- After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
- After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
- Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
- What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
- Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
- Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value
Sunday, September 27, 2015
Chapter II - Questions for the Blog discussion
The Blog activism is worth 10% of the total final mark. So please discuss on the Blog at least two of the following questions (point 1 is mandatory):
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I found the debate between M. Friedman and the young man very interesting. Many people keep asking whether the companies care about their customers and bear any responsibility for their wellbeing. The question made by the young man, passionate and not without sarcastic notes, is relevant today. In fact, I found a kindred spirit in him :)
ReplyDeleteMr. Friedman was asked to respond to a hypothetical situation when an electric company stops provision of electricity to those (in this case an old man) who do not pay the bills. Is it fair? Where is the ethical side?
In my opinion Mr. Friedman was right to say, that if there would be no danger of losing electricity due to unpaid bills, no one would care about it, that is “the only people who would pay for it would be those who pay voluntarily”. That means, all the costs of the services would be borne by the other stakeholders – employees and owners of the business, which is not their aim. Besides bringing value to the society, a business is directed at reaching its economic goals, normally profit. This would not happen in the above case.
However, I find two points out of accord with my understanding of the situation. (1) Provision of electricity is a basic need of a human being in today’s world. This affects life, health and wellbeing. That is why such kind of services should be treated with care and consideration, e.g. involvement of public administration, consideration of people’s income when allocating payment rates. (2) According to Mr. Friedman, it is the old man’s neighbors and family who should be caring enough as to help him cover his bills, not the corporation. This, to my mind, is a disruptive idea, leading to the conclusion that only those who are rich will survive. I do agree that the responsibility does not fully lie with the corporation, but it is the government and public authorities which should be able to assess their citizens’ ability to pay and provide them with suitable allowances, subsidies and partial coverage of costs.
1) In the video "Milton Friedman on Self-Interest and the Profit Motive", Friedman's shareholders theory is challenged about the negative consequences that self-interest of company's owners, namely the profit maximization, may have on people freedom. To face this theme, an example is proposed to Friedman, which can be riassumed in the following question: is right for an electricity company to turn off the energy to an old man who cannot pay for it, even if this causes the death of this man? That's an extreme point of view, but it explains how far may go the bad consequences of the profit maximization tension embodied in the shareholders theory. Friedman answers reversing the point view, namely asking what if the company would keep the electricity on to everyone who's not willing to - or who cannot - pay. This company will start to rely on the revenues coming only from those who voluntarily will pay for electricity, which actually would be not so many, and sooner or later would fail. The faliure would have bad consequences not only on the shareholders, but also on the employees of the company, on the customers and, in general, on the whole community. So, according to Friedman, the best the company can do to be socially responsible is to turn off the electricity to those who don’t pay the bill driven by - and, more in general, to pursue - the profit maximization, since if the company survives, the whole community will benefit from this.
ReplyDeleteApparently this rationale works. Though it is based on the strong assumption that the interests of the company - of its shareholders - are always aligned to those of all its stakeholders. Is that always true?
No, especially in those situations which we call Market faliure: a place where private decision making left to its own hands does not appreciate the distortion between what society would choose to do and what the individual would choose to do (e.g externalities).
Moreover, we above mentioned the concept of survival. Profit maximization should be a mean to the survival of the company, which is clearly a long-term concept. It's when profit maximization is pusuit in the short-term that the social interests and the private ones are misaligned.
1 – After watching the video Youtube 3 (“Milton Friedman on the Self-Interest and the Profit Motive 1of 2”), discuss the strength and weaknesses of the Milton Friedman's thought.
ReplyDeleteIn this video Friedman was asked about the relation between the Self-Interest of the owners (namely the profit) and the freedom (since Friedman publicly said that he supports the concept of “freedom”).
As Friedman himself said “in a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employee. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom”. Now, as it seems evident, he strongly support the shareholder theory, and we can easily agree with him that shareholders are probably the most involved actors in the organizations. This may lead us to say that shareholders are, by far, the stakeholders that are most interested in the firm and the people who have the leading interests. Moreover, we can add that they are putting capitals in the firm, so they will be focused in recovering this capital by being dynamic and active in the market. Being dynamic would favour the whole economic system.
In the previous definition Friedman also pointed out that the management of the firm in view of the profit maximization should conform “to their basic rules of the society, both those embodied in law and those embodied in ethical custom”, that is, as professor Ernesto Dal Bò said in the Oxford-debate Youtube video 5, a constrained value maximization program.
To conclude, we can say that the main strength of his thought is that the management of the organization is left in the hands of the persons who are involved the most in the organization itself and who are more likely to favour the market dynamism. On the other hand, even if Friedman specified the necessary conformity with other rules, he did not point out what are these stakeholders' rules and which ones should be preferred, if any.
2 – After watching the video Youtube 5 (“Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteThe video is an Oxford-debate at the University of Berkeley. Three speakers provided their ideas about the right approach to be used in running an organization. After introducing some basic concepts, they started talking about the idea they support.
The first speaker supports the shareholder theory and explains it from a financial point of view. Financially speaking, the value and profit maximization needs to take in consideration time and uncertainty (risk adjustment). His point is that financiers (shareholders) are those who can best run an organization since they want to recover their investments and so they will act dynamically in the market.
The second speaker supports the stakeholder theory. He says that, in a world in which the concept of market failure does exist, in order to serve the morality and the social well-being, the only way is to care about all involved actors. Friedman himself placed morality as a constraint for profit-seeking (see answer 1) when he talks about basic rules of the society.
The third speaker talks in favour of the shareholder theory. He says that Friedman’s idea, even if true, is becoming less relevant because of the modern corporate responsibility movements. These new upcoming ideas say that there is no more a tradeoff between being responsible and being profitable, so managers may have room to run the organization and have discretion on how to behave. However, he points out that, whenever a tradeoff between responsibility and profitability does exist, there are no companies that are expected to abandon the interests of shareholders and to act in a non-profitable way. Here come public laws and regulations to address these topics.
To conclude, my opinion is that stakeholder theory should be preferred. Long-term orientation should drive the management of all organizations and the stakeholder theory does take into account many more long-term interests rather than the shareholder theory does. Let's imagine environmental issues, or social well-being: they are not necessarily taken in consideration when short-term profit maximization is pursued, while they are more likely to be analysed when a long-term orientation is followed.
3 – Give your opinion on the video Youtube 6 “Who's minding the Store? The Ethics of Corporate Governance for what concern the BP case”.
ReplyDeleteThe video is a speech by Lynn A. Stout focused on disastrous BP oil spill in the gulf of Mexico in 2010 (the Deepwater Horizon oil rig). The example she brought supports her idea that a successful society, and in particular a strong business sector, even if profit-oriented (shareholder-oriented) requires laws and public policies in order to positively affect everyday life. Even if the U.S. government discovered the ultimate cause of the disaster to be a lack of safety measures, Stout strongly believes that there is a deeper ultimate cause: the shareholder value thinking. In fact, the cut in safety measures performed by the BP allowed the company to save 1 million $ a day, while causing a loss of 100 billions $ in shares value. In her opinion, this cut was driven by managers who want to increase their short-term profits (by cutting expenses). However, she concluded, this is a quite common situation, especially for publicly listed company, to cut expenses, customer support, safety measures, or to worsen workplace conditions.
As far as this video is concerned, it seems clear how a strong addiction to profits and short-term gains may sometimes lead to wrong choices (e.g. reducing safety measures), and then to disasters which can affect the society (e.g. in this case the environment) for a very long period. It might be that, in this case, a stakeholder view of the firm would not have caused the same disaster, because maybe the possible impact on the environment would have been taken into account.
4 – What did you learn from the previous courses (in “Tor Vergata” or other Universities”)? Are firms oriented to the shareholders or stakeholders?
According to my experience, I have never attended any courses in which one of the theories was strongly preferred to the other. However, many “general” courses were always a bit more oriented to the shareholder theory, being focused either on some financial aspects and on profit. Courses that want to provide a different perspective, taking in consideration other stakeholders, either were taught separately focusing just on these perspectives or reserved just a small portion of their content to these different approaches. So, in the end, academically speaking, there is maybe a slight preference for the shareholder theory.
5 – Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society).
Two recent examples can easily explain what an unsustainable profit is.
First, the Volkswagen case. The German company was found guilty of having faked the diesel emissions of their car. The unsustainable profit lies on the fact that not only their revenues came from an illegal procedure, but also the enrichment of the company damaged the environment because their emissions are more polluting than what was expected.
Second, the Ilva case in Puglia. Due to the lack of proper equipment, emissions of the company were too much detrimental. The Riva family cashed in many profits without reinvesting them to renew machinery and equipment; this led to a poor quality of emissions and so to huge damages to both the environment and people. Think about the fact that investigations report about 650 hospitalized people per year, 90 deaths per year, and many cases of cancer, just in the city of Taranto.
4) What I noticed in the last year is that the corporate governance and especially the corporate social responsibility debate - pushing towards a shareholders approach tendency - have become increasingly important for companies. At least, for what regards their intention to communicate their concern about these matters. It is easy today to find a corporate governance section in the websites of the major companies, especially if publicly listed. Nevertheless, this is not sufficient to say that they are actually shareholders oriented and the Volkswagen example, which Giacomo has reported above, demonstrates this.
Delete2) It seems to me that, in discussing these two points of view, we should focus on the time horizon of creating value. The shareholders theory approach is influenced by the market pressure in creating value, namely maximizing the profit, in the short term. On the contrary the stakeholders theory aims at creating value in the long-term.
ReplyDeleteAs pointed out by David Vogel, a shareholders approach advocate, there are circumstances in the reality called market faliures where a manager is forced to face a trade-off between maximizing profit today or being concerned about social matters tomorrow. In these situations, the manager can take into account the social interests, investing resources (subtructing them to the profit mazimization aim), only if he/she has economic incetives to do so, such as taxes. This implies that is the public sector which should align the social interests to the private ones. This approach discharges companies and their managers to take always into account the social well-being reducing everything to a matter of convenience.
Nowadays, and in this sense I agree with Dal Bó and the shareholders theory, we should be driven by a costrained profit maximization which is not only imposed by external rules, such as governmental taxes, but also and mainly by a different culture which is part of the companies. In this sense I'm referring to a typical way of reasoning a la Galbraith: change in organizations can come from outside or from inside. External pressures to change are easier to implement but can be always ampered by internal resistence; internal forces to change are generally more effective but they take more time to be absorbed since they require cultural change. Well, that's the usefulness of the corporate governance debate: creating the basis for a cultural change that can operate from inside the companies to build up a bridge between long-term profit maximization and social well-being concern.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDelete> Friedman's thought is very linear and rational. He looks at every single case holisticaly and confirms his shareholder theory perspective. In the particular case of the electric company in Ohio, he correctly points out that the only responsibilty of the company is to provide electricity to whom pays for it. Ethics rely on this supposition. Then he says that it's up to the entourage of the old man to help him if there are some issues. It's a bit arsh, but true. This is a typical case where business and ethics may conflict. But companies must pursue their corporate goals first of all.
3. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
> This video points out the classical dilemma "a bird in the hand is worth two in the bush". I agree with Lynn Stout on the impossibility to focus exlusively on short term results. In the case of BP it is quite evident: the tremendous and clumsy mistake has been made over 1 milion $/day savings in safety to please shareholders. The damage has gone over 100 bilion dollars according to hestimates. I believe that listed company especially should think twice before implementing cost-saving plans, since so many stakeholders are involved.
4. What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
> I'm more of a practical thinker and never liked very much the theoretical approach of universities (especially italians). The objective of firms was always taken to be "profit maximisation". Even though I believe that also professors didn't believe that. So, when we talk of profit maximisation we talk about shareholders, so I believe this is a trend.
4. Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
> Alitalia is the first example that pops to my mind. Even though there has been a recent improvement thank's to Ethiad Airlines partnership, the company is still going on in a spiral of recession. Business processes and services are out of date, company income is to low to support innovation (which in this case would mean imitation). The profit of Alitalia is unsustainable because of obsolete Governance.
5. Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value.
> An example of useless (non)business entity which does not satisfy a human need is more likely to be found in the startup world. Where entrepreneurs test their products (or ideas) believing they are useful but really aren't.
While an example of one which does not create value can be found simply in the public administration. For example, Atac Roma delivers public transportation in Rome but it doesn't create value. Not economic nore social, since public transportation in Rome is extremely poor.
Author: Marleen Hansel
ReplyDelete1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1 of 2), discuss the strength and weaknesses of the Milton Friedman’s thought
Milton Friedman’s thoughts are about morality and the economic policy and on the implications of what happens, when everybody pursues their own self-interests, profit-making in this case. He was asked about his opinion on the example of an electric company that turned off the electricity of a man who could not pay his bills and died afterwards. According to Friedman, the question about whose fault this was is not very easy to solve. He pointed out, that the electric company is not a human institution but that there are many different shareholders involved (e.g. stakeholders, employees and customers). Furthermore, he proposes the other extreme, what would happen if the company never turned off the electricity? Only a few people would pay for it, voluntarily. Therefore he suggests that the family and friends of the man are responsible since they were not charitable enough to help him. This is where Friedman’s strength of his argument lies in, too. Not only the economy, but also the whole society only works, because there are certain (unwritten) rules everybody needs to follow. It was not the company’s fault who acted in self-interest because of this one person, but because the system would not work otherwise. On the other hand, it is too easy to blame the friends and family for the dead. Maybe the man was too embarrassed to ask for help or he did not think that they would turn it off that quickly and therefore did not ask for help yet.
5. Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
Companies that create an unsustainable profit are those companies that on a longer term view will not be able to survive in the way they operate now. This can have different causes, for instance because of environmental issues or because the demands of the society changes. One example could be the Music industry. Companies who only sell CDs make an unsustainable profit due to high competitive by digital music provider. The number of people buying a CD decreases and therefore the company soo will not be able to make a profit anymore.
1 – After watching the video Youtube 3 (“Milton Friedman on the Self-Interest and the Profit Motive 1of 2”), discuss the strength and weaknesses of the Milton Friedman's thought.
ReplyDeleteDespite being rather a short debate, it comes out with an interesting example. I am referring to the last one, which points out how running a business may sometime contrast with ethics.
The young guy who is making some questions provokes Friedman by arguing the morality of his thought, by stating that, according to Friedman’s line of reasoning, in order for an electric company to pursue its own interests (i.e. profits maximization), it would be legitimated to turn off electricity to whoever doesn’t meet the electric bill, even in case the electricity is the only means to keep this person alive.
Besides the strengths and weaknesses of Friedman’s take, we must acknowledge the consistency of his thought, which, be it ethical or not, never contradicts itself.
The lack of compliance with payments beyond a certain threshold and/or time range allows the electric company to stop providing services.
If this negligent behaviour (i.e. not paying or delaying payments) would get widespread, the financial health of the company risks being put in danger, along with its employees, who risk not receiving their wages in case the company goes short of resources. The company’s reaction to this harmful situation may finally impact over end users as well in the long-run, who will probably have to pay higher bills to offset others’ non-compliance.
Following this line of thought, Friedman would say that the bill must be paid in any case, both to the interest of the company and to the interest of the society as a whole. In case one user is not able to comply with its obligation, social charity should step it to help him not miss the payment.
One can argue and say:” why shouldn’t be the electric company to act charitably?” This question is not that easy to answer.
I cannot take an inflexible position about this issue, but I may say that an act of charity from the company’s side could put the basis for future opportunistic behaviours.
An act of charity like that consists in overlooking a fundamental breach of contract, which easily translates into accusations of unequal treatment from a legal and practical point of view, which can make other users expect the same treatment for related and unrelated reasons.
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ReplyDeleteQuestion (1) Milton Friedman in this video answers to a question.” What are the implications of a situation in which businesses follow just their own interests (namely profit maximization)? The question was related to a case in Ohio about an electric company that following the profit logic (in the opinion of the young guy) caused the death of a person. In the answer of Friedman I do not find the defense of the shareholder theory but just logic considerations, as he argues. On one hand, in fact, the electricity company has an ethic and maybe she would like to light up all Ohio houses, but, on the other hand, she is not a non-profit company, and hence granting electricity for free or at a low costs would lead to losses and in the end to layoffs. To sum I thinks that Friedman logic is correct and that there are not strengths in its reasoning, maybe sometimes profit logic could be less stringent, maybe, in very particular cases, the electricity company could grant payment delaying or credit but what if these solutions would lead to the layoff of the employees or the default of the company itself?
ReplyDeleteQuestion (2) Addressing to the question I think that business should serve all stakeholders but taking into account with a particular interest the firm itself and the shareholders. When I think to shareholders and stakeholders theory I find more complete and exhaustive the stakeholders theory and after Prof. Leland and Prof. Vogel reasoning I continue to think so. They argue that business should be run for shareholders’ interests, on one hand because they are the only one for which a business could be run (the Leland example is very clear in that sense), on the other (especially in widely held companies) managers have to do what shareholders would like because they are managing their money! Well, I think that this cannot always be true, I think that an azienda should try to align its (and also shareholders) interests with the one of the other main stakeholders. I’d like to underline how this (the “overall balance”) should be a goal of each azienda that could also be reached following mainly the shareholders interest.
Question (3) I totally agree with what Prof. Lynn states in the video. She basically argues how bad corporate governance or CoGo too focus on what she calls “shareholders value thinking “, lead to disaster for the azienda itself, environment and society. I agree when she says that business needs to be regulated and hence that the Economy or free market (capitalism) has to be linked to the Law/regulations. In the end, considering the BP example, where corporate governance focused only on short period results, I wonder: is it worth to create non-sustainable value just for the present profit maximization? The BP disaster, in a sort of paradox, caused economic losses instead of increase economic profit (BP share price fell), is it reasonable to cheat and risk?
Question (4) During my academic career here at Tor Vergata, I studied Corporate Governance theory just in the course of Economia Aziendale with prof. Giosi. These theories (shareholders and stakeholders) have been seen obviously in a broad way, as a part that complete the program, but I learned the basic ideas under these theories and their differences. In particular we observed how while shareholders theory is very popular in Anglo-American countries (where the shareholders needs are the most important to be satisfied) in other counties as Germany the stakeholders theory is used in companies mainly because employees are part of the governance of the company, in other words since employees are have a discrete decision power, it is not possible to use shareholders theory.
ReplyDeleteQuestion (5) Without showing a financial statement of a firm, we might make the example of a firm that has a positive but low level of profit! In this case, the profits, even if positive, do not allow the entrepreneur/corporate governance to use profits for paying shareholders, or to maintain them into the economy for example. Another example in my opinion could also be the case in which we have a company whit positive and high profit. The problem here could be if the source of profits does not came from the core activity of the company! If the company has won the lottery it does not mean she is successful!
Question (6)
Useless company because it does not meet human needs a company that sells raincoats or winter coat in the desert. Alternatively, as we actually stated during our lecture, criminal companies! They do not satisfy needs, actually, they create needs through threats!
Useless company because it does not create value: since we know that the value has to be sustainable, we might say from the practice ILVA or every company that makes profit but polluting the environment or makes profit destroying the local culture or wellbeing of society!
The video represents three rather intriguing opinions on whose interests should a company serve more: stakeholders or shareholders.
ReplyDeleteHayne Leland appeared as a shareholder theory supporter, who argues in favour of profit maximization as a priority for a firm, otherwise this firm would work at losses. His opponent, Ernesto Dal Bo, was very effective in contradicting this view by stressing impossibility of ignoring everyone else’s interests besides the shareholders and pursue the “unconstrained profit”. In fact, even M.Friedman acknowledged that profit maximization should be reached complying to the legal and social rules – which is nothing else but taking into consideration the other stakeholders. Finally, the mitigating part (to my mind) was the position of David Vogel, who stressed the fact that we cannot expect firms to completely abandon the shareholders’ interests, and therefore there should be a public body “to align the shareholders’ interests with the ones of the society”.
Out of the two the stakeholder theory appeals more to me, when prior to any decision a firm would have to consider the needs and interests of its stakeholders (customers, employees, suppliers, government etc.). However, throughout our business course we cannot fail to acknowledge the importance of a company’s growth and survival, that is mostly realized through economic equilibrium, profit included. It is natural that shareholders’ primary aim is to maximize profits and the managers’ – to keep this aim in mind. The main task here is to be effective enough to bring the different interests together and minimize negative effect on both sides.
In the end, I would like to refer to David Vogel’s notice, that “we should not rely on the managers’ ethics or the society consciousness”, but also expect the public policy and the government to be a proactive representative of a variety of interests.
Oops, I did not specify the question!
DeleteThe above refers to: (2) After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
:)
1)Obviously according to Friedman’s point of view menagers have to focus on the maximization of the shareholders wealth. Stockholders hire these managerial decision making specialists in order to increase the share price. A company is founded first to generate a return BUT nowdays a company has major responsabilities that cannot be disregarded. Starting from the extreme case showed in the video it’s necessary to try to maximize the “welfare” of everyone involved; it’s necessary that the company acts in respect of its stakeholders ( and it means producing something in a sustainable and efficient way).
ReplyDelete5)The first example that comes to my mind regarding the creation of a unsustainable profit is the Volkswagen’s case, as my colleague has already explained but we can also consider the case of Ikea, the world’s biggest furniture retailer, accused of having destroyed thousands of hectares of old and biodiverse forests (not considering the other scandals in which it was involved too).
1) After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteIn my opinion this video is really interesting. It shows us the two sides of the coin. The guy asks to Friedman the relationship between morality and economic policies. He's going to present "profit maximization" as a horrible goal to achieve. Doing so he makes an example of an old man who dies because of an electricity interruption due to the fact that the old man has not been able to pay his bills. Friedman immediately asks to the guy to see this example from the point of view of the electricity company. If nobody pays the bill or just the volounteers pay, how could the company survive? When we are talking about the company we have to think to all the actors involved with her: employees, customers and all the stakeholders. What about these people? And Friedman gives also another point to reflect on: why the family and friends of the man haven't paid the bill for him? why were they not charitable with him?
In my opinion the only weakness of this speech is that Friedman has not given a clear answer to the guy, but the counter example has been something great because it helps us to see the point of view of the company and of the owner. In society usually the word profit is seen as a dirty word because it is linked to negative images such as exploitation of limited resources, people and acts against morality. But in my opinion the concept of profit has to be referred also to the survival of a company and so to all the people involved. This video gives us an idea of this last meaning and association of the words self-interest and profit.
3) Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteThis video shows us one of the greatest disaster in the oil mining. The speech is made by Lynn Stout. She talks about the disaster of BP oil in the gulf of Mexico in 2010. I totally agree with her, because she states that a short-term focus (such as the one of BP oil management) could bring negative results in the future. This is what happened to BP oil. They have saved 1 million $ a day cutting expenses in plant safety, but they finally lost 100 billions $ in shares due to the disaster. She affirms there is a common shareholder value thinking, so the management usually focuses on short term profit maximization, ignoring future consequences. But as we can see from the evidence a stakeholder point of view can bring positive results in the long run also for the shareholders.
1.After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought.
ReplyDelete> The first thing to notice is that the youngster talking is Micheal Moore, a Master of rhetorical speech. I think that the main strength of Friedman's thought is the adaptability. It's not black and it's not white. Each single circumstance must be treated separately and this is what Friedman does after listening to Moore's arguments. The weaknesses are very difficult to see, but it relies in the fact that no clear answer is given. It's based too much on "ifs" and "buts".
2. After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
> I am more stakeholders oriented simply because it seems clear even to the speakers whom had the responsibility to talk as shareholder oriented people didn't seem very convinced. I believe that general satisfaction of all stakeholders (including shareholders) is the only key towards a successful business.
3. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
> What is there to say? It's an awful disaster and it clearly affected negatively many stakeholders.
4. What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
> Shareholders. At least from what I seem to remember in Roma3.
6) Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value.
ReplyDeleteThe start-up world is full of ideas in this sense.
-KOLOS: was a start-up that created the first racing wheel for iPad. Basically you could insert your iPad in this wheel-shaped support to play racing games. After three years of product development and some 50.000$ spent on it, they felt ready to launch an advertising campaign. They got picked up by many famous websites of the field (Cult of Mac, Yahoo! Games, and so on). They got so many bad reviews they had to retreat completely. Why? There was no need for it. It didn't fix any problem, it was just something nice to have but almost a pain actually compared to the mobility of the iPad.
-"Delight" was a smart idea: a software that shows how people use your app. Basically you buy Delight, you integrate it with your app, you spread your app, people download it, use it and you can visually see through Delight HOW people use that app. It is a potentially interesting source of data! Why did it fail? It didn't give value to the customers: It didn't ANALYSE data, it only gave raw data as output. People didn't really know what to do with them. They should have delivered more value in the form of analysed data: ready-to-use knowledge. I.e. it gave a tool but no consulting about the output.
After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe video is about a young man who tries to challenge the shareholder theory supported by Friedman. According to this theory managers, as agents of shareholders (principals), are expected to satisfy the desires of their principals which often concide with profit maximization. Provided this theoretical approach, the two examples held by the guy in the video seem pretty weak, as a result he fails in his intent of challenging shareholder theory. However, let's focus on the second example since in the first one the young man does not even know about what Friedman actually said about that case.
In his second argument the guy blames an electric company because an old man, who did not pay the bill, died because of lack of electricity. The guy basically states that the company is guilty for the tragedy because of profit maximization orientation. In this context, it's quite easy for Friedman defends his own position. Indeed, Friedman actually accuse the people or istitutions which could have helped the old man, but they didn't. The reasons behind this statement seem clearly understandable: the electric company is a business entity, as a result it operates in a market in which demand and supply meet at a certain price. This mechanism applies in any market in our everyday life. The idea is that if someone needs an important good or service like electricity and cannot afford the purchase, he/she should be helped but not by the business entity otherwise the latter dies. Moreover, we know that business entities need profits to survive over time. As a consequence, if people were allowed to not pay for goods and services produced by business entities they would not pay and these organizations are going to die definitely. In this context, the speech of Friedman makes sense.
On the other hand, even though the video does not show weaknesses of shareholder theory, we can come up with them using the Economia Aziendale theory. In fact, according to this theoretical framework we should use the other way round of reasoning: profit maximization is not the aim of business entities, but it is their condition of survival since their aim should be satisfying human needs. That's why even big companies, pursuing profit maximization, such as Enron, Volkswagen and Parmalat face crises. They do not consider employees, environment, society and so on. This is the main limit of shareholder theory.
3. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteIn this video we see Lynn Stout that uses the environmental disaster related to British Petroleum oil well explosion that occurred in April 2010 as an example to address shareholder theory. That disaster is considered the worst oil spill ever and Lynn explains that the cause was that BP decided to cut safety corners to save one million US dollars daily and according to shareholder theory we might think that this was a good move. Unfortunately, this led the oil well to blow up, eleven people killed and a loss of one hundred billion in US dollars in market capitalization. In particular, Lynn uses the last piece of information to stress the paradox of profit maximization policy. The idea of BP was to cut costs and increasing profit to boost the value of its shares, but the result surprisingly was the opposite. Indeed, because of the disaster, the price of the shares decreased form 60 to 30 $ each in just one month. In my opinion, this is a perfect example to show that sometimes even profit maximization orientation does not maximize value for shareholders. As a result Lynn states that business should aim to "improve our lives" and that it is brilliant in doing that when it is "structured properly".
1. The view that business should pursue self-interest was articulated by Milton Friedman. Friedman is clear: there is one and one only social responsibility of business which is to use its resources and engage in activities designed to increase its profit so long as it engages in open and free competition without deception or fraud. Therefore Friedman is far from supporting immoral business conduct. Enron, Worldcom and Parmalat would still be scandalized from Friedman’s point of view. So what I think it is the strength of Friedman’s thought is that he stands for the pursue of corporation interest (that means profit) but he also specifies that profit seeking is moral as long as it remains within the bounds of law and customs. According to Friedman corporations that deliberately conceal materials that is relevant can be sued for fraud and made to pay very heavy expenses. In other words the pursuit of profit should not be constrained by the desire to exercise social responsibility (i.e. to do good) but by the decision of other individuals whether or not to freely enter risky transactions.
ReplyDeleteConversely what I think it is the weakness of Friedman’s thought is that in this view the company might be missing some opportunities to increase profit by creating positive, lasting relationships with those the company interact with. In addition managers, who just maximize shareholder wealth, can grossly underestimate the damages to long run shareholder value and reputation risk that gets undermined in the public eye.
2. On one hand Prof. Leland and Prof. Vogel speak from the shareholder point of view. Prof. Leland argues that maximizing stock market value is the extension of profit maximization suggested by Friedman. Maximizing stock market value minimize the cost of raising new capital and consequently a lower cost of capital leads to more investments and greater growth. In his view following alternative objectives will raise the cost of capital, lower investments and of course it would make it harder for firms to compete. Both Prof. Leland and Prof. Vogel argue that there are problems in our economy like lack of competition, externalities, public goods, information asymmetries but these are problems that should be dealt with by public policy. In their mind it’s not feasible to ask a company to internalize their negative externalities at a price of undermining their profitability. The role of public policy is to align the shareholders interest and the public interest. For example in the case of climate change, the government is the one putting a tax on fossil fuels, which means that now it makes business sense for a manager to divert resources from fossil fuels into alternative energy.
ReplyDeleteOn the other hand Prof. Dal Bò and Prof. Lyons speak from the stakeholder point of view. Prof. Dal Bò argues that Friedman himself did not say that managers should follow a program of unconstrained profit maximization, instead they should follow a constrained profit maximization program where the constrains are the law and the ethics. One of those relevant ethical constraint on profit maximization is not expropriating others, that basically means internalizing externalities or more broadly put taking into account all stakeholders that might be impacted by managerial decisions. According to Prof. Lyons owners and managers may want to run the company in a way that does well enough on the profit side but also addresses some of the considerations regarding social welfare. Failing to do so the shareholder value may suffer damages in the long run.
I’m personally more stakeholder oriented because I believe that socially responsible actions can bring tangible benefits for the enterprise and its shareholders. Socially responsible actions are linked to business goals, particularly the company’s need to attract loyal customers, productive employees, and enthusiastic investors. In such a case, socially responsible activities simultaneously serve both the interests of the business and the stakeholders.
3. In this video the speaker discusses the consequences of the Deepwater Horizon explosion in the gulf of Mexico. This disaster was an event that affected many entities. Right after the spill BP shares’ value was halved to 30 dollars a share (a loss in BP’s market capitalization of 100 billion dollars). The calamity was not just confined to the reduction in the value of BP shares, BP bonds were downgraded to almost junk bond status. Other oil companies were damaged because after the spill President Obama imposed a moratorium on all drilling in the Gulf. In addition the spill was bad for the tourism industry, the fishing industry, the individuals who owned real estate in the Gulf and for the eco-system itself which will suffer long-term negative consequences. An investigation commission concluded that the ultimate cause of the disaster was BP’s desire to cut proper safety corners in order to save money. This ended up with huge additional costs that hurt the shareholders, the ones the company was trying to create value for. According to the speaker shareholder value thinking drives executives and directors to focus relentlessly on trying to get their share price up in the very short-term at the expense of the shareholder value later on. In the quest to raise share prices companies do what BP did, they cut safety corners, they reduce work place safety, they cut on R&D, they make a bunch of poor decisions in the hope that if things go well they will produce enormous profit and with the belief that if things go poorly much of the loss will be borne by the stakeholders. This is not the case since shareholders were severely harmed too. I believe the BP case shows exactly what are the consequences of focusing just on maximizing stock price. This is also what happened at Volkswagen, as the emissions scandal broke the immediate market reaction made the share price drop sharply, dusting billions from VW’s value. Undoubtedly unethical behavior destroys share value. That is why corporations need to adopt a broader view of the firm and must balance shareholders’ desire for rising earnings with the protection of the interest of the stakeholders.
ReplyDelete4. What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
ReplyDeleteGenerally in academic courses there is no direct mention about the "for whom create value" governance orientation simply because it is not strictly related to what is taught in these courses. Indeed, many courses take for granted that we talk about business entities, that's why, just to make an example, most of the times professors use the concept of profit as the main indicator of value creation. However, each academic course is different and to sharply respond this question we should analyze this issue course by course. Nevertheless, a detailed analysis of all the previous courses goes beyond the aim of this blog, that's why we can make a couple of examples:
- In Macroeconomics profit is not only considered as a performance indicator for organizations but it also defined as the contribution of the private system to the wealth of a country (GDP). Moreover, organizations are rationally considered profit maximizers. On the other hand, economists perfectly know that GDP does not take into account many important elements such as: the impact of production on the environment; the value created by unpaid economic activities; depletion of natural resources and so on. However, the limits of GDP computation are more due to the lack of tools to measure these factors rather than to the laziness of economists. Any science has its own limits and Macroeconomics had its own ones.
- To the other extreme we may quote Supply Chain course. Here, even though profit has a significant importance, practitioners tend to stress the importance of not squeezing those partners of the chain (suppliers and distributors) with which the organization has a critical relationship since preserving a good relationship with a critical partner may be essential for achievement of a competitive advantage.
To sum up, before Corporate Governance course we have had some slight insights about the different orientations that an organization may have in terms of value creation.
2) After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteIn this video there are four speakers: Rich Lyons(the Haas School of Business dean, Berkeley university), Hayne Leland(finance expert), Ernesto Dal Bò(political science and economics expert) and David Vogel(political science expert). Dal Bò support the stakeholder theory, while Hayne and Vogel the shareholder one. The debate is based on three points: market failure concept, the trade-off between efficiency and equity, large vs small firms. Lyons starts talking about the market failure concept explaining there are a lot of externalities (such as pollution a firm produce) that bring to market failure because they are not taken into consideration (private benefit wins against the society ones). Dal Bò assesses it's not possible run a business based 100% on profit maximization, so a 100% shareholder orientation doesn't work. For Dal Bò there are two profit maximization constraints: law and ethics. A company has also social responsability in taking productive decisions. So for Dal Bò each company has to take into consideration a stakeholder view, in order to achieve a very sustainable profit and a long life cycle. On the other hand Leland and Vogel are supporters of the shareholders theory. Leland explains the profit maximization from a financial point of view. He states that profit has to be seen from a time dimension point and it's necessary to reach innovation and dynamics goals. The stock market value is the extension of profit maximization. Vogel is a shareholder theory supporter but he adds a public point of view. He says that public policy is the problem (also Hayne supports this concept) so if there are externalities or failures you have to change the public policy, or better the Government has to change it, so the Government has an acctive role here. From the shareholder view, the shareholders are the only ones who can run the business effectively because they want to recover their investments and they take the risk of the business.
In my opinion a stakeholder orientation is the most appropriate. Companies (especially large ones) involve so many different actors and everyone brings to the organization a contribution. Not taking into consideration all the stakeholders (employess, suppliers, environment, and so far), fostering only shareholders could bring huge disadvantages in the long run, undermining the company survival.
1- In this video, Friedman points out his preference for the Shareholderes theory. In fact, he makes an example of an electric company, where managers have the moral obligation to maximize the profit of the company, for the shareholders, even if an old man can' t pay for the electricity, even if this old man can die. So, on the one hand, Friedman is right to say that the corporation shouldn' t care about the old man, but other people can do it; on the other hand, I think that, in this speech, could be lacking about ethics.
ReplyDelete2- In this video, there are two points of view, one for the shareholders theory and one for the stakeholders theory.
I think that the shareholders theory rationally works because the most important people in doing business are surely shareholders and the managers, in particular, have to satisfy them, but, in my opinion, there are a lot of other things to take into consideration: for example, the morality or corporate social responsibility, which are mentioned by Ernesto Dal Bo in the debate, a strong exponent of stakeholders theory. In this view, there are a lot of other things connected to productive decisions, to satisfy better all the stakeholders interested in the business.
3- In this video, it takes into consideration the morality from a pluralist perspective: the inability to measure changing in morality of the market can ultimately hurt the stakeholders and can caused disasters like the example of pollution in the video. Customers prefer to have to deal with managers who operate with morality (social desires),also, because managers consider employees, customers and risks. Moreover, conflicts/costs can be mitigate if firms respond timely adequately to public sentiment.
4- In my previous studies in economics, the orientation was more on the shareholders theory simply because a large part of courses have rational teaching. But I' m seeing a development in thinking with the insertion of courses oriented to ethics or including all types ofinterests.
2. After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteThe video shows a simulated debate among four members of a panel about whether an organization should create value for shareholders or stakeholders. Two panelists support the shareholders orientation while the others do the same for stakeholders.
- The first speaker is Hayne Lelond who support shareholder theory. His main argument holds that organizations need profit to survive over time and, in doing so, they tend maximize stock value which is considered as the natural extension of profit maximization. Indeed going public allows organizations to lower capital cost and to foster growth. Moreover, he adds that if a firm was ruled by another group of stakeholder rather than shareholder one, that group would not pursue profit maximization and this would lead the firm to “run at losses” especially in competitive industries where margins are low.
- The second speaker is Ernesto Dal Bò supporting stakeholder theory. He points out that we live in a complex world in which not only free market does not perfectly allocate outputs and inputs but also the government is not able to fix this problem. As a result, our society experiences both market and government failure. In this context, he highlights that profit maximization could be adopted only when organizations “do not have a choice” between profit and social goal, as a consequence they should pursue both when they have it. Moreover, Mr. Dal Bò adds something which is surprising about Friedman’s thought. In fact, according to the latter organizations should maximize constraint profit where constraints are law and ethics.
- The third panelist is David Vogel. In maintaining shareholders orientation, he states that the point is not facing the trade-off between profit and internalization of externalities since any organization would rationally opt for the former, but it is “to what extent we may internalize without undermining profit maximization”. According to this scenario, when negative externalities occur (i.e. pollution) the government intervenes, for example, charging taxes on goods (i.e. petroleum) or resources and this governmental action results in a constraint the organizations should operate in line with, trying to maximize profits.
- The fourth speaker is Rych Lyons who provides some general arguments to maintain stakeholder orientation. In my opinion, he say nothing special and his contribution is not as significant as the the one of the other panelists.
In my opinion, the first three speakers provide the debate with relevant arguments, however I stand more by Mr. Dal Bò side since stakeholder orientation is closer, form a theoretical point of view, to Economia Aziendale framework than the shareholder one.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s though
ReplyDeleteThis video concerns the Shareholders Theory of Milton Friedman. In particular, he defends the behavior of the shareholders of an electricity company, which cut off the light to a man, unable to pay the bills anymore. The strenght of this theory is that is realistic, of course there wouldn't be longevity if shareholders spent their money in the firm without returns. Firms would fail and employees or suppliers (as stakeholders) would be negatively affected. The weakness concerns the concept of ethics which involves the objective and the duration of the firm. If the company thought only about the profits, so why does the no- profit companies exist? Moreover the achievement of the profit as the objective of the firm, would lead the company towards a short term perspective, due to selfish and egoistic behavior, covering the interests of the shareholders and not of the business entity itself.
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ReplyDelete2. After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteI saw this video, and what emerges, as usual, is the contrast between shareholder -supported by Leland and Vogel- and stakeholder theory, supported by Ernesto del Bò. It's not a matter of positions among them, the truth is not black or white, for this reason I agree with a theory in which the strengths of both are present (Economia Aziendale Point of view for instance). After watching this video,as far as "whom the business serve" is concerned, I agree with the statement "economics is about incentives" -as Leland says- but the world is going towards globalization, so is important give a social dimension to the enviroment, so protect all the stakeholders involved within and around the firm, through morality -as Del Bò says- and not only relying on laws provided by policy makers - Vogel view- that impose restrictions.
3.Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteI think that there has been a misunderstanding over the last 20 years about what business and public corporations actually serve. The BP case has been affecting the enviroment we live, because they preferred cut the costs of safety corners, increasing the gross margin, but this caused the explosion of the rig. This terrible event shows that the firms can't be only shareholders oriented, both for the business entity itself which may fail due to decreasing revenues for bad brand image, and for the stakeholders itself and the ethics for the world we live.
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ReplyDelete1) I think it's interesting to highlight strengths and weaknesses when Milton and the student talk about the example of the death of a man in Ohio due to the turn off of the electricity. The strength is that, agreeing with Friedman, the company cannot provide electricity even when my customer does not pay me; it is unfair for my investors, employees, other customer and, as Friedman support, my shareholders. On the other hand, conversely to Friedman's thought, the company should not even turn off completely the electricity, therefore i agree on the student perspective that there are other possibilities between these 2 extremes. However, also the Friedman's view about neighbourhood and association could be agreed but it takes away the attention by the main problem of a company which completely "discard" a customer.
ReplyDelete2) Personally i agree with Ernesto Dal Bo and Rich Lyons, although i agree on some aspects discussed by the other. Especially regarding Public Policy. It is true that externalities and other negative effect that company could trigger must be secured and solved by these policies in order to align the interest of both stakeholder and shareholder. However, as Lyons pointed, Government and its policies could fail or not being followed properly, so what happen ? Lyon, go on, explaining that managers in this case have a distorted view based on reputation risk, thus are not willing to face the consequences of long term actions.
Moreover, it is interesting even the view of H. Leland, which support the shareholder theory due to the potential reduction of new capital and so increase in investment as well as growth. I agree partly with this view because it does not consider the effect of this change in value,investment and growth on other stakeholder. Rather i agree with the vision of Dal Bo, looking at the global world as a whole, where every action has a consequence inward and outward, like a "butterfly effect". Eventually, agreeing with Dal Bo and Lyons, it's important to consider all stakeholder because the value of them as active actors is much higher that the value of one of them, like shareholder; the problem is to find the right balance among these interests .
3)In my opinion, what happened with BP Oil in the Gulf Region, it is not just about shareholder theory, rather it's not considering at all the stakeholder. Cutting safety measure in order to save money it is not considering just shareholder but failing in doing business and in this case the consequences have had a big impact on all stakeholder, from the environment to the employee, from the shareholder to the community and so on.
4) Mainly previous course were more focused on shareholder theory so make profit. Maybe because it is easier, from a quantitative point of view, compute it and it is the first thing, from a legal point of view, which come up in mind. However not all courses done where shareholder oriented, some of them included the concept of stakeholder, although there wasn't a clear distinction of WHY a company must choose stakeholder rather than shareholder theory.
5) I would use a recent italian scandal about ANAS, in which top management have been involved in actions of breaking the law, corruption and exchange of vote. There were some of managers that created a sort illegal association exchanging bribes in order to get return with other individual and entities. This an example of failing in create sustainable value, going to ruin first of all the engagement within the community but also all the other stakeholder. This is of course not the first and maybe not the last example in Italy, in which company owned by the State often fail to be fair with their customer\community.
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ReplyDelete1. The first thing to notice is that the youngster talking is Micheal Moore, a Master of rhetorical speech. I think that the main strength of Friedman's thought is the adaptability. It's not black and it's not white. Each single circumstance must be treated separately and this is what Friedman does after listening to Moore's arguments. The weaknesses are very difficult to see, but it relies in the fact that no clear answer is given. It's based too much on "ifs" and "buts".
ReplyDelete2. I am more stakeholders oriented simply because it seems clear even to the speakers whom had the responsibility to talk as shareholder oriented people didn't seem very convinced. I believe that general satisfaction of all stakeholders (including shareholders) is the only key towards a successful business.
3. What is there to say? It's an awful disaster and it clearly affected negatively many stakeholders. The scarse vision of the firm and the lack of foresight made them eager to save money today not thinking of the dramatical consequences later on.
4. Shareholders. At least from what I seem to remember in Roma3. Obviously not always we can be sure since we’ve never been teached to look at firms from this point of view. But in my personal experience, I would say that firm act like they are stakeholder oriented, and in some sense they really want to be, but since firms generally do not produce for humanitarian objectives but to generate profits, they’re orientation is first of all towards shareholders, then if possible towards stakeholders.
5. The first example that pops to my mind is the case of Volkswagen that recently exploded. Since they tricked the gas emissions of their cars, their profits obviously become unsustainable because of the fact that also their revenues automatically become tricked. So here we have a case where their profit is unsustainable because it damages the environment AND society.
6. An example of useless (non)business entity which does not satisfy a human need is more likely to be found in the startup world. Where entrepreneurs test their products (or ideas) believing they are useful but really aren't.
While an example of one which does not create value can be found simply in the public administration. For example, Atac Roma delivers public transportation in Rome but it doesn't create value. Not economic nore social, since public transportation in Rome is extremely poor.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe debate rotates around Henry David Thoreau (American author, poet and philosopher of the 1800) quote: “If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life.” A guy in the audience points out that this thought applied to business would mean that Organizations should only pursue their interest (profit) otherwise people would run away. As a dramatic example, in Ohio an old man failed to pay his bills, so the electric company turned off the electricity and he died. Friedman firmly replied that the real responsibility did not lie in the electric company, as a reiterated behaviour of not cutting electricity to anyone would lead to a society where the only people paying the electric bills would be the one doing it voluntarily. Instead, the responsibility lies in that poor man’s neighbours that should have helped him paying those bills. Friedman’s line of thought is very rational and it can seem cold but nonetheless true. Opportunistic behaviour of people not paying the bills would jeopardize the organization’s existence and its shareholder would bear this burden. In this debate thou, the separation line between business and ethic and morality is very thin and I find it hard to stand for a unique side. It is also true that corporate social responsibility is growing concern for organizations that are continuously trying to create value for both shareholders and society.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteSince it has already been described by others I am not going to talk about the content on the video but to focus on the kind of question has been asked. It's not a concern of a company to deal with the satisfaction of primary needs of people; My personal idea is that a citizen gives up part of his sovreignity to the state and the state should have the duty too garantee basics needs of the individual. In this lockenian point of view the company has nothing to do with the poor man and the state is incharged of providing him the first needs in the case he doesn't have the possibilities to do it by himselfs. So, in this sense, I totally agree with Mr friedman and his ideas. I am focusing on the question because, posed in this way, it shows only the strenght of Milton's thought and not its weakness. It's all about the costs imposed on different individual; why should the company care about that particular person and why should shareholders pay for him or for everyone who doesn't have the possibility to pay the electrical bill?
But what if the question would have been the following: You are a pharmaceutical company and you discover that a drug that you use creates addiction to customers and that, if used for a long-term, it creates dark side effects. Should you retire it from the market and think about individuals health or should you keep on selling it and maximise profits?
This is an extreme but not so far from the reality example on the limits of shareholder theory and profit maximization.
6) Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value
ReplyDeleteBusiness that do not meet human needs: a business that sells umbrellas in a desert
Business that does not create value:for example a business that sells tobacco. It actually satisfies a human need but it is dangerous for the health of customers.
4.What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
ReplyDeleteI think in this days every firms has an objective which means every firms have a reason for their establishment, and the one who establish a firm also has their own objectives, and it’s also true that when an individual or any entity established a firm their ultimate objective is by providing goods and service and maximizing their wealth and increasing their profit. This means what share holder needs it this since the firms are established by the shareholder every firm has to give more attention to his shareholder. Even if the share holder are the owner of the business and every business firms focus on to maximize shareholder wealth without focusing to our other stakeholder can be consider clapping with one hand because in order to have increase the firm wealth and to survive the firm also take it to consideration its other stockholder, so in my view most of today’s firms are both shareholder and stockholder oriented firm.
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ReplyDeleteGive your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteAfter watching who minding the store for the ethics of the corporate governance low, I understand that what professor Lynn A. stout said has absolutely true facts , corporate social responsiveness is a very important thing that an organization can to take in to account even firm aim is shareholder profit maximization there must be there an ethics of corporate governance .so what I understand from bp case is without having a long term negative consequence or inability to anticipate the possible impact they would have on stakeholders by putting off the proper safety measures in order to save money , which is in order to save a million euro they ended up with scarifies a billion of euro this costs hurt their shareholder . so this teaches to other corporation who subscribe to the monotonist view to think about what they can do to make short term profits , which may negatively affect their operations and the long term health of the firm and also it may neglect to consider relevant stakeholders, thus incurring addition cost and losses to shareholder wealth.
1) After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe debate in the video between the young guy and Milton Friedman shows the latter be challenged on the principles of his thought, the Shareholder theory and the profit maximization of organizations. This theory, as Friedman explains, illustrates the situation where managers of a company are agents that have only to maximize the wealth (profits) of the owners, the principals. In the debate, the student ask Friedman to explain his position toward morality and profit maximization using different examples. In the last one, which I think is the most important, the latter asks Friedman his thoughts about a man whose electricity was shut down after bills not paid, which caused the death of the man himself. The student blaimed the company for the action taken, while Friedman says that it wasn't a company's fault, but it was the fault of the neighbors, friends and associations which didn't help the man paying his bills.
My thoughts about this situation, and the shareholder's theory in general, is that while Friedman's theory describes profit maximization as the end, the objective, of a company, we should consider it the mean, the main instrument by which organizations reach the satisfaction of human needs (Economia Aziendale theory). One of the weaknesses of Friedman's theory is that instead of considering only the shareholder's perspective, companies should also focus on maximizing stakeholders' wealth. On the otherside, what we can agree with Friedman, is that we can't complain about the company shutting down the service to people not paying bills, otherwise we would find ourselves in the extreme where the only ones paying bills are those that pay voluntarily. Ending, we can say that the truth lies somewhere in the middle, where companies care, of course, about their customers, but also for their business.
CHAPTER 2 BLOG DISCUSSION
ReplyDeleteThe video is about a young man who tries to criticize Milton Friedman theories by providing one o more examples, the young guy is particularly worried about the relationship between self interest and morality and proposes an extreme example of an old man who died because its electricity has been turned off as he failed to pay the bill.
The guy basically states that the company is guilty for the tragedy because of the company profit maximization orientation. Milton Friedman answered by saying that the guy is blaming the wrong person; as if the electric company follows the practice of never turning electricity off who would have to pay for its costs? Then the only people that would pay the electric company would be volunteers. According to Friedman responsibility lies not on he electric company for turning off the light but on those friends neighbors and associates who were not chartable enough to let the old man pay the bill.
Well the proposed example is an extreme and does not allow us to find out the strengths and the weaknesses of Milton Friedman Theory. On the on hand, by looking at the sole example I will answer that Milton Friedman is right by saying that the electric company is not responsible for the old man death and that the organization cannot follow the practice of never turning the electricity off as, it this case the business it self will be able not be able to survive (and what about shareholders who invested money in it).
However on the other hand, scandals and corporate failures have shown us that profit maximization is not conductive the welfare of community and sometime not even of the firm, thus profit maximization should not be the end objective, of a company, by a mean, through which organizations reach the satisfaction of human needs by producing goods and services.
2.After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteWhom exactly should the business serve? Not an easy question to answer as I think no single right answer exist, one should think about how businesses really work while considering at the broader community that it is affected by or affects such business; I judge my thought to be more in line with the stakeholder theory; I think that that an organization must create value for its stakeholders: customers suppliers employees community and financers as in turn each of these group are important for business success; it must create profits while adopting a socially responsible behavior while responding to the economic, environmental and social expectation of all its stakeholders; using economia aziendale words I will say that in carrying out its activities the business entity must create sustainable profits while satisfying human needs.
3. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteThe question is what do I think about the BP case. Before answering I will like to tell some numbers and facts about the BP disaster in the gulf of Mexico; worst oil spill in history, 11 workers were killed, loss of 1 billion dollar of market capitalization, the disaster affected corporations in tourism fishing real estate sectors in the gulf, it affected other oil companies share price, it was bad for people eating fish for those who lived in the gulf, it was a disaster for the entire ecosystem of the gulf, 2 years later the oil was a still there; the ultimate cause of such a massive scale disaster according to the US commission was BP desire to cut safety measures in order to save money.
But think about the hidden cause linked to BP shareholder view, executives to often think about getting share price up in the short run; companies like BP make poor decision cut safety measures, cut back on customers support reduce R&D expenditures main concern is linked to short term profits, companies resist to long term investments if these harm short term ability to meet earnings estimates fail to make adequate investment, these companies’ main objectives is short term profit maximization which is an unsustainable objective which may ultimately harm their operations and the long term health of the company.
In this scenario then Corporate Governance has an important role as businesses should contribute to social welfare, and improve our lives, organizations’ objective then should take a broader view supported by morality.
4. What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
Previous courses especially corporate finance ones always argue that firms objective is to maximize shareholder’s wealth; as managers are agents oriented toward the benefit of their principals, shareholders, the act on shareholders behalf increasing their wealth by paying dividends and/or causing the stock price or market value to increase.
5. Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
ReplyDeleteProfit must be sustainable in the ethical social and environmental point of view, when talking about unsustainable profit, recent facts, let me think about Volkswagen The German company was found guilty for having cheated pollution emission test.
Volkswagen profit is unsustainable from and ethical point of view due to illegal procedure and more importantly from an environmental point of view as its revenues are linked to products whose engines emitted nitrogen oxide pollutants up to 40 times above what is allowed thereby damaging the society and the environment.
6. Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value
ReplyDeleteIts hard to think about useless business entities manly because these do not survive, how can an organization that produces unuseful products and/or survive, this organization will have no customers, recall the objective an organization is to satisfy human needs. Furthermore I can think about and organization whose value of inputs used in the production process is higher than the value of output produced, thus the company destroys value but again this will be unsustainable in the long run and probably the organization will not have any ability survive and grow.
5. Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
ReplyDeleteProfit must be sustainable in the ethical social and environmental point of view, when talking about unsustainable profit, recent facts, let me think about Volkswagen The German company was found guilty for having cheated pollution emission test.
Volkswagen profit is unsustainable from and ethical point of view due to illegal procedure and more importantly from an environmental point of view as its revenues are linked to products whose engines emitted nitrogen oxide pollutants up to 40 times above what is allowed thereby damaging the society and the environment.
3) Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteIn this video professor Lynn Stout uses the example of the 2010 Deepwater Horizon oil spill scandal from BP to explain the differences between monotonist and pluralist companies. Monotonist organizations follow the shareholder theory objective of profit maximization, while pluralist ones follow the stakeholder theory, creating value for all the individuals that can affect or are affected by the achievements of the organization itself. What is at stake in the discussion is that BP, in order to save operational costs, decided to cut safety corners, which is the ultimate cause of the disaster. In economical terms, Lynn says that in order to save 1 million dollar, BP ended up sacrificing 100 billion dollars of stakeholders' value, causing problems to whoever had a link with the Gulf of Mexico (fishermen, tourists, companies, the ecosystem itself). I think that the main message from this video is the explanation of one of the weaknesses of shareholder's theory, which is short term profit maximization. Many companies nowadays focus their attention only on short term value creation, taking very bad decisions like BP, reducing operational safety, working place safety, or reducing R&D investments, thus increasing stakeholders costs or destroying value. Only considering the long term value proposition, companies can take care of stakeholders interests.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought.
ReplyDeleteIn this video the shareholder theory perspective is supported by Friedman. According to him, the activities of the company is about getting a profit and the economic interest of the entrepreneurs is aimed at maximizing profits. An interesting example was made during the debate. It can show the situation how running a business may be sometimes in contrast with ethics. Moreover, it says about possible consequences of self-interest of the owners of the company that can have on freedom of people. The sample concerns an electric company, which turned off the electricity to the old man, who couldn’t pay his bills (it could later cause the death of this man). Friedman's thought is rational. For the question that he was asked Friedman answered that the electric company company wasn’t responsible for the death of the old man, as the company is responsible just for providing an electricity to those who pays for it. He suggested that neighbours could help the man to pay the bills. But also it could be said that the government should take into account the financial possibilities of different people. Friedman was right saying that if the company would not cut the electricity to those who did not pay for it – it could lead to the situation where “the only people who would pay for it would be those who pay voluntarily”. And as the result the company would fail. It is important to say that the faliure would have bad consequences not only on the shareholders, but also on the employees, customers and on the society.
3.Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”.
In this video the consequences of the explosion in the gulf of Mexico were discussed by Prof. Lynn. The situation with BP Oil that took place in Gulf Region was a disaster that could be treated as the worst oil spill. As it was mentioned in the video it was a disaster for humanity and for shareholders. Moreover, it had negative effects on many stakeholders. The disaster had a bad impact on different industries (tourism, fishing), for individuals and for eco-system. According to the information, the cause was that BP decided to cut safety measure in order to save money, so to cut costs and to increase profit, to increase value of shares. But the results were different, and arrived to the additional costs, oil companies shares were harmed. To take such decisions many aspects have be considered about cost-saving plans. It is important to note that taking such decisions about cutting proper safety corners is considered that corporate governance was focused on short term results. It could serve as the example that focusing just on maximizing of profit could not have always desired consequences. It would be right to say that the business have to be regulated. Market and business can’t exist without law. The speaker mentioned about the “shareholders value thinking“ talking about corporate governance, adding that “shareholders value thinking“ possesses today’s world. In was noted that successful society can’t exist without business sector and that business should be about improving our lives.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe Friedman’s point of view is very interesting because he introduces a crucial notion in the world we live that goes well beyond the simple idea of profit: self-interest. In this case, the element at stake could be identified as the “self-interest motive”. Indeed, according to Friedman, the self- interest is the primary engine for any action pursue by an individual.
The self-interest could be generated by an incentive: the case of Federal discounted flood insurance.
In the case of the discounted flood insurance, it can be stated that the self-interest had been “generated” by the action of the government. Milton is very right arguing against the Federal action, indeed, if there wasn’t any discounted flood insurance for hoe purchasers, people wouldn’t have been built their houses because of a lack of self-interest. However, at the same time we should ask whether a superior self-interest could ever take action (the government) in redeeming the people’s naïve one when opposing against the profit.
The second case is the one of the electric company, and, again, the professor is right. The morality of the company cannot, in this case, put in discussion, since there is not the life of the old man at stake, but also the life of all the people working for the company whose work would be at risk. Then, Milton’s thought is reasonable, although hard to comprehend when looking at the problem without seeing what is behind it. In my belief, a more suitable answer would be that a company providing a service should be interest in providing it, providing it at the best price, and not the one of caring for every single customers’ life or problems: that is not their business.
The last point, in my opinion, is the most controversial. A single life could be not calculated in monetary means, and sometimes it is inestimable. The example of one billion for each life is an extreme one, and although valid, it is inappropriate. We should invest all our strengths in saving one’s life, whichever the cost is. Ford in his calculation is not a ethical company because it indirectly stated that there is an “acceptable” level of life lost.
2. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
In the video, the speaker introduced a crucial aspect of the business that underlined the its real essence that often is miscomprehended: the business is about making our life better.
The example of a company failing to do so is BP during the 2010 Mexico Gulf oil disaster. The company was damaged itself, but it damaged in turn fishing, tourism, other oil companies etc.
The reason is the simplest one, that have characterized in the past several corporate scandals: maximizing the short-term profit at the expense of the long-term.
This way of handling a business is very common between corporations, especially the big ones, and in my opinion is all about greed and lack of foresight.
Indeed, is the greed that push executive to leverage the short-term profit at all cost, even cutting on safety expenses. At the same time is lack of foresight that make the same executives blinds of the costs that specific choices would create in the long-term. The speaker quoted a survey on several executives, where the 85% were ready to sacrifice the long-term profitability in turn of the short one.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe Friedman’s point of view is very interesting because he introduces a crucial notion in the world we live that goes well beyond the simple idea of profit: self-interest. In this case, the element at stake could be identified as the “self-interest motive”. Indeed, according to Friedman, the self- interest is the primary engine for any action pursue by an individual.
The self-interest could be generated by an incentive: the case of Federal discounted flood insurance.
In the case of the discounted flood insurance, it can be stated that the self-interest had been “generated” by the action of the government. Milton is very right arguing against the Federal action, indeed, if there wasn’t any discounted flood insurance for hoe purchasers, people wouldn’t have been built their houses because of a lack of self-interest. However, at the same time we should ask whether a superior self-interest could ever take action (the government) in redeeming the people’s naïve one when opposing against the profit.
The second case is the one of the electric company, and, again, the professor is right. The morality of the company cannot, in this case, put in discussion, since there is not the life of the old man at stake, but also the life of all the people working for the company whose work would be at risk. Then, Milton’s thought is reasonable, although hard to comprehend when looking at the problem without seeing what is behind it. In my belief, a more suitable answer would be that a company providing a service should be interest in providing it, providing it at the best price, and not the one of caring for every single customers’ life or problems: that is not their business.
The last point, in my opinion, is the most controversial. A single life could be not calculated in monetary means, and sometimes it is inestimable. The example of one billion for each life is an extreme one, and although valid, it is inappropriate. We should invest all our strengths in saving one’s life, whichever the cost is. Ford in his calculation is not a ethical company because it indirectly stated that there is an “acceptable” level of life lost.
2. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
In the video, the speaker introduced a crucial aspect of the business that underlined the its real essence that often is miscomprehended: the business is about making our life better.
The example of a company failing to do so is BP during the 2010 Mexico Gulf oil disaster. The company was damaged itself, but it damaged in turn fishing, tourism, other oil companies etc.
The reason is the simplest one, that have characterized in the past several corporate scandals: maximizing the short-term profit at the expense of the long-term.
This way of handling a business is very common between corporations, especially the big ones, and in my opinion is all about greed and lack of foresight.
Indeed, is the greed that push executive to leverage the short-term profit at all cost, even cutting on safety expenses. At the same time is lack of foresight that make the same executives blinds of the costs that specific choices would create in the long-term. The speaker quoted a survey on several executives, where the 85% were ready to sacrifice the long-term profitability in turn of the short one.
1. After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteIn this video at first, guy asks Friedman about the relationship between morality and economic policy and leads that to the assumption that profit maximization cannot be considered as a main objective of an organization. Milton Friedman was asked to explain his point in hypothetical situation. The situation was related to an incident in Ohio about an electric company and a man who didn't pay his electricity bills. Certainly that wasn't profitable for a company and they turned off electricity in his house that caused death of a man. Guy blamed the company in his death; in fact, the electricity company has an ethic and they have to think not only about their profits but also about the consequences of their actions. Friedman`s point here that the guy is blaming a wrong person. He wants to find out who is really responsible in above situation. He asserts that the death of a man, is not a fault of the electric company which turned off the power to his house leading to his death, but it’s the fault of the man`s neighbors, friends and family that they are not charitable enough. Friedman supposes the situation with an electric company that never turns off the electricity for unpayable bills, in this point who will pay a cost then?! The electric company is not human institution there are a stakeholders, employees and the customers involved, if the electric company will apply the policy to never turn off electricity for unpayable bills, the only people who will pay for the electricity would be those who do it voluntarily. And this will lead to failure of the firm and stakeholders would be negatively affected.
2. Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
In this video professor Lynn Stout discusses the consequences of the Deepwater Horizon explosion that took place in the Gulf of Mexico in April 2010 to explain her points of view in what makes business contributed to social welfare, as a main idea of what business is about, what business really is and especially what the public corporation is.
This accident was a disaster especially a disaster for BP shareholders. BP shares have been trading 60 USD a share before this accident and within a month or so afterwards they have been 30 USD a share and total loss of BP was 100 billion dollars in shares value.
That caused a lot of problems not only to BP shareholders but also to other oil companies’ shares as the president Obama imposed a moratorium on all drilling companies on the gulf. This disaster affected companies in tourism, fishing and the individuals who owned the estates in the gulf and first of all the entire ecosystem of the gulf.
And the main question here is how could a disaster happen on such a massive scale? The US government organized the commission to investigate this accident and what they concluded was the ultimate causes of the disaster is that BP cut safety corners in order to save money.
Each day that BP was drilling with safety reduction was costing them one million dollars. So in order to save one million dollars a day they ended up sacrificing a hundred million dollars of shareholders wealth.
The hypothesis of Professor Lynn Stout is that shareholders` value thinking drives executives and directors to focus relentlessly on trying to get their share price up in the very short-term.
This disaster should show to other corporations who subscribe to the monotonist view to think about what will be the consequences of focusing on making short term profits. But again in quest to raise share price we see companies do what BP did. They cut safety corners, they reduce workplace safety, they cut back on customers support and they reduce expenditures on R&D, which negatively affect their operations and the long term health of the firm, thus incurring additional cost and losses to shareholder wealth.
My opinion after watching is Friedman signalizes his priority from the Shareholderes theory. In other words, he provides good example of an (electric company), wherever managers have the moral commitment to increase the benefit of the company, for the shareholders, even though if an old man can’t pay for the electricity, even if this old man can die. So, on the one hand, Friedman is right to say that the corporation should care about the old man, but other people can do it; on the other hand, I think that, in this speech, could be lacking about ethics.
ReplyDelete2- This video shows, there are two important fact should be consider, one for the shareholders theory and one for the stakeholders theory. To my opinion that the shareholders theory logically works because the most important people in doing business are convinced shareholders and the managers, must satisfy them, although, there are a lot of other things to take into consideration: for instance, the morality or corporate social responsibility, which are mentioned by Ernesto Dal Bo in the debate, a strong exponent of stakeholders theory. In this view, there are a lot of other things connected to productive decisions, to satisfy better all the stakeholders interested in the business.
3- In this video, it gives into attention the morality from a pluralist view: the incapacity to extent conversion in morality of the market can ultimately hurt the stakeholders and can caused disasters like the example of pollution in the video. Customers prefer to have to deal with managers who operate with morality (social desires), because managers consider employees, customers and risks. Moreover, conflicts/costs can be mitigate if firms respond timely adequately to public sentiment.
4- Far as I know, shareholder theory so make profit in other words, it’s not so difficult, calculate it and it is the first thing, in legal view, which show up in mind. However not all courses done where shareholder partial, some of them includes the concept of stakeholder, although there wasn't a clear distinction of WHY a company must choose stakeholder instead of shareholder theory.
4. After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?” discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteIn this Oxford-style debate, Professors Ernesto Dal Bó and Dean Rich Lyons speak from the stakeholder point of view, while Professors Hayne Leland and David Vogel champion shareholders theory, in running an organization
Three topics are the common ground of this debate: market failure (welfare economics), trade-off between efficiency and equity and large vs small firms.
Hayne Leland emphasizes the importance of profit maximization in the sense that profit is not a goal among many others to be reached, but the economic goal through which economic well-being is promoted. Talking from a financial point of view, maximizing shareholder value in a multi-period word has to bring two key elements: time and uncertainty (risk). Maximizing stock market value for Hayne is the extension of profit maximization as the cost of capitals falls while investments and grow increase. Reasoning per absurd, Hayne points out that if any other stakeholders other than shareholders would run a firm, it would not be carried out in the most optimal way and with less incentives.
Professors Ernesto Dal Bó responds to Haynes, saying that people do have a choice and they are not forced to maximize profit otherwise they would operate at loss and be driven out of business in the long-run. As we are living in a word where market failures and government failures exist, the only way to carry out a business is to internalize the externalities and act in a utilitarian way for all stakeholders. Dal Bò concludes adding that Friedman placed two “big” constraints on profit maximization that most people forget: Law and Ethics.
ReplyDeleteDavid Vogel discusses Modern Corporate Responsibility. He starts by stating that the best way to maximize shareholder value is behaving responsibly: there is no trade-off between the two of them. Unfortunately, Vogel continues, there is no empirical and evident proof that this is true. It is not true that the most responsible organizations are the one maximizing profit the most, but there is also no proof that most profitable organizations are the ones least responsible. This means that managers do have discretion. However, whenever a trade-off between responsibility and profitability does exist, there are no managers that are expected to abandon the interests of shareholders in the pursue of other values. The role of public policy is to change the incentives of managers to align the interest of shareholders and managers.
Lastly, Dean Rich Lyons concludes the debate discussing the government failures. Eliminating the separation between ownership and control, people would theoretically want to run their business in a way that is stable on the profit side and also creating value for all the other stakeholders.
My personal opinion is that the focus of an organization should be oriented towards all its stakeholders. Every organizations live in an environment and it is affected by all the actors in that same environment. Excluding part or even all of them would be a crucial mistake, that I do believe in the long run will jeopardize the organization stability and life. Every single force reflected on the organization should be taken into account when planning head, especially when talking about corporate social responsibility.
1) In this video, M. Friedman is told by the student to be a defendant of capitalism, because capitalism tend to provide benefits to him and to other well being personality like him. The student then asked why F. was convinced that the corporations have to not think to anyone else (the external society) good but pursue personal interest: profit. Friedman response to this is that he tends to not trust people who try to “doing him good” he “would run for his life”. That’s a point of view pretty un social in my opinion. This because from a corporate point of view the needs and wants satisfaction are the fundamental points of the goods and service supply by the companies, so the firms’ main objective is to deliver benefits to customers, of course under payment of the price.
ReplyDeleteAbout the question that nuclear power plants insurance, Friedman said that the companies that runs the plants have to pay themselves their insurance, not the government. By so, the Country’s expense can decrease and that means a potential lower tax rate to the society. I think that this point of view is taking care of the whole society and not only to corporate interests and I personally agree with him on that answer.
When F. was asked about the The Ohio state man who could not pay the electricity bills and so he died because he was ill. Friedman thought that the responsibility is not relying on the electric provider company, but on the people that was near the people that were not so charitable. This point of view is highly subjective in my point of view. Being charitable in my opinion is not only helping people we know, but also people we do not know personally. On the other hand, his taught about the possibility that the electric corporation could not ever cut the electricity to non-paying customer can impact the corporate employees. I think that from a corporate point of view this is also true, but I consider that taking a decision in the middle between the two extremes (cutting electricity in that case or never doing it) could be taken by the company.
3) This video is about the ethics behind the performing of the business. The starting point of the discussion is the role of business to improve social wellness. The BP Case of 2010 when a company’s drilling plant in Mexico gulf exploded is taken into account. The result was more than ten people as well as ruining almost permanently the environment near the plant. On the corporate side, the BP’s shares value declined as well as the other oil and gas companies due to the President of USA claims of new regulamentations about oil drilling that implied new technologies to be adopted by the firms. The oil spilled out of the damaged plants ruined the whole natural ecosystem of that site and is thought to have long-term negative effect on it. A federal investigations found that the cause of the disaster was that BP cutting costs activity on the safety procedures of drilling by advantaging the companies performance and by so the shareholders value. The “shareholders thinking” is condemned here as a long-term negative activity that is based on pursuing short term strategies. I agree on the point of view of the speaker, because I have a predominant “stakeholders perspective”. I do believe that the optimal performances of a firm are conducted whereas all the people directly and indirectly impacted by the company should perceive benefits or at least never being damaged by it. By so, an opportunistic behaviour should be aways avoided even if it could lead to few people wellness and better companies performances and its relative value.
Question n°1 : After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe video concern the trade off between the Ohio azienda main goal (efficiency and profit maximization) and morality. Friedman, as Head of a Corporation, supported the choice of the Ohio company to pursue its self-interest and turn off the electricity of a man who was not able to meet the bill.
Friedman rejects the stakeholders view and the social responsibility of the enterprise from the economic and ethical point of view; the ultimate interest according to which agents have to work is that represented by shareholders.
According to the economist, if we have to blame someone for the man’s death than we should look at his neighbours and friends who were not sympathetic enough to help him in paying the bills.
On one hand his thought is witty and clear, but on the other hand it overlooks the ethics and CSR. Nowadays a company can no more solely pursue its own interest, and even if it’s not economically advantageous in the short-medium run, the stakeholder dimension cannot be omitted: the aim is to create value in a sustainable and efficient way for whoever is concerned.
Question n°4 : What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
ReplyDeleteEven if in my Bachelor I have never encountered a very specific course on such topic, the latter was always treated, especially during Economia aziendale lectures. The aim has always been to give us the “overall picture” of the azienda, making us understand that even if we are likely to become entrepreneurs or CEO’s, hence we are prone to pursue the profit maximization goal, we should not ever overlook the other stakeholders (employees, environment, Government and so forth).
According to me the shareholder theory is predominant in the current economic thinking of a firm whereas the stakeholder dimension is outclassed ; this is easily confirmed by all the economic crack-ups and scandals such as Enron, WorldCom, Parmalat, Volkswagen, Ilva, Eternit..etc.
Question n°5: Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
ReplyDeleteOne example of unsustainable profit company could be the Nokia business case.
Not long ago, it was the world’s dominant and pace-setting mobile-phone maker; nevertheless it was not able to compete against Apple and Android in the smart-phone era.
Paradoxically Nokia was the very first mobile industry that came up with a smart-phone and that built a prototype of touch screen.
Huge amount of money has been invested in R&D, however they were not able to translate all that R&D spending into products that customers actually wanted to buy.
Finally they weren’t able to develop an efficient and updated software since they underestimated its importance in comparison with the hardware part.
Question n°6 : Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value.
ReplyDeleteWe can think about several examples of useless business entities that do not meet human needs such as a luxury automotive industry whose end market are the Sub-saharian African countries, a food industry that want to sell its pork products in a Muslim country or finally an ice producing firm that sells in North Alaska.
On the other hand useless business entities that satisfy human needs without creating value are firms that exploit child labour and slavery or industries that damage the environment.
1) After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought:
ReplyDeleteIn this youtube video we have seen Milton Friedman being questioned by the university student on profit and self-interest. At a first glance is it possible to notice the high degree of hostility between the student and Friedman. In my opinion, the most interesting question made by the student regards the case of the old man, who could not afford to pay the electric bill. Thus, the electric company cut off the electricity and he died. In Friedman's view, if an electric company does not turn off anybody's electricity, nobody would pay the bill. That's the free-rider problem, because individuals have no incentive to pay. The economist said that the death of the old man was not the fault of the electric company, the responsibility should be of his friends, neighbors and associates, who should have helped him. The “extreme” hypothesis made by Friedman may be considered at the same time a point of strength and a point of weakness. He is right saying that the company has to do its work, but on the other hand I think that the weakness of Friedman's thought is that he should consider also the government. Another option could be an agreement between the company and people who cannot afford to pay. For instance, I have found that in the UK If you’re struggling to pay your electricity bills, you should tell your supplier that you want to pay off your debts in instalments as part of a payment plan. You will pay fixed amounts over a set period of time, meaning you will pay what you can afford. (https://www.citizensadvice.org.uk/consumer/energy/energy-supply/get-help-paying-your-bills/struggling-to-pay-your-energy-bills/)
1) After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought:
ReplyDeleteIn this youtube video we have seen Milton Friedman being questioned by the university student on profit and self-interest. At a first glance is it possible to notice the high degree of hostility between the student and Friedman. In my opinion, the most interesting question made by the student regards the case of the old man, who could not afford to pay the electric bill. Thus, the electric company cut off the electricity and he died. In Friedman's view, if an electric company does not turn off anybody's electricity, nobody would pay the bill. That's the free-rider problem, because individuals have no incentive to pay. The economist said that the death of the old man was not the fault of the electric company, the responsibility should be of his friends, neighbors and associates, who should have helped him. The “extreme” hypothesis made by Friedman may be considered at the same time a point of strength and a point of weakness. He is right saying that the company has to do its work, but on the other hand I think that the weakness of Friedman's thought is that he should consider also the government. Another option could be an agreement between the company and people who cannot afford to pay. For instance, I have found that in the UK If you’re struggling to pay your electricity bills, you should tell your supplier that you want to pay off your debts in instalments as part of a payment plan. You will pay fixed amounts over a set period of time, meaning you will pay what you can afford.
4) What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
ReplyDeleteDuring my bachelor's degree in Tor Vergata University, I have studied these theories within the “Economia aziendale” and the “Economia e gestione delle imprese” courses. But I think that in many other courses I have studied those concepts implicitly. For instance I still remember the “Mayo” motivation theory studied within “Organizzazione Aziendale”. Mayo said that motivation was improved through making employees feel important, giving them a degree of freedom to make choices and acknowledging their social needs. In my view, Mayo's theory could be related to Freeman's thought. Stakeholder theory says that the company should create value for its customers, suppliers, employees, communities, shareholders and banks. The idea of the stakeholder theory is that the relationships among the company and its stakeholders will affect company's survival and development. Thus, if we take into consideration employees as stakeholders of the company, the higher their motivation, the greater will be their performance and therefore the performance of the company. Furthermore, during the course of “Macroeconomia”, I have learnt that households are economic agents along with companies, government and intermediate bodies. According to Keynes, an increase in production increases consumers’ income, and they will spend more. This additional spending will generate additional production, creating a continuous cycle. It is important to underline that the higher the income, the lower the marginal propensity to consume. Thus, companies should be responsible not also for shareholders, but also for employees, communities and other stakeholders, in order to prevent negative macroeconomics events that, in turn, will affect company's performance. Finally, in the “Economia e gestione dell'innovazione”, I have studied the relationships between firms within the supply chain. Supply chain members should share access to system and knowledge and should cooperate in order to appear a unique organization. This means that stakeholders are always involved in decision making and need to play a role due to their inter-relation with the company. To sum up, I would argue that firms are more oriented to stakeholders. As we have seen, the stakeholder theory proposes bilateral relationships between the firms and its stakeholders, based on exchange of inputs of stakeholders and outputs of the firm.
(1) The video "Milton Friedman on Self-Interest and the Profit Motive" is based on a dialectical discussion between Friedman himself and a student who is clearly against Friedman's position. This particular type of interaction between the two, gives us a clear picture about the strengths and the weaknesses of the shareholders' theory. The student starts accusing Friedman of having come against disaster aid for victims of a flood in Pennsylvania. But Friedman corrects him saying that he is not against Private aid but against the Federal Governance providing in advance discounted flood insurance to home purchasers which motivated them to build in a dangerous area at risk of floods. Friedman explains that it has been against people's interest. As a second point, the student arguments the story of an old man in Ohio who has died when the electronic company turned off his power because he did not pay the bill. Was it moral for the company to act in its self-interest? Friedman makes him notice what would happen if the electronic company never turns-off power to anyone. Who would pay the costs, the people who work for or own the company?
ReplyDeleteFriedman concludes affirming that charity belongs to HUMAN ENTITIES, to private actors and not to the government or to business organizations. We can summarize as follows the strengths and the weaknesses of the Friedman approach. Among the strengths we find that there is no distortion in the Economic activity implementation. In fact, Friedman believes that social responsible activities deviates economic freedom because shareholders are not free to decide how to spend their money and how to maximize profits. So a pros of this approach is that, excluding social orientation, it's possible to reach profit maximization and economic efficiency. However, on the other side, this approach has many weaknesses, such as the absence of the "Corporate Social Responsibility", ethics and morality issues. These are clear limits, and many practical cases in business are the evidence.
(3) I think that the video "Who's Minding the store? The ethics of co.go." is really interesting. It starts saying that the concept and the idea of the free-market is an oxymoron: in fact, the market is not free at all from the moment in which the strongest powers take it all. So there is the necessity of business and law for its existence. In general, business contributes to social welfare if it is properly structured. But to structure it properly we have to know what business actually is, and recent years events have shown that too often we don't know it. We can find out two main schools of thought about "social duty" in corporations: the "monotonist", recognizing only the duty of profit maximization; "the pluralist" considering the morality in the market.
ReplyDeleteThere are, unfortunately, too many cases of monotonist approach. A famous example is the one of British Petroleum (BP). In 2010, a BP oil drill exploded in the Gulf of Mexico, becoming the worst oil spill in the human history. It has been a real disaster not only for all BP's stakeholders (especially for the environment) but also for the shareholders themselves: 100 billion dollars lost in market capitalization; the BP bonds under-classified at "junk bonds". This example makes clear that reducing the investments in proper safety measures and R&D to save money, ends up with catastrophic additional costs. This a valid thesis in the "shareholder vs. stakeholder" debate. The BP case highlights how destroying value for the stakeholders, also the value for the shareholders is dramatically damaged.
(4) In many courses during my bachelor degree at Tor Vergata I have found the concept and the dichotomy shareholder vs. stakeholders orientation. An example is the course of "Economia e gestione delle imprese" in which the issue was central. Many business case studies have been presented as "shareholder" oriented, but with the increasing necessity of a change of direction towards a stakeholder orientation. Another course dealing with this issue is "Economia e gestione dell'innovazione". Here the involvement of all the stakeholders of the firm was seen as the basis for the evolution of the firm and to foster innovation itself. For example, involving the customer and the suppliers in the final product creation is possible to innovate it and also to increase the value delivered. The stakeholder approach was present also in other courses. In general, I have had the impression that it is a recent approach compared to the shareholder one. The themes of environmental sustainability, for example, has become increasingly important after recent years disaster. Also considering the environment a stakeholder of the firm is something new.
ReplyDelete2) From the video emerges that the shareholders theory explained by Friedman has as main goal the maximization of profit for shareholders, sometimes against the corporate responsibility
ReplyDeleteOn the other hand, Freeman with the stakeholders theory explain that, focusing on people (customers, suppliers, employees) as well as on environmental and social responsibility is essential to maximizing profit for shareholders. He thinks that is Friedman was alive he’d be a stakeholder theorist and agrees with him.
In my opinion the crucial point is the time orientation of the business. The shareholders theory is limited in the fact that it seems to have a look just in the internal environment of the business. Despite the owners' reward has to exist, otherwise there will be no investment in the market, in a long term orientation the only way to have continuos profits is the satisfaction of stakeholders (widely intended) needs. Instead taking into account short term perspective, we could find many examples of companies born just to make profit and disappear in no more than a year.
3) The main point is that the market and business can’t exist without law. An example of mistake in businesses management is BP oil spill in Gulf of Mexico. The thesis of the professor Lynn is that thinking-focusing on rising share price in the short-term (for example: cutting on R&D, safety, etc.), may negative effect the operations and the long term wealth of the company. That is what happened: there was a disaster to BP shareholders (reduction of 50% of share price) and also it damaged other industries operating in the gulf; (tourism, fishing, etc). As the investigations revealed, the main cause, was BP’s desire to cut safety corners to save money ($1 million per day).
From that emerges the concept of Corporate Social Responsiveness, as the ability and readiness of a firm to respond to stockholders. Must measure changing morality in order to not hurt shareholders.
Q: After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought.
ReplyDeleteA: Even if it has been already discussed in the previous posts by the others, I cannot go on without mentioning the examples highlighted in this ironic and interesting debate between the young guy and Milton Friedman. Concerning Friedman’s take, the main point is when he is asked to make his position clear about the connection “ethics & profit maximization” in the example given. Here it seems quite easy for Friedman to explain and support his position, since in order for the electric company to survive and make profits, they would be justified to turn off the electricity to whoever doesn’t pay the bill, even if electricity means life for that person; otherwise , agreeing to this charitable deed for “everyone in poor condition”, the company would fail in the short-term. So I think the main strength lies in the clearness of Friedman’s words and advice about looking at this issue from others point view (that is from actors of the company itself ’s p.o.v. or the family and friends of the poor man’s p.o.v.). As to the weaknesses , I actually have not found a specific one since I do not think this example really suits the topic at issue, where the young guy is trying to challenge the Shareholder theory supported by Friedman.
Q: After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
A: Here when listening to all the speakers about these two different theories, the only main point from where they should be easily distinguishable one another seems to be the time.
According to me, stakeholder theory should be liked most aiming at creating value in the long term. Also considering the previous question, issues such as social well-being, ethics and public institution, are and could be much more considered in the stakeholder theory, in fact here long-term orientation (and so long-term profit) come into contact with a trade-off between ethics and maximization of the profit.
Q: Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteA: A clear and eye opening video about the Mexican Gulf disaster caused by British Petroleum, revealing the company’s non-compliance with safety standards so that shareholders could have maximized their short-term returns. Consequences involved seriously both the environment and company’s shareholders and stakeholders.
Q: What did you learn from the previous courses (in “Tor Vergata” or other Universities)? Are firms oriented to the shareholders or stakeholders?
A: During my studies in economics, I have always been taught that in taking one decision I have to account of all the effects such decision has over the stakeholders affected by itself. Furthermore, when taking any kind of decision, from a practical standpoint, we have not total leeway since our choices are to some extent affected by others, be them the contexts where we operate or be them people we interact with. For this reason I would dare to say that I am more stakeholder-oriented than shareholder-oriented, as shareholders are just one of the several different kinds of stakeholders that can affect or can be affected by my undertakings.
Q: Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
A: As one of the most known and close in Italy, Ilva S.p.a. would suit the case. For a too long time the use of old and irregular tools, machinery and equipment has brought to a serious disaster both for the environment and people’s wealth, because of the continuous harmful emissions.
1)After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought.
ReplyDeleteIn the video Friedman states the main concept of the shareholder theory: the objective of the firm is to maximize the profit.
The objections proposed by the student help to analyze which are the strengths and the weaknesses of the Friedman's thought.
The guy contests the maximization of the profit as the objective of the firm making the example of the old man died because the electric company turned off his power when he'd failed to pay the electric bill. Regarding Friedman the task of the firm is the pursue of the self interest and not the care of the collectivity.
In answering to the student, Friedman asks what would happen if people knows that the firm is responsible for the state of health of those who live in the apartment in addition to providing electricity. He says that if everybody knew this policy of care, no one would have an incentive to pay the bill.
In a situation like the previous one acting in accordance with the principles of shareholder theory would limit the behavior of free-riding. This could be a strength of the Friedman's thought.
The weaknesses of the Friedman though could be evident in applying the principles of the shareholder theory in a firm that involves in its business directly or indirectly the risk of people's life. The student contests in the example of Ford that the firm decides not to install a $13 block of plastic which would prevent it's Pinto cars from exploding in a rear-end collision. What would happen if an airline company were to follow only the maximization of the profit in providing its services? Or even worst if it were a drug company?
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ReplyDelete3) Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
ReplyDeleteIn this video there is first an explanation on the two schools of thought on the duties of Corporate Governance: Monotonist and Pluralist. For the former, corporation's duties are linked with shareholders' profit maximization, thus oriented to short-term, while the latter is related to the stakeholder theory. In my view, the most interesting part of the video is the story of the BP's Deepwater Horizon oil spill. Indeed, in 2010 the initial oil rig explosion in the Gulf of Mexico killed 11 workers and injured 17 others. The oil rig burned up for two days before finally collapse into the depths of the Gulf. This is the largest accidental marine oil spill in the history of the petroleum industry. The U.S. Commission has found that the ultimate cause of this disaster was the desire to cut safety corners, in order to save $ 1 million a day. Unfortunately, they ended up sacrificing $ 100 billion in shareholder wealth alone. It was (and already is) a disaster for several actors, such as:
- BP shareholders (affected by the decrease in the value of the shares and several losses)
- BP bondholders (owners of junk bonds)
- other corporations that were seeking oil in the Gulf of Mexico
- corporations that were in the tourist industry and in the fishing industry,
- owners of real estate in the Gulf
- animals
In my opinion too often companies are focused only on the short-term and do not think to possible negative consequences in the long-term. In this example BP's, has decided to cut safety corners, thus to reduce workplace safety. In order to save money they faced additional costs that hurt their shareholders, as well as the whole community. As we have seen, it was not only a damage for who had a “stake”, thus an interest, in the firm. It was a damage also for who was employed in tourist and fishing industries.
+ After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDelete− This video is about a case that in Ohio there is a man who couldn’t able to pay the electric bills and electric company turned off the man’s electricity and the man died. The person who asked the question blames the electric company and thinks about there can be more options instead of turning on or off the electricity. However Milton Friedman thinks about if electric company turned on the man’s electricity, most of the people take this as an example and they don’t want to pay their bills as well. Moreover he blames the man’s friends, family and neighbors because of they didn’t help him. I think that Friedman is right in some thoughts but I wanted to believe other options. Maybe electric company could hire him for a job or government could help him.
+ Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society)
− For example, petrol companies because fossil fuels are finishing day by day and they are harmful for environment. That’s why there is research for electric cars. In the long-term cars will shift to electricity over petrol.
+ Find two useless business or non-business entities: One should be useless since it does not meet human needs, the other because it does not create value
o Useless business: cassette producers, it was a great job 20 years ago but nowadays it is not a good idea because of the technology, they are unnecessary now.
o Non- business entity: newspaper publishers, nowadays majority use internet for reading news, that’s why print media doesn’t bring as much income.
1) He is not in favor of Government’s subsidies and he is not a conservative. He promotes freedom in the market. This kind of approach of course stimulates the market in order to find new ways to create value and to solve on its own the problems. However this kind of approach can be considered positive only talking about people that are in the condition to stay “inside” the market. The ones that cannot, even because of different initial economical possibilities, are cut outside of it in a logic that sometimes seems to be too much egoistic. To conclude, a strength point would be the possibility to stimulate the market to be “self-sufficient”, a weakness would be that it does not consider all those that do not have the possibility to participate.
ReplyDelete2) The long debate has been going through mainly the two side of the coin: the shareholder position and the stakeholder one. The speeches that I preferred, are the ones of the Hayne Leland and the one of Ernesto Dal Bo’. Starting from the one of Leland, he shows a really emphasized shareholder’s theory point of view. He suggests that taking into consideration the two aspects of dynamic and innovative world, only through the shareholders’ prioritization it is possible to let the stock market value grow, let the cost of capital fall so at the end increase the amount of investments allowing the growth . He underlines that the problems in the economy are the lack of competition, the asymmetric information and the presence of public goods. At the end of the debate, moreover he strictly suggests to focus on the U.S. market point of view and doing in that way, underlying the concept of incentives that of course “push” to assume some kinds of behaviors. The other speech that captured my attention and that moreover represents “the side of the coin” I agree with, is the one of Ernest Dal Bo’. He underlines the concept of “choice” that each one has. He reports the example about some entrepreneurs that say: ”what I do, adds value” showing in a positive way non-egocentric point of view of them. He clarifies what said by the Friedman’s article underling the concept of profit maximization through constraints: profits and ethics. In particular he is a professor in the Haas Berkley University of California of Ethics and underlines a lot this aspect that sometimes it is taken into consideration in an improper way. At the end of the debate he says moreover that morality is a “superior good” and that should be the way the people should tend to. I strongly support the stakeholders’ theory even if the shareholders’ one seems to be more attractive and positive in the long-term point of view, as it has been described by Leland. Following the Friedman’s article (that from Leland was “contextualized”) as suggested Dal Bo’, that is the way of Profit Maximization, thinking about the profits but taking into account the ethics as well. I would personally suggest an example. I am not against the smokers, I have been for a while as well but, now as a student I should take into consideration the opportunity to apply for one of the firms that produce cigarettes to find a job. My ethics suggests to do not support a business that at the end kills people. So even if I could have an opportunity to find a job I have discarded it “a priori” in order to follow my ethic. Now taking into consideration the workers of that firm and having in mind an example of the interviewer of the YouTube video number 3, how should they act? Should they leave the job, should they work more in order to contribute to the profits maximization of the firm, knowing that the more cigarettes they sell, the more people will die one day? That is controversial but if the ethic would be considered maybe a lot of the industries would not still be alive.
3) What happened in the Gulf of Mexico is something that cannot be described under the ethical point of view for the damages they made. What is it underlined by the speaker, talking about the U.S. consultancy firm’s survey over the opinion about an investment that would guarantee in 3/5 years positive results cutting the actual quarters’ profits for the shareholders, showing that the 85% of the CEOs would not do the investments, represents maybe an extreme case but of course, shows an important kind of approach to the business that the majority has. The shareholders’ value thinking, as said by the speaker, is one of the causes of the disaster. I strongly agree with this point. Thinking about the shareholders’ value maximization would bring to a point in which some aspects that are fundamental at the beginning, would be considered useless at the end and that is the scary point: how the orientation of a firm can change even some objective priorities in order to reach the pre-fixed goal that mainly is connected to the possibility to get higher profits in the short-term.
ReplyDelete3) What happened in the Gulf of Mexico is something that cannot be described under the ethical point of view for the damages they made. What is it underlined by the speaker, talking about the U.S. consultancy firm’s survey over the opinion about an investment that would guarantee in 3/5 years positive results cutting the actual quarters’ profits for the shareholders, showing that the 85% of the CEOs would not do the investments, represents maybe an extreme case but of course, shows an important kind of approach to the business that the majority has. The shareholders’ value thinking, as said by the speaker, is one of the causes of the disaster. I strongly agree with this point. Thinking about the shareholders’ value maximization would bring to a point in which some aspects that are fundamental at the beginning, would be considered useless at the end and that is the scary point: how the orientation of a firm can change even some objective priorities in order to reach the pre-fixed goal that mainly is connected to the possibility to get higher profits in the short-term.
ReplyDelete1) He is not in favor of Government’s subsidies and he is not a conservative. He promotes freedom in the market. This kind of approach of course stimulates the market in order to find new ways to create value and to solve on its own the problems. However this kind of approach can be considered positive only talking about people that are in the condition to stay “inside” the market. The ones that cannot, even because of different initial economical possibilities, are cut outside of it in a logic that sometimes seems to be too much egoistic. To conclude, a strength point would be the possibility to stimulate the market to be “self-sufficient”, a weakness would be that it does not consider all those that do not have the possibility to participate.
ReplyDelete2) The long debate has been going through mainly the two side of the coin: the shareholder position and the stakeholder one. The speeches that I preferred, are the ones of the Hayne Leland and the one of Ernesto Dal Bo’. Starting from the one of Leland, he shows a really emphasized shareholder’s theory point of view. He suggests that taking into consideration the two aspects of dynamic and innovative world, only through the shareholders’ prioritization it is possible to let the stock market value grow, let the cost of capital fall so at the end increase the amount of investments allowing the growth . He underlines that the problems in the economy are the lack of competition, the asymmetric information and the presence of public goods. At the end of the debate, moreover he strictly suggests to focus on the U.S. market point of view and doing in that way, underlying the concept of incentives that of course “push” to assume some kinds of behaviors. The other speech that captured my attention and that moreover represents “the side of the coin” I agree with, is the one of Ernest Dal Bo’. He underlines the concept of “choice” that each one has. He reports the example about some entrepreneurs that say: ”what I do, adds value” showing in a positive way non-egocentric point of view of them. He clarifies what said by the Friedman’s article underling the concept of profit maximization through constraints: profits and ethics. In particular he is a professor in the Haas Berkley University of California of Ethics and underlines a lot this aspect that sometimes it is taken into consideration in an improper way. At the end of the debate he says moreover that morality is a “superior good” and that should be the way the people should tend to. I strongly support the stakeholders’ theory even if the shareholders’ one seems to be more attractive and positive in the long-term point of view, as it has been described by Leland. Following the Friedman’s article (that from Leland was “contextualized”) as suggested Dal Bo’, that is the way of Profit Maximization, thinking about the profits but taking into account the ethics as well. I would personally suggest an example. I am not against the smokers, I have been for a while as well but, now as a student I should take into consideration the opportunity to apply for one of the firms that produce cigarettes to find a job. My ethics suggests to do not support a business that at the end kills people. So even if I could have an opportunity to find a job I have discarded it “a priori” in order to follow my ethic. Now taking into consideration the workers of that firm and having in mind an example of the interviewer of the YouTube video number 3, how should they act? Should they leave the job, should they work more in order to contribute to the profits maximization of the firm, knowing that the more cigarettes they sell, the more people will die one day? That is controversial but if the ethic would be considered maybe a lot of the industries would not still be alive.
1)After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteIn the video “Milton Friedman on Self-Interest and the Profit Motive” it is showed a debate between Milton Friedman and a guy, who is posing him questions - through the formulation of cases - for knowing what would be the position of Friedman, supporter of the Shareholder Theory, in those cases.
For this theory, the managers of an organization have a moral obligation to maximize the shareholders’ wealth: namely maximize profit; The guy in the video, taking this theory as a basis for his arguments, tries to support the ethics of his thinking, pointing out the negative aspects of the underlying self-interest of the owners of a company. The most noteworthy case the guy presents to Friedman is an extreme one and the question he asks him is the following: supposing an old man cannot pay for electricity bills, would be fair, for a company, to turn off the energy in his house, even though this would cause the death of this old man? - for the guy the death of the old man would be a company’s fault, because of its profit maximization vision.
Friedman answers by proposing him another extreme point of view - the one of the electricity company: what would happen if the company allowed everyone to use the electricity, including those who cannot afford it or are not willing to pay for it?
In this case, only few persons would pay for electricity (they would represent, of course, a very small portion of the total) and this would mean the end, in the long run, of the company with its failure. As Friedman points out, the firm is not a human institution itself, but there are a lot of human being involved: employees - they would not receive their wages anymore - , customers - they probably would have to pay a higher price also for others - , all the stakeholders. And also he wonders: what about the family, friends and neighbours of this man? They should be responsible for him, not the electrical company - a business entity. Or, at least, this should be the objective of social institutions, to help people in trouble, as would be the case of this old man with the payment of the bills. This is where, for Friedman, lies the real guilt. These thoughts represent, for me, a strength of his speech. Even if my tendence is on the side of the stakeholder theory, in this video he makes light to other aspects of the shareholder theory’s point of view in a very interesting and smart way. This video has let me reflect: what seems immoral from a customer’s point of view, cannot be the same from the owner’s one: it is not a matter of the death of a single man (life that could have been saved with the right help), it’s a matter of the death of a whole society - If every business entity starts to act in an extreme charitable way with everyone, allowing people not to pay them anymore, soon this would represent the end of the whole economy).
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ReplyDelete2) After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteThe video consists in an debate, in which three speakers talk about their points of view towards the Shareholders and Stakeholders theories, explaining for whom, according to each of them, a business should create value and why.
Hayne Lelond, the first speaker, is a supporter of the Shareholder theory and his explanation is from a financial point of view. He states that organizations need profit in order not to die and so they are inclined to maximize stock market value, which is considered as the extension of profit maximization (Friedman).
Ernesto Dal Bò, the second speaker, is a supporter of the Stakeholder theory and he points out the existence of market and government failures and the impossibility of chasing an unconstrained profit, stating what an organization has to run its business thinking also to morality. It is not possible, from its perspective, to run a business ignoring the interests of all other people’ interests besides those of the shareholders. He argues that Friedman said managers should follow a constrained profit maximization, in which constraints are represented by law and ethics.
David Vogel, the third speaker, is a supporter of the Shareholder theory. He points out that a business cannot think about the interest of the shareholders. Considering market failures present in our economy, as externalities, he explains these have to be solved by the public policy and by the Government, which have the role to align the shareholder interests with the public interests (with those of the society).
In conclusion, I can say I prefer the concept underlying the Stakeholder theory, because this is the one that takes a broader view of the firm: it considers not only the value creation for shareholders, but also it cares about the protection of the stakeholders’ interests, namely all those who are involved in the business. I think that comparing these two theories, it’s more successful to maximise the wellbeing of all stakeholders (including shareholders in this category as well).
2) After watching the video YouTube 5 “Stakeholders vs. Shareholders”: Haas faculty debate “Whom exactly should business serve?”, discuss it and give your opinion: Are you more “shareholders” or “stakeholders” oriented?
ReplyDeleteThe video consists in an debate, in which three speakers talk about their points of view towards the Shareholders and Stakeholders theories, explaining for whom, according to each of them, a business should create value and why.
Hayne Lelond, the first speaker, is a supporter of the Shareholder theory and his explanation is from a financial point of view. He states that organizations need profit in order not to die and so they are inclined to maximize stock market value, which is considered as the extension of profit maximization (Friedman).
Ernesto Dal Bò, the second speaker, is a supporter of the Stakeholder theory and he points out the existence of market and government failures and the impossibility of chasing an unconstrained profit, stating what an organization has to run its business thinking also to morality. It is not possible, from its perspective, to run a business ignoring the interests of all other people’ interests besides those of the shareholders. He argues that Friedman said managers should follow a constrained profit maximization, in which constraints are represented by law and ethics.
David Vogel, the third speaker, is a supporter of the Shareholder theory. He points out that a business cannot think about the interest of the shareholders. Considering market failures present in our economy, as externalities, he explains these have to be solved by the public policy and by the Government, which have the role to align the shareholder interests with the public interests (with those of the society).
In conclusion, I can say I prefer the concept underlying the Stakeholder theory, because this is the one that takes a broader view of the firm: it considers not only the value creation for shareholders, but also it cares about the protection of the stakeholders’ interests, namely all those who are involved in the business. I think that comparing these two theories, it’s more successful to maximise the wellbeing of all stakeholders (including shareholders in this category as well).
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ReplyDelete1.After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDeleteThe most important thing Milton Friedman says is that “ Corporation should pursue their own self-interest which is profit”. Then he also specifies that he is not a conservative, but a believer in freedom. But what is freedom? Is it the liberty of not paying an electricity bill? Is it the freedom of tuning off the electricity? After listening to this debate, it is not easy to say who is right or who is wrong but it seems as though the boy who was asking the questions was unsure about his theory because it discriminates the less wealthy people.
1) After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
ReplyDelete- Milton Friedman is one of the greatest exponents of the Shareholder Theory, one of the main Anglo-American theories on firm objective. In this theory the managers have a moral obblligation to maximize the shareholders wealth: maximize the profit. As a consequence the shareholders wealth maximization is considered of fundemental importance for corporate decision making, taking also in consideration that the shareholders' interest coincides with the firm one.
In the discussion between Milton Friedman and the guy, Friedman supports that the right choice of a electric firm is to turn off the electricity to those who don’t pay the bill. What could happen if the firm keeps the electricity on to everyone who doesn't pay? The bad consequences of a failure would have bad consequences on the shareholders, on the employees of the company, on the customers and so on. This is the reason why the profit maximization purpose seems the best because if the company survives, the whole community will benefit from this.
On the other hand this theory causes embarrassment for other kind of company. If we take in consideration a Pharmaceutical company we can understand that it cannot put the profit as the objective of its economic actiity because the objective of this enterprise must be the improvement of people's health. As well this last example we can talk about other kind of enterprise as auditing firms, ranting agencies and companies that operate in the controversial industries. As a consequence in these last examples we can find the weaknesses of the Milton Friedman's view.
3) Give your opinion on the video YouTube 6 “Who’s Minding the Store? The Ethics of Corporate Governance for what concern the BP case”
Delete- This video talks about the tragic consequences of the Deepwater Horizon explosion in the gulf of Mexico in which between the main bad consequences there was the BP shares’ value decrease (30 dollars per share), the BP bonds were downgraded and the environment has suffered such big negative consequence too.
The shareholders' desire to increase the share price has brought to a bad management, based mainly in the short term focus with bad decisions that determined negative consequences for all the stakeholders.
As said from the Professor Lynn, the shareholders value thinking with the short term focus has brought to bad decision-making process with wrong short term choices and catastrophic long term consequences.
This is the reason why the azienda must create value in a sustainable way for itself and for the different categories of stakeholders (not only shareholders) involved ensuring the durability of the azienda over time, economically, socially and environmentally.
1) this video shows a man who dies because the electric company stopped the electricity services to that man because he was not able to pay the bills. so the video investigate if there could be any other options for the electric company other than turning the electricity off in the similar cases. from Milton Friedman point of view, if the electricity company does not stop the services to whom who not pay the bill, then other people may not pay their own bills. To Milton, the friends and family of that poor man are also responsible for his death as they did not do any help to survive this man. to me the strength of Milton thought is that he consider that the electricity company should also survive and is not a charity company and therefore should do the best for it's own benefits. on the other hand, I also consider the strength of Milton when he pays attention to morality and blame the friends and family of that poor man. I believe the weakness of Milton's thought is that he does not take the Corporate Social Responsibility into account.
ReplyDelete5) for example, petroleum companies as the earth will run out of fossil fuels and is these kind of products are highly harmful to environment as they produce greenhouse gases. also the technology by providing substities respond for this demand, for example, creating electronic cars or biodiesel , makes fossil fuel based companies unsustainable.
Author: Martina Giani
ReplyDelete1)After watching the video YouTube 3 (Milton Friedman on Self-Interest and the Profit Motive 1of2), discuss the strength and weaknesses of the Milton Friedman’s thought
In this video, the issue of an electric company that cut supply to a customer for non-payment upon which the customer died as a consequence, was presented to Milton Friedman. He argues that a utility company that does not cut off electricity to non-paying customers will not survive as there is no reason for customers to pay their bills. Consequently, the failure of the company would have negative implications not only on the shareholders, but also on the employees, on the customers and on the community.
In other words, he considers the decision to cut the supply of electricity as ethical because managers have a moral duty to ensure the survival of the corporation. A manager must to act in the interest of the shareholders maximizing their value and is not right that a manager, instead of maximize the profits, tries to “do some good” with the resources of the company.
On the other hand, I think that there is not a black or white distinction between “to make profit” and “ do some good”. In this sense, I think that Mr Friedman in his answer doesn’t highlight to much the importance of some linkages between companies, especially those involved in the supplying of goods necessary to “live”, with other associations: he just says neighbors and family should help the old man to cover his bills.
In my opinion, the company should have other funds for extreme situations like this to share with associations, foundations, non-profit organizations and the public administration in order to avoid tragic events like the one discussed in the video.
5) Find a company that create an unsustainable profit, saying why it is unsustainable (e.g. because of the environment or society).
The conditions to achieve in order to create sustainable value and sustainable economic equilibrium are connected with the financial, monetary and interests equilibrium. In particular, the latter takes into account the interests of all the stakeholders of the azienda, that in this context are widely intended. Stakeholders have a stake, an interest into the azienda and affect or are affected by the achievement of the primary interest. Following this definition, also the community or the environment must be considered stakeholders of the azienda and consequently their interests must be protected by the interests equilibrium. In my example I have found a company that is able to create profit but with unacceptable social costs. According to “The Guardian”, children younger than 15 continue to work at cocoa farms connected to Nestlé, more than a decade after the food company promised to end the use of child labour in its supply chain. A report of 2014 conducted by the Fair Labor Association (FLA), commissioned by Nestlé, saw researchers visit 260 farms used by the company in Ivory Coast : the researchers found 56 workers under the age of 18, of which 27 were under 15.