Question

Firms often involve themselves in projects that do not result directly in profits. For

example, IBM and ExxonMobil frequently support public television broadcasts. Do these projects contradict the goal of maximization of shareholder wealth? Why or why not? Please explain in more detail

Answer 1

It is true that carrying out socially responsible program may entail huge cost but it does not contradict goal of maximization of wealth of shareholder. Such projects creates goodwill for the company.Having good reputation among local community is very important for sustaining business. Such projects entails concept of give and take whatever company is getting from public i.e profit, company is returning them part of profit in form of such project.

For example: If australian company 'Energex stopped spending some of it's money on alternative energy initiatives, that can be seen environmentally friendly, some of it's customer could decide to do business with other company which are more socially responsible.

Thus through such project company creates goodwill which will ensure continuity of the business in long term, thereby following principle of wealth creation for share holders