BUSI 530 Week 1 Discussion Board Forum 1 Example

Discussion Board Forum 1: The Goal of the Corporation

BUSI 530 Managerial Finance, Discussion Board Forum 1 Thread and Replies

Thread by [Student Name]

The forum prompt and the two classmates are composites standing in for the course's own prompt; the textbook and the research cited are real, and the requirements follow Liberty's public course guide for BUSI 530.

Thread

I will defend the textbook's answer, with one important limit. Brealey et al. (2018) argue that managers should maximize the current market value of the shareholders' investment in the firm. Shareholders differ in age, wealth and appetite for risk, but they all want more wealth rather than less, and once they have it they can spend, save or give it away as they choose. A manager who pursues some other goal is spending the owners' money on the manager's own preferences.

The objection I find strongest is that market value can reward harm that the market does not yet see or price. A firm can raise its share price by loading costs onto customers, workers or neighbors who cannot bargain back. Jensen (2001) took this seriously while still rejecting stakeholder theory as an operating rule. His point was that "balance the interests of all stakeholders" gives a manager no way to decide between competing claims and therefore no accountability. He proposed enlightened value maximization instead: long-run value as the single scorecard, pursued by treating employees, customers and communities well because a firm cannot create lasting value by mistreating them.

Hart and Zingales (2017) push further. They argue that shareholders are people with ethical concerns as well as portfolios, and that when harm cannot be separated from the firm's activities, a shareholder cannot simply undo it with personal donations. Maximizing market value is therefore a good rule when profits and harm can be separated, and a poor one when they cannot. On that view, managers should maximize shareholder welfare, which may include declining profitable activities that owners would reject.

My working rule for a manager combines the two. Use market value as the scorecard, because it disciplines waste and forces long-run thinking, but refuse value that depends on deceiving or harming people who cannot protect themselves. Most of the time those two rules point the same way, since customers who are deceived eventually leave and regulators eventually act. The harder cases are the ones where they do not, and those are exactly the cases where a manager's character, not a formula, decides the outcome.

Reply to Marcus

Marcus, your thread made a clear case that the agency problem is the central issue in corporate governance, and your example of a chief executive who built a costly headquarters while earnings fell showed how private benefits can drain value. I would add one complication. Executive pay is usually presented as the solution, since stock and options tie a manager's wealth to the shareholders'. Bebchuk and Fried (2003) argued that pay can itself be part of the problem. When boards are close to the executives they oversee, pay packages may reflect managerial power more than arm's-length bargaining, and companies use forms of pay that are hard for outsiders to see. Their evidence included pay that rose with stock prices driven by the whole market rather than by the executive's own performance, which rewards luck as generously as skill. Do you think stronger independent boards are enough, or does the problem require more disclosure to shareholders, such as clear reporting of the total value of retirement benefits and deferred pay?

Reply to Lauren

Lauren, I liked your explanation of how financial markets let savers and firms find each other without knowing one another, and your point that markets also produce prices that signal the value of companies. Your thread made me wonder why banks still exist when markets do so much. Diamond (1984) offered a well-known answer: lending requires someone to monitor borrowers, and it is wasteful for thousands of small savers each to do it. A bank monitors on behalf of all its depositors, and because it lends to many borrowers, its own risk falls enough that depositors need not monitor the bank closely in turn. Brealey et al. (2018) describe the same role in plainer terms when they explain how intermediaries pool savings and spread risk. Does that suggest why small firms still borrow from banks rather than issuing bonds? A small manufacturer has no credit rating and little public information, so a lender that knows its books and watches its accounts may be the only investor willing to fund it at a reasonable rate.

References

Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362

Brealey, R. A., Myers, S. C., & Marcus, A. J. (2018). Fundamentals of corporate finance (9th ed.). McGraw-Hill Education.

Diamond, D. W. (1984). Financial intermediation and delegated monitoring. The Review of Economic Studies, 51(3), 393-414. https://doi.org/10.2307/2297430

Hart, O., & Zingales, L. (2017). Companies should maximize shareholder welfare not market value. Journal of Law, Finance, and Accounting, 2(2), 247-275. https://doi.org/10.1561/108.00000022

Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21. https://doi.org/10.1111/j.1745-6622.2001.tb00434.x