FUNDAMENTAL OF CORPORATE FINANCE
FUNDAMENTAL OF CORPORATE FINANCE
4th Edition
ISBN: 9781323942925
Author: Berk
Publisher: PEARSON
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Textbook Question
Chapter 1, Problem 15P

You sit on the board of a public corporation. Your CEO has proposed taking steps to offset the carbon impact of your company's manufacturing process. Doing so will add to the company's overall expenses. Your CEO argues, however, that this action will actually increase the stock price, maximizing shareholder wealth. Why might socially-responsible activities also be value-maximizing?

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If a company’s board of directors wants management to  maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
In 1970, the great American economist and a Nobel laureate Milton Friedman argued that “the social responsibility of business is to increase its profits”. He wrote that a company has no social responsibility to the public or society, and its only responsibility is to its shareholders. Critically evaluate his statement. Do you agree or disagree? Why?
If a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
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