leases, bonds, floating-rate notes3. Equity – preferred, common

New sustainability-related content1. Emerging financial instruments – IFC (and other) loans, green bonds, social

impact bonds, private equity finds

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Chapter 7 – Financial Markets and Institutions Traditional content

1. Functions and functioning of financial markets2. Primary and secondary financial markets3. Security price behavior4. Financial intermediaries

New sustainability-related content1. Sustainability-related indexes2. Sustainability requirements of exchanges3. Emerging security markets that seek to avoid short-termism

Part III – Risk versus Return

Chapter 8 – Risk Traditional content

1. Defining risk2. The relationship of financial risk to value for financial stakeholders3. Financial risk models – sources of financial risk, measuring financial risk (total

risk, portfolio risk) New sustainability-related content

1. The relationship of non-financial risk to value for all stakeholders2. The relationship of ESG issues to financial value

Chapter 9 – The Value of Securities Traditional content

1. Value versus price2. Bond valuation3. Preferred stock valuation4. Common stock valuation

New sustainability-related content

Chapter 10 – The Cost of Capital Traditional content

1. The role of a cost of capital2. Calculating a cost of capital

New sustainability-related content1. The impact of sustainability on the cost of capital

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Part IV – Adding Value

Chapter 11 – Making Investment Decisions – Capital Budgeting Traditional content

1. Incremental thinking2. Organizing the data3. Reaching a decision – NPV, IRR

New sustainability-related content1. Non-financial value

Chapter 12 – Making Investment Decisions – Permanent Working Capital Assets Traditional content

1. Types of working capital2. “Permanent cash,” “permanent accounts receivable,” “permanent inventory”

New sustainability-related content

Chapter 13 – Improving Financial Processes Traditional content

1. Recognizing and understanding financial processes2. Measuring process performance3. Systematic process improvement – tools, examples

New sustainability-related content

Chapter 14 – Selecting the Best Debt-Equity Mix Traditional content

1. Leverage2. The relationship of the debt/equity mix to value – Modigliani-Miller, practical

issues, typical capital structures New sustainability-related content

1. How sustainability improves debt-equity opportunities

Chapter 15 – Managing Risk Traditional content

1. Managing financial risk – working capital, debt maturity2. Reducing financial risk – hedging

New sustainability-related content1. Managing financial risk that affects society2. Managing non-financial risk that affects financial value

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Part V – Providing Value to Society

Chapter 16 – Financial Value Traditional content

1. Dividend policy2. Increasing share price

New sustainability-related content

Chapter 17 – Environmental and Social Value Traditional content

1. NONE – NEW TOPIC New sustainability-related content

Part VI – Looking Ahead

Chapter 18 – The Future: Yours and Finance’s Traditional content

1. The last chapter game plan2. Review of key traditional financial concepts3. Recent changes in finance theory and practice4. The benefits and dangers of the finance perspective

New sustainability-related content1. Review of emerging sustainability-driven financial concepts2. Why an understanding of “sustainability and finance” is an increasingly important

part of a finance skill set

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Appendix 2 – Examples of Companies Contributing to the UN Sustainable Development Goals (“Finding Value in Values”)7

SDG #1 – NO POVERTYVisa brings financial services to the underserved

SDG #2 – ZERO HUNGERGeneral Mills gives meals to local food banks

SDG #3 – GOOD HEALTH AND WELL-BEINGKaiser Permanente invests in healthy communities

SDG #4 – QUALITY EDUCATION LEGO funds children’s play, learning, and creativity

SDG #5 – GENDER EQUALITYParticipant Media teaches students worldwide about Malala

SDG #6 – CLEAN WATER AND SANITATIONKimberly-Clark provides toilets to poor communities

SDG #7 – AFFORDABLE AND CLEAN ENERGYCummins is investing in solar power

SDG #8 – DECENT WORK AND ECONOMIC GROWTHMicrosoft helps young people develop computer skills

SDG #9 – INDUSTRY, INNOVATION, AND INFRASTRUCTUREQualcomm brings wireless technology to underserved communities

SDG #10 –REDUCED INEQUALITIESCitigroup sees diversity as a source of strength

SDG #11 – SUSTAINABLE CITIES AND COMMUNITIESSiemens celebrates communities that foster green and sustainable economic solutions

SDG #12 – RESPONSIBLE CONSUMPTIONA ND PRODUCTIONNike uses recycled materials in most of its gear

SDG #13 – CLIMATE ACTIONJetBlue teaches customers and crew about climate change

SDG #14 – LIFE BELOW WATER7 http://sdgfunders.org/blog/how-17-companies-are-tackling-sustainable-development-goals-and-your-company-

can-too/

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Discovery Channel supports clean oceans

SDG #15 – LIFE ON LANDThe North Face protects outdoor areas

SDG #16 – PEACE, JUSTICE, AND STRONG INSTITUTIONSAirBnB helps provide refugee relief workers with places to stay

SDG #17 – PARTNERSHIP FOR THE GOALSTripAdvisor partners with GlobalGiving to identify and support locally-driven non-profits with SDG-focused missions

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