Strategic financial management and corporate finance introduction

¶ … management's primary goal is to maximize shareholder wealth by maximizing the price of the firm's stock. What other goals might a firm have, and are they congruent with the goal of maximizing share price?

It has become increasingly clear that a narrow, short-term focus on maximizing the price of a firm's stock is foolhardy. The most obvious example of the problematic nature of a focus on immediate wealth generation is seen in the example of the Enron Corporation. Enron used accounting fraud to make it seem as if the company was fantastically profitable, but the profits only existed on paper, not in reality. There are other, less obvious examples of narrow-minded tradeoffs between long and short-term gains. For example, many American car manufacturers, such as General Motors (GM), continue to lobby against environmental legislation that would require them to spend money to alter the design of many of their vehicles. "GM, like the other automakers, has raised concerns about efforts to raise fuel efficiency standards to as high as 60 miles per gallon" (Whoriskey 2011).

In the short-term, American car manufacturer's successful anti-green efforts will no doubt help to raise their stock prices. Long-term evidence indicates that vehicle manufacturers like Toyota, who prioritize fuel efficiency and show concern for the environment, are far stronger, in terms of their stability as companies. GM was a relatively 'late mover' in the hybrid technology market, for example, and instead focused upon generating copycat after copycat of fuel-inefficient SUVs until it went bankrupt. By focusing on long-term gains and environmental concerns, Toyota was able to generate a more ethical, ecologically sound, and recession-proof business model.

Even Wal-Mart, which has often been criticized for its labor practices and encouraging the consumption of cheap, shoddy goods, has jumped on the green marketing bandwagon by offering organic produce, and showing greater concern for sustainability. "Wal-Mart is making its aggressive move into organics at the same time it's trying to improve its environmental image" (Gogoi, 2006). Other companies have found that weathering a public relations firestorm is not worth the short-term profits generated by sacrificing all ethical concerns. For example, Nike was forced to create a policy regarding the ethical treatment of workers abroad after it was criticized for using 'sweatshop' labor. Mattel discovered that insufficient oversight over its toy manufacturing abroad in China generated the need for massive recalls of dangerous toys, and its stock plummeted.

These examples indicate that a Machiavellian approach to corporate ethics and an utter lack of concern for the state of the environment in the future is poor business practice. Yet the ethical arguments in favor of businesses showing concern for the environment, having rigorous accounting ethics and observing regulations regarding consumer safety is that a failure to take ethical action often results in losses of profits. It is far more difficult to argue that a firm should ignore the need to make a profit at all, and to place the environment first.