[ Music ] >> Let us now think about this conflict. Right? We just discussed the notion of shareholder value right, shareholder wealth; maximizing the stock price; that seems to be a reasonable objective for the corporation if you are thinking strictly about shareholders. Right? But what about society as a whole? The first issue that we can talk about is social responsibility, right? And before we get into the problems, let's talk about a few actions that companies make that are actually socially responsible. Right? So you know, there are necessarily complex all the time. Right? For example, companies invest in human capital. Right? If an employee works in a company for a long time, and learns new skills, right? Some of these value is not going to be captured by the company, but it's going to be captured by the employee. So investments in human capital is something that benefits society as a whole, not only the company. Right? Sustainability is another issue. Many companies are trying to develop products that are better for the environment, right? And that make the environment more sustainable. Again, that is an example of a socially responsible corporate action. Okay? And philanthropy, right, many companies engage in donations and actions that benefit the communities and the society as a whole. Right? So there are examples of socially responsible corporate actions, but of course that doesn't always happen. Right? There are conflicts as well. And it's very easy to think about a situation in which maximizing shareholder wealth may not be consistent with social responsibility. Right? For example, right, if you want to take some time to think about some examples you can, but let's just go on and talk about a few, right. There are some products that are bad for our health, right. Some companies produce tobacco, junk food, it is well known that these are not great for people, but people value them, right. So companies can create profits by selling these products. This might be-- these is good for shareholders, but it may not be good for society. So there are some conflicts there. Right? Pollution is another classic example. Right? Companies' incentives are to reduce costs, to produce things as cheaply as possible, to increase profits and therefore increase shareholder value, but these may not be the best thing for the environment, right. Technologies that are cheap, but pollute the environment are not going to be great for society as a whole. Right. Another example you might think of is outsourcing of labor. Right? Hiring employees in other countries of course going to be great for those countries but it might not be good for the local labor market. This is another issue that is being discussed a lot these days. One issue that you might not have thought of as an example of a conflict is taxes. Right? Should companies minimize their tax abuse? Right? The answer seems to be obvious, right? Minimizing taxes increases profits and therefore should increase stock prices. Right? If taxes go down, both your current and your future profits are higher. Right? But there is a downside. Minimizing taxes is also going to reduce tax collection. Right? The government is going to receive less money, right? The government will have less money to invest in infrastructure, to invest in social projects, right? This is going to increase budget deficits. It might not be best for society as a whole. Okay? One example that the financial press is talking about these days okay is the fact that multinational companies around the world of really, but this example uses U.S. companies, are holding a lot of cash abroad. Okay? So U.S. multinational companies are holding a large amount of cash in countries that are outside the U.S. So here there is a chart for you to look at. You can see the example of Apple for example, that holds $157 billion of cash outside of the U.S. Okay? You might have heard about this before. Let's talk about this for a while. Why is this related to taxes? Okay? It's because of this notion of repatriation taxes. Right. So suppose-- take Apple for example. Apple has some operations in Ireland. Okay? The corporate tax rate in Ireland is just 10 percent. Okay? So if Apple generates $1 billion of profits in Ireland, you're going to generate a tax bill of 100 million. Okay? That's the Irish tax. The U.S. corporate tax rate is much higher. It's 35 percent. Okay? So the U.S. firm Apple in this case, in our example, would have to pay an extra $250 million to bring the cash back home. You know, guess what? They're not bringing. Right? The cash is staying abroad, okay? Why is this a problem? The problem is that this foreign cash cannot be used for dividends and it also cannot be used for investments in the U.S. without generating these repatriation taxes. So if Apple wants to invest the money in the U.S., it has to bring the money back to the U.S. and pay that tax. Guess what? You know, this multinationals are not bringing the cash back home. So even the government has got into this. The current U.S. president, Barack Obama is trying to come up with a plan to force multinationals to bring the cash back home of course that is not something that is easy to do. Okay? And that shows a general point, you know, every time there is a conflict there is a conflict, between shareholder value maximization and society as a whole, there is a potential role for the government to try to improve the situation. Okay? I'm not saying that it's right for Obama to tax U.S. companies on their profits held abroad, but the general point is that these are situations where typically the government comes in; tries to intervene, and improve the situation. Pollution for example can be regulated, outsourcing of labor can be regulated if the government wants, so there is a potential role for the government to play a role. Okay? Next topic. Let's think about conflicts between shareholder wealth with other stakeholders. Right? This is related to what we've been talking about, but now it's think more specifically about stakeholders like employees, suppliers, and debt holders, bondholders. Okay? Does a high stock price also benefit these other people? That's the question I want you to think about for a while. And then will talk about in a second. [ Silence ] And the answer is yes, right? There isn't necessarily a conflict if you think about it in the following way. Right? A more valuable firm, a firm with a higher stock price is going to be able to pay higher wages, right? Is going to improve career prospects, right, if you're a manager working for a successful company, that is going to improve your [inaudible], right? It's going to be good for the employee as well. Right? It's also good for suppliers because increases profits for suppliers. It makes the company more stable, and it lowers the risk for debt holders. Okay? So there is-- there are many reasons why a stock price is also good for other stakeholders. The problem of course is that this congruence does not always hold. Okay? A very, you know, commonly discussed example of a potential conflict is actually mergers and acquisitions, which we discussed a little bit already, and we will discuss more later on in the course. Okay. M&A can of course make some jobs obsolete. Right? If two companies merge, some jobs may not make sense anymore, so there is some evidence that M&A's related to employment cuts. Right? If you work for a company that has undergone M&A activity that is always a very stressful time for employees. Right? In the name of improving operating efficiency, is common that M&A will result in lower employment. Right? And something you might not have thought about yet is that M&A's sometimes financed with large amounts of new debt. Okay? This is a leverage buyouts that we are going to talk about in module four. This new issuance can of course heard existing bondholders. Right? If you hold a bond in a company that undergoes a leveraged buyout, you know, it's very likely that the value of your bond is going to go down because leverage is increasing so much. Okay? So this is an issue we will discuss later in the course we talk about mergers and acquisitions and leverage buyouts. [ Silence ]
