Profit Maximization Essay

Length: 2 pages Subject: Economics Type: Essay Paper: #32310065 Related Topics: Wealth, Stakeholders, Corporate Finance, Climate Change
Excerpt from Essay :

Corporate Objective

I do not think it is necessary to have a single-valued objective function. Maximizing firm value is not mutually exclusive to all other objectives, first. Second, that's like saying that human should only seek to maximize his or her net worth -- it's absurd. A corporation is an investment vehicle, yes, but that's not all it is. As for the idea that firm value maximization is the best objective function, that's not entirely true either. It's important -- you wouldn't have a firm in the capitalist sense of the word without some value maximization, but if the firm didn't provide jobs, for example, it would also not exist. Every firm provides a living for at least one person -- and they do that before firm value even enters into the question.

Freeman's stakeholder theory reflects the idea that the firm should be governed by the interests of its stakeholders. Jensen is arguing that within this context, value maximization should be paramount. Freeman does not opt for value maximization as his primary driver. Jensen does, allowing mostly that other things might also be important sometimes as well.

3. Freeman argues that tradeoffs should be avoided. That managers can find solutions that do not require such direct tradeoffs of shareholder vs. stakeholder, but that with some creativity and sound thinking, managers...

...

Porter thinks that businesses can be good at solving social problems because business have a profit motive. The profit motive will drive business to utilize the resources it has access to -- which are substantial -- to solve problems. Profit will then create momentum towards a solution as well, as profits are reinvested, more companies enter the industry, etc.

5. Porter's perspective is still a little bit inconsistent with Jensen's. They are quite similar, both believe in profit, maximizing firm value and things like that. But Porter is basically asking business to tackle social problems, because it can and maybe there will be some profit out of it. Jensen is saying business has to think about profit in the long run. So Jensen goes back to profit maximization -- say, oil companies -- while Porter is positing the business can address climate change. Maybe it can deal with climate change better than government, but with public goods and negative externalities, Jensen's value maximization might focus on other things with more short-run payoffs.

6. Vogel's solution to market failures is that public policy steps in, which changes the incentives of managers so as to align the interests of shareholders and stakeholders.

7. Leland argues that stockholder maximization is so important in the context of the economy, and that companies drive innovation in our society.…

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