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Risk is a major concern of almost all investors. When shareholders invest their money in a...

Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risk with those funds. What do you think are the ethical limits that managers should observe when taking risk with other people's money?

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Answer #1

The managers are acting as agents of the shareholders. Their objective is to maximize the wealth of the shareholders. This implies that they need to maximize the share price. For this they need to take a limited amount of risks in such a manner that there is maximum profitability with minimum risk. The risks should be well calculated and taken after extensive and sufficient analysis. The managers should take the decisions keeping in mind their corporate social responsibility as well as within ethical limits. Hence they should not invest the shareholders’ money in projects which are unethical and beyond the values of the company.

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