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You are a banker working for Westpac Banking Corporation. Your neighbour is retired and has invested some of his superannuation in a share portfolio that includes Westpac shares. Although he is not unhappy about the bank's share performance he believes Westpac can do better by its shareholders. In particular he is not sure about the values of socially responsible projects Westpac undertakes. As you are to present a brief in an issue of your own choice in next monthly staff meeting you decide to write the brief on the following topic:
'Is maximising the value of the firm to its shareholders consistent with the firm exercising considerable social responsibility?'
Write the brief incorporating various social obligations undertaken by Westpac to illustrate your argument. (Word limit 1000 words)
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Is maximizing the value of the firm to its shareholders consistent with the firm exercising considerable social responsibility
As of being a manager of the firm it is the prime objective to maximize the shareholder's wealth. This is due to the fact that the shareholders' are the fund suppliers and managers' acts on behalf of the shareholders' and therefore, can be considered as hired guns. In this write up the main objective is to highlight the importance of socially responsible projects and explaining the inter-linkages between the socially responsible project's value and growth in the shareholders' wealth. This is imperative to explain the role of managerial actions while considering socially responsible projects and value maximization.
After the recent financial crisis, it has been emphasized that in a broad perspective, the managers have to formulate their strategy in such a way that the stakeholder's welfare is crucial and important. Several studies have formally emphasized for the importance of stakeholder's welfare to be directly linked with the shareholder's wealth maximization. This has now become a general understanding that the company's growth survival and shareholder's welfare is depending upon the stakeholder's welfare. Before moving further and coming to the core issues it is important to understand how managers' maximize shareholders' value?
It is a known fact that managers work on behalf of shareholders and invests the fund as supplied by shareholders in the productive activities or say the projects giving higher returns. In layman, after deducting all expenses, salaries and interest expenses etc. the remaining is the profit, which, either distributed as dividend or kept for further investment. Rising profit figures creates demand for the stocks in the market and hence share prices increases. In this way, the shareholder’s wealth is multiplied in the sense that corporate action by managers increases the market value of the share prices. Here, when managers' misbehave or work for their private benefits the net worth is affected and suboptimal output leads to poor performance and lower value to the shareholders. This is known as a principal-agent problem and has been widely discussed in the corporate finance literature. When there is collusion between large block-holders and managers, this forces the expropriation of minority shareholders, which, also is not in favor of the public investors and is known as principal-principal agent problem.
Therefore, the actions taken by managers matters and has an important role in maximizing the shareholders' wealth.