Question

Do you believe that the firm’s social responsibilities conflict with the ultimate goal of shareholder’s wealth maximization? Consider issues such as the protection of the environment and the creation of jobs.

Answer 1

It is true that the social responsibilities of the firm conflict with the goal of wealth of shareholder maximization at least in the short run. Due to social responsibilities businesses are supposed to take care of the environment and for this they need to invest heavily in non-polluting machinery and Technology. This increases the cost of investment and reduces the profitability of the business thus reducing the profits available to the shareholders. Similarly social objectives such as job creation present a huge burden of salary expenses on the business which finally affects the profitability of the firm. However in the long run companies which complete the social responsibility gain from the Goodwill that they earn and hence they are able to maximize shareholder wealth in the long run.