The finance manager plays a vital role in the ‘gompany’s success. As cash flows into the company, the finance manager thinks of how it will be used daily and how it will help the firm sustain its ‘operations in the future. If finance is in the heart of “everything that goes on in the company, managing fis difficult because the person handling it must be fnvolved in every activity thatthe firm may perform. "The financial manager has to be in touch with the ‘operations, marketing, and overall strategy of the ‘company. Inthe past, the finance manager was only involved simple bookkeeping tasks such as documentation, "record-keeping, preparation of financial reports, and ‘payments of the company's bills (Van Horne, 2005), As time went by, the task of the finance manager ‘evolved, going deeply inco the major aspects of the firm's activites. This roe critically developed to what ‘is now known as financial management. ee saree Atthe end of the chapter, students are expected to be able to: + discuss the primary objective of financial management; distinguish profit maximization from stockholders’ wealth maximization; identify the primary functions of the finance manager; analyze problems that are applicable to finance; differentiate between sole’ proprietorship, partnership, and corporation; and define the basic features, advantages, and disadvantages of the diferent forms of business organization. ‘Normally, financial management is immediately associated with accounting, a common mistake made bby most individuals. In reality financial management is more than that, Real financial management starts “swhere accounting ends. Financial management is more concerned with raising, allocating, and controlling the firm's Funds. In ‘times of financial trouble, the finance manager must find ways o get ts financial position in order. Should ‘therm borrow money? Ista shore-rerm or long-term need? Did the firm generate enough funds to sustain ‘ts activities? Should they issue additional shares of stocks and would these be preferred or common? These are the kinds of questions that one has to answer when dealing with financing. [fthe firm has enough money, the finance manager again has to know how to allocate the money in ‘order to generate wealth forthe stockholders. Should the firm invest it in short-term marketable securities ‘or long-term investments, pay their debts, or pay dividends to their stockholders?oS | abe aia AA dividend policy decision is another aspect of financial management that has to be addressed. One ‘must be able to suggest what dividend policy the firm should adopt. Dividend policy plays a significane role in enticing investors. Thus, the policy chosen by the firm determines the kind of investors the firm will have and the kind of a company ie will be in the Future. The Firm's Goal The economic problem—a fundamental theoretical principle in the operational dynamics of an economy—states that human wants or needs are unlimited but resources are finite. To satisfy their unlimited wants, people would seek to maximize the utilities of whatever resources they posses. Utilities include satisfaction, pleasure, or usefulness. However, maximizing utility is only possible if the people concerned ‘ould produce savings out oftheir earnings and do whatever they want to do with it. People always have the options to choose what to do with their earnings. They can spend, save, or invest it. Spending could satisfy wants immediately but not maximize utility because it makes one lose the opportunity to have more carnings if saved. On the other hand, people who choose to save their money defer the enjoyment of this resources in the hope of earning more so that they can bette enjoy i in the Future. People who save theit money in order to invest it could have a beter chance of satisfying their wants and ‘maximizing its tility. The primary objective of the firm's Finance manager is to maximize the return that it could offer to the people who trust the company. People who invest in the stock of a particular company will contribute towards maximizing their investments utility People who buy shares of stocks become the common stockholders of the company and therefore collectively own it. Management of operations is delegated to finance managers who seek to maximize the value of the firm’s common stock. This is done by increasing the marker price of the stock. How ist done? ‘The firm must be able to increase its value by creating a good name in terms of profitability, liqui effectiveness of management, and sustainability ofthe operations. The firm must be able to play a major role in the economy and in the industry to where it belongs. In this way, the market forces wil favor them and create value by increasing the demands for heir shares. As the demand for their shares increases, and with limited authorized capital stocks to issue, the price of the stock goes higher. In conclusion, the generally accepted goal of the firm is to maximize the wealth of its common stockholders through the value ofits common stock (Kolb & Demong, 1988). Why not Maximize Profit? Finance people disagree with accounting people over one point: the primary objective of conducting = business People in finance always tend to say “maximize stockholders’ wealth” while those in accounting would say “maximize profits.” This argument has been going on for many years. Though finance and accounting are related, the people in these specialized areas could not agree as to which one really contributes to making sound financial decisions. Finance people need accounting to have the necessary financial information to make quality decisions. {In makingan analysis, financial and non-financial data are scrutinized to suit the need of decision-making. Finance people also use more tools and techniques that would make the financial reports very useful, On the other hand, the accounting people are more involved in preparing financial reports for both the internal and external users. The manner of reporting is based on certain accounting standards.‘of the arguments that oppose profit maximization as the main objective in financial management ‘change in profi is also a change in isk, Profit maximization does not consider risk or uncertainty, whereas wealth maximization does (Shim & Siegel, 2006). For instance, a firm whose annual sales is P1,000,000 per year likes to atain ‘220% increase in the succeeding year. In doing so, the firm decides to change its credit policy by prolonging it credit rerm from 30 days to 45 days. Surely, because of an increase in credit term, the buyer who would benefit from such increase will buy more from the seller and in effect, the sales will increase due tothe relaxation of the credit term. Here, the seller whose main objective is to increase the company’s sales overlooks the impact of such move on its cash flow. The sales would hhave increased, bu the inflow of cash is hampered because ofan investment made on the receivables, ‘In wealth maximization, before offering an increase in credit term, the cost and benefit should first be measured. The firm should try to answer questions like: * Will the relaxation of the credit term bring more benefits than the cost of investing in accounts receivable? ‘+ Is the benefit more than the cost of capital invested in accounts receivable? If the answers to the preceding questions are yes, then the firm may change its credit policy. Ik fails to determine the timing of benefits. In profit maximization, the timing of the benefits is not considered. ‘The firm does not care if che cash flow is higher or lower in the early years ofthe project. Higher cash inflow in the early years would mean better benefits to the firm because ofthe possibility of generating other potential income. However, this is only «rue ifthe alternatives under consideration would give the same cash benefits over the same number of years. Example: Consider Projects A and B with their corresponding cash inflows per year A firm is choosing which between the two alternative five-year projects will give better benefits. Project A shows an increasing cash inflow from year 1 to year 5 from 1.50 to 350. On the ‘other hand, Project B has a declining cash inflow from year 1 to year 5 from 4,0 to 1.0. Ifthe firm does nor consider other factors in making a sound decision, choosing cither Project A or Project B docs not make any difference, Besides, at the end of five yeas, both projects will give them a cash inflow of 12. A 20 35 1200 B 400 introduction to Financial Management wwi i 3 i However, in financial management, the following analysis must be done before making a decision: Consider that the rate of return for five years is 12%. Net Cash Inflow Xan nfow py ot cash tntoms NAECASNINDOW py of casnintows Text 150 re 400 337 Yer2—-200 19 $00 an ters 250 ir 200 ue tara 280 19 200 127 vers 50 199 to os7 a2 oz ‘Afver considering the present values of the annual cash inflows for five years, Project B, with inflows’ present value of 9.22, is better than Project A whose inflows’ present value is only 8.29. Likewise, ifonly che cash inflows for the first rwo years are considered, Project B wil stil perform better due to a higher recovery of cash in the early years. The company can invest the cash inflows in other earning activities that will help increase the net income. ‘Accounting profits cannot be measured accurately. “The reported accounting profits are mere estimates of how much net income is generated for 8 particular period of time, The eal accounting profits are only measured atthe end ofthe life ofthe compai ‘or not. It is for this same reason why financial management is Icisonly by chat time that the company may determine ifits entire operation is successful is more concerned with the cash inflows rather than the accounting profits. The profit itself does not generate cash if sales connected ro it are on credit. The finance manager measures the cas accounting profit. flows which are then invested to generate Profit Maximization versus Stockholders’ Wealth Maximization Goat Objective Aavantages Prot Obtainlarge 1. Caleulating pros easy. Maximizaton smounto! 2. Determining thetink ieee ‘between financial decisions aa prose simpe icioideg”” “Achieve” Theiong enn s emphasized wet ig MRS 2 Riskoruncenaintyis Monmizaion masevase > Rongncs SESSION 5m ining ofretume taken {nto account 4, Stockholders return is ‘considered, 1 The short term is more emphasized. 2. Risk or uncertainty is ignored 3. The timing of retuns does not matter. 4, Immediate resources are necessary. 1 There is no clear relationship between financial decisions and stock price. 2, Management aruiety and frustration may be experienced. Source Shim, J Ky & Siegel J. G. (2006). Shaun’ oniline of financial management. rd ed). New York: McGraw-Hill Book ‘Company.of Financial Managers Fonancal manager ofthe firm plas a crucial ole inthe company’s goals, plies and sucess ‘bilities of the financial manager include the following: nvestment decision “This emails an outflow of resources with the expecratons of a benefit in che form of cash decision is the most important of the three decisions ‘becomes the firms life support system in continuing tts existence; thus, the allocation of funds must be prudently done. Since the Future benefits are ae tare igh creainy, investment proposals must reengnize the existence of rik, Laverne aa Malu interme of their expeted recuns and comesponding sks thar could ast ‘the firm's valuation in the market. A To accepting or rejecting an investment proposal a flr may use capital ‘budgeting technique ae etd the dime value of money (discounted payback period, internal rae of en 1 presen value, and profitability indes) or one that docs not (6+ ‘payback period and accounting rate of retutr). Financing decision “The financial manager finds ways wo provide money forthe actives of the frm. He or she must know where to outsource its funds. Shoreterm or Tong:-term debtor equity financing has 0 Bust Te manager eases the best possible inancing mix ox capil sructare For she ‘company in order to meet the expected return on an investment. “The main idea in financing decision is ro look for resources that will give the company the lowest weighted average cost of capital. Dividend policy decision equally important to know what sound dividend policy i good financial signal to the marke he contin ssesesthe company. Firms with good history of dividend payment have Fetes potential nuring investors. Dividend declaration reflects a profitable sats ‘of the company. Hire ether hand, companies with earnings retention have more funds for ineesutsnt hhence, it indicates the growth potential of che company. To pay oF not to pay dividends relics basically wnat sion nade bythe board of directors through the advice piven by the nance mans. the aforementioned financial responsibilities ae carted our by the treasures, ins (CO). The reasureris responsible For managing corporate assets and + budgeting the capital financing the business, formulating a ced policy vonfolo. The weasuer basally handle externa financing mater. "he ‘of which ae financial and cost accounting, taxes, budgeting» ee The chit fancier oveecs he ete Financ airy and seve 2 Sxdviser in finance matters to the board of direcrors.rr) The role of finance in a typical corporate business organization is as follows. in ma a ee =e pt The common functions of the controller include accounting and Financial reporting, internal aud cost accounting, tax accounting, planning for contro, evaluating and consulting, government report protection of assets, nd economic appraisal The treasurer's common functions ate cash management, banking relationship, finding sources financing, financial planning, investment planning, capital budgeting, risk management, investor relat cd credit and collection, Financial Decisions and Risk-Return Trade-off Ie is significant to note chat an increase in retuen is coupled by a corresponding increase in risk cannot be expected that whatever financial decision is made will immediately favor the firm. The fina manager’ obligation isto ascertain that such rsk present is tolerable. Risk is common and ubiquitous could be credit, nancial, political, interest, and social. The firm must recognize the risk and include ¢ in whatever financial decisions it will make. The aphorism “the higher the return, the higher the risk” m always be kept in mind Types of Business Organizations The three major forms of business organizations are sole proprietorship, partnership, and corporat ay firms are frst organized as sole proprietorships, being the most simple ofthe three. As the yeas by, this form of business organization tends to evolve into a partnership and finally into a corporation. The Sole Proprietorship A sole proprietorship isa business owned bya single person. Typically, che individual proprietor orig finances the firm by using his or her personal savings, supplemented by bank or government loans. The proprietorship form of organization is the simplest form of a legal organization, since no fo procedures are needed to establish the business. The owner is only required to comply with specific icensing laws in order to start selling goods of services to the public. The business entity itself is generalFequirements, and has no the sole proprietorship provides "er, the control held by the with differences of opinion 8 Policies or making other tbe to taxaon, However income are 8 filed r pebusines. Thus, the income tax te app be thesole ‘ora income fom all soures and his or he vay deductions BERS Fr principal disadvantages of sole he nctorships are limited life and the unlimited liabiliey of BS Upon the death or reinemmenr the owner, the current business must be dissolved inasmuch as Bese normally no provisions for the continuity ofthe business Furthermore, unlimited lability makes penne PeePtctorship personaly liable for ck firm’ FP Poonal assets are legally available ro, satisfy business deb S actions and debts. This means that the Asother dis. Teis dfficul for an org other businesses to borrow large sums of money 'e Sole Proprietorship Ens of formation. A single propre rorship is simple to establish. Ie does not require tedious Ssumentaions similar to partnership or corporation, Control over operations. There @perations, thereby specdin, Be shating of profs. All profits ofthe business belongs only eo the owner Ssmpliiy. A proprcrorship is subject to less ‘overnment regulations compared with a Partnership © corporation, However, the incor * included and shal be a part of the incor ‘generated by the owner which is PPP to tar. The taxis graduated based on ‘oral income of the taxpayer. 8 of the Sole Proprietorship Pimited life. Death or bankrupecy of th Unlimited liailiy Remiation of skills A proprio, as compared with she busines associates ina partnership and a Seabee att tions in the applicaions of silk uit rae to see a proprietor who has BME sille involving finance, marking, ant operations0 | munca. nanan The Partnership ‘A partnership is composed of two or more persons who agree to contribute money, property, of services for the purpose of dividing the profits between or among themselves. ‘Two or more persons, called the partners, own the business. Ics a more formal type of a legal organization than the sole proprietorship but much less formal than a corporation A basic requirement for the registration ofa partnership with the Securities and Exchange Commission (SEC) is the filing of the Articles of Co-partnership. The SEC is a government body that supervises the affairs of the partnership and corporate forms of businesses. The following information is contained in the articles of co-partnership: Name of the partnership Principal place of business Date of effectivity and life ofthe partnership Purpose of the partnership 5. Names, addresses, and contributions of che partners 6. Agreement as to the manner of management of the partnership ‘Manner of dividing the profits becween or among the partners 8, Manner of liquidating the partnership with the rights and duties of the partners 9. Arbitration of disputes Likea proprietorship, a partnership is simple to organize and is subject ro few government regulations Ic also has a limited life. Death, bankruptcy, or withdrawal of a partner results in the dissolution of the business. Similarly, admission of a new partner to an existing partnership either by contribution of capital or by acquisition of an interest from an old partner requires the formation of a new partnership. The individual partner's actions can actually obligate the busines if they are performed within the scope of the partnership. Additionally, each partner becomes personally liable for the business. Like a proprietorship, a partnership has unlimited liability. The partners ae jointly and individually liable for the debts of the partnership; in other words, in the event that the partnership is unable to pay its debts, the partners’ personal assets will be available to satisfy creditors’ claims. However, for a limited partner, the liability is Limited only to the extent of his or her capital contribution to the partnership, Partners can distribute profits oF losses from the business in many different ways. Ifno prior agreement exist, the profits are divided equally among the partners or some other ratios, aking into consideration some pertinent factors like the partners capital contribution, goodwill contribution, and special ability and experience in the field The tax for the partnership depends on whether the partnership isa general professional partnership or just an ordinary partnership. The ordinary partnership is subject to a tax similar to that of a corporation which is 30%. The general professional partnership is tax-exempt for the sole purpose of exercising the partners’ common profession (National Internal Revenue Cade, Sections 20 and 24).of the Partnership fim BB ye halesne ii group of people tha share experts in runing the barre & The combined capital resources of the partners of ffer better capitalization as compared with those of a sole proprietorship. the athe s of the Partnership © Limited life. Withdrawal, death, or bankruptcy of a partner will result in the dissolution of a partnership. Likewise, admission ofa new partner ends the old partnership. 2 Unlimited liability. Each partner is personally liable to creditors for debts incurred by other partners acting for the partnership. Mutual agency, Each partner isan agent ofthe company and c her acts within the scope of the partnership business. an obligate the partnership for his % Difficulty in raising capital. Although iis somewhat easier for partnerships wo obran the capital required for expanding operations than it is for proprctorships, iis stil diffcule to raise huge amounts of partnership capital since the ability todo so is limited by the partnes’ personal wealth and borrowing power. k The Corporation the A corporation is an artificial being created by the operation of law having the right of succession and the ower, attributes, and properties expesly authorized by law or incident ots existence (Corporation Code of the Philippines, Section 1). A corporation is a mult-owner organization that is recognize! as se legal entity by law. Accordingly, c can enter into contracts and can sue or be sed. Since che co legal person, a corporate officer signing a loan as an agent for a corporation or risks. The corporation is responsible for its own acts tothe extent individual stockholders. Thus, one ofthe main reasons for inc poration is the is not putting personal assets ofits own assets only, not those of the ‘orporating.a partnership or proprietorship is fo protect the owners’ personal assets from losses beyond the amount invested in the business the the the The owners of a corporation are called shareholders or stockholders. The ownership interest in the company is evidenced by readily transferable shares of stock issued (or sold) by the cor oration. The Ind shareholders ofa corporation indirectly contro the regular operations of the busines bye directors who actually manage the corporation. In this management set-up, the board of direson, selec the corporation's officers who run the day-to-day operations, and establishes general This circuitous route noewithstanding, the ult conporate policies. imate control of a corporation rests with the shareholders for Unlike the partnership and proprietorship forms of business organizations, the corporate form facilitates the acquisition of large amounts of capital needed for sale of addicional shares of stock he pansion, This can be accomplished through the to new owners by issuing stock certificates represents the enterprise. The stock certificates ownership can be easily transferred any time in the future. Since the borrowing capacity of a profitable corporation is far greater than that of a because ofits limited liability, building proprietorship of a partnership *w plants and facilities, renovating old ones, and purchasi ‘equipment as means of expanding the existing operations are greatly f of legal organization acilcated by using the corporate formSS | rmanciat manncsscenr} port Since corporations have several owners, itis usually necessary to establish a management team— which may include one or more owners—to carry on the operations of the business. The members ofthis ‘management team composed of corporation officers and employees act as agents for the corporation and conduct its business as a separate legal person with the same rights, duties, and responsibilities of a natural person. A sharcholder has no power to bind the corporation to contracts, unlike a partner or a proprietor. In addition, shareholders enjoy limited lability, which means that they are protected from personal losses beyond the amount of their investment. In contrast with general professional partnerships and proprietorships, corporate income is subject to taxation; that i, corporations are required to pay income taxes and file separate tax returns. Shareholders do not have to include their corporation's net income in their personal tax returns except for those earnings actually paid out to them in the form of dividends. Accordingly, corporate income ‘may be taxed twice: first, as the corporation's income, and second, if dividends are declared, these are taxed again as shareholders’ income. Advantages of the Corporation 1. Limited liability. The special legal status enjoyed by the corporation acts as a bartierto protect the lownersshareholders from losses beyond the amount of their investment. 2. Indefinite life. Unlike in proprietorships and partnerships, the life ofthe corporate form of business ‘organization is not affected by the withdrawal of sharcholders in any way since the corporation is treated legally s if it were a person separate from its owners 3. No mutual agency. Sharcholders who are not legal agents or officers are unable to bind a corporation by their actions. If they own many shares, they may bear a strong influence on its management team but cannot unilaterally bind the corporation legally without the specific authorization of the corporation itself 4, Ease of obtaining additional capital. Corporations are aptly structured for borrowing large sums of money. They also have a legal structure that enables them to sell small ownership interests (hares) to the general public 5. Ease of transfer of ownership interest, Since ownership of the corporation is via shares of stock, itis simple to transfer ownership interest. Shareholders can ordinasily sell their shares to others without obtaining the company’s approval wheteas a sole proprietorship cannot sll partial interests in business, nor can a partner sella partnership interest without dissolving the partnership. 6. Separate legal entity. By virtue o its special legal status, a corporation has the power to buy, own, or sell property. Furthermore, it can enter into contracts and can sue or be sued, Disadvantages of the Corporation 1. Double taxation. Corporate income is intially subject to the payment of income taxes by the corporate entity itself, and then the shareholders are required to pay income taxes on the portion of corporate earnings distributed to them in the form of dividends. 2. More government control. Corporations are governed and influenced largely by national government regulations. ‘More costly to organize. The establishment of a corporation entails the payment of legal fees. More involved decision-making process. Incorporations, making important business decisions may be quite time-consuming. They ae usually referred up to the chain of command, often necessitating the agreement and final approval of the board of directors ofthe corporation. agag © POPPER a€ d 5 Dilution of earnings and control. A typical corporation has a large number of sharcholders who ‘ust share the earnings and control ofthe corporation with many other owners, Agency Theory The agency theory poses a porential conflict of interest between the stockholders and the managers. Seek conflict starts when the stockholders entrust to the managers the authority to make decision for = firm. The managers, with the power vested upon them, may have personal goals that clash with the seckholders’ wealth maximization. This theory exists due to the creation of an agency relationship. This relationship is borne as soon as an Seaividual or group of people, called the principals, hire the service ofan individual or organization cal = agen, to perform a service and exercise decision-making for the principal. The primary agency relationships are those between: 2 Stockholders and managers ‘An agency problem will likely exist when the manager owns a very small percentage of th ‘company’s stock. When the firm is a sole proprietorship and the manager is also the owner, he or she will presumably function to maximize his or her personal wealth. However, when the owner ‘manager decides ro share the company with an outside investor by making the firm a corporation a potential problem may arise, Ifthe proprietor worked to his or her full potential before, this time with shared ownership, he or she may tend to relax a bit, knowing that some of the wealth will ‘now accrue to the other stockholders. At the same time, the owner-manager may be litle loo with the mony or use more of its earnings knowing that some of the costs will be borne by the other stockholders. In many large corporations, potential agency conflicts are noted specially when the managers do not own a small percentage of the company's stocks. However, managers may be encouraged to act in ‘maximizing stockholders’ wealth by giving them incentives for good performance and punishment for poor performance. Some of the incentives that maybe offered are as follows: increase in salary bonus, stock options, promotions, travel, and many more. For poor performance, the punishment ‘maybe as follows: no bonus, threat of termination, or no increase in salary. Other devices that ‘may be used by the company so that the managers will act in accordance with the interest of the stockholders are threat of takeovers by another company and shutdown. b. Stockholders and creditors Aside from the conflicts between the stockholders and managers, a conflict may also arise between stockholders and creditors. Stockholders’ claims over the assets of the company are just a residue after deducting the creditors’ claims. In the same manner, creditors also have a claim over the firm's earnings through interests and principal payments. The firm's creditors grant loans rates based on the firm's capital structure, expected future cash flows, profitability, and stability ‘The conflice berween stockholders and creditors is more evident when the stockholders, through management, undertake a huge project that is too risky for the firm and has been overlooked by the creditors upon granting of the loan. If there isan increased risk, creditors will undoubtedly increase their interest rate and provide a smaller amount of loan. If the project succeeds, all benefits will 80 to the stockholders at the disadvantage of the creditor receiving a less interest rate on the loan.FS | rmmvens amore rat Misconceptions about Financial Management Ifthe project does not succeed, the creditors will have to share inthe losses ofthe firm because of ‘the possibility of non-payments of interest and principal ‘Due to the conflicts berween these two parties, creditors attempt to prorect themselves against sxockholders by puting restrictive covenants on the loan. Some examples are restrictions on declaring ddivdends, issuance of bonds, and accumulating capital assets. Some of the most usual misconceptions about financial management ae listed as follows: inancial management is accounting. “The most common mistake is thinking that financial management is accounting because i utiles nancial statements to arrive at certain decisions. Ie is true that financial information tevessary to ative ata sound decision s provided by accounting, However, he tools used in making vTeislon are different from the ones used in accounting, Accounting has a standard to be followed While financial management doesnot have any. The tools and techniques used by finance people Tre more sophisticated and more scientific and vary depending on what decison is needed. ‘Accounting provides financial information useful forthe common needs of multiple users. In financial management, decision-making is directed to specific Financial uses. 2, Financial management isa review of mathematics. rmulas are used before arriving at a decision. With annuities, and other values, finance is thought to wgin financial Tn making financial decisions, alot of for the computation of present values, furure values, be too much mathematical. Mathematics is always present in every decision-makins management, Toa certain extent, t also uses calculus, math of investments, and algebra before arriving ta decision. Like in ccounting, mathematics is one ofthe tools used in decision-making 3, Financial management isa branch of statistics. Statistics is used at times to ascertain the risks involved in decision-making, Standard deviations, correlation coefficient, coeficient of determinations, and forecasting tools and techniques are used se measure the risk before making financial decisions. With saristic as part ofthe decision-making process it is hought tha Financial management is a branch of statistics Social Responsibility “The primary responsbility of financial the market price of the stock. Do companies are firms also equally responsible forthe welfare oftheir employees, customers, they belong? Iris understandable that Firms hae tobe responsible o thir employes by providing sem ‘eth good working conditions to che environment by not polluing the airand water; and thes cus ty prodacing quality oods or services in the most efficent way. However, be socially responsible 1 management isto maximize the stockholders wealth through hhave to operate strictly in their stockholders’ best interests of ‘and the communities where firm has to incur costs. Social responsibilty implies addtional costs roche company. Notall firms are willing to take hat ex cost ander follow the rules and regulations st forth by good standards. For instance it given a chan setvest which would an investor choose: a company that. maximizes the use of chit funds by investiFan gains RO consi: i soil obligation ora company thats socially responsible with most of xa ie? Mose ofthe time, the answer could be the former than the latter, of investing is to maximize return. Afterall, Docs it mean that companies should not be socially responsible? The answer is, not necessarily. Ir only Sep that social responsibility has to be mandated rather than voluntary o neue burden will not fe shouldered by a single firm, but rather, distributed uniformly among busineace Thee social benefit Perseus in the forms of clear guidelines in hing people, laws on pollution, anebarune actions, mining Es; Product safery and other similar actions cha ar likely wo be effective are eaal het and enforced by mh canent: However, these actions should be implemented in full cooperation between he, industry ad the government and that the costs and benefits of such are estimated ant Properly taken into account. study made on the hazardous effects of plastics, fast-food restaurants are now using paper cups which can Sail be recycle and are biodegradable. Companies like PLDT, San Miguel Corporation, and others are eda ar 28 Gavad Kalingt’ housing projects, These are only some ofthe examples thar day foe $e hing as par of ther corporate socal responsibilty. They belive thar hevoleaf ote is to promote Public good, not jst the good ofthe firms’ shareholders. As tated by the presidens of th Body Shop, mis impossible to separate business from social responsibilty. For other firms, scially responsible endeavors ay Not be expensive at all. They would incur more cost if they do not follow the aac, pred standards of Production and good business management procedures. Many industries in the past suffered losses, o even more became bankrupt due to lawsuit as a result of being socially responsible