FINM1416 Workshop 1 Assignment

Word count: 788

Name: Ang Zhou
Student Number: 45573484
Q1. Short answer: Describe the debate between the Stanford Cornell student and Milton Friedman.
What did Friedman say was the principle the student is raising? What is your opinion about this
principle? How is this principle relevant to the GM case? (10 marks

That an infinite value should be put on an individual life. I totally agree with this principle, Human
life should not be quantified by capital. Although in reality, there are behaviours that quantify the
value of individual life, under common human values, individual lives can not be quantified by any
money, resources. In GM's case, GM management chose not to improve the design because, although
they knew the car's parts could cause accidents and endanger the lives of consumers, the cost of
replacing a critical ignition switch component was greater than the cost of the warranty. GM ignores
the lives of consumers through costing, which goes against the principle that human life is priceless.
Caused phenomenal social impact.

Q2. Short answer: List 2 key quotes from each of the four authors (i.e. Friedman, Freeman, Hart,
Stout, see Module 1 on LearnX and Tutorial 1 materials) that best demonstrates their view, and
explain what they mean in your own words (list each the two quotes and explain in no more than
three four complete sentences). (16 marks)

Friedman:
Quote1: "there is one and only one social responsibility of business--to use its resources and engage
in activities designed to increase its profits so long as it stays within the rules of the game, which is to
say, engages in open and free competition without deception or fraud."
Quote2:“In a free-enterprise, private-property system, a corporate executive is an employee of the
owners of the business. He has direct responsibility to his employers. That responsibility is to conduct
the business in accordance with their desires, which generally will be to make as much money as
possible while conforming to their basic rules of the society, both those embodied in law and those
embodied in ethical custom.”

In Friedman's theory, the purpose of a business is to maximise profits for shareholders, as permitted
by law and consistent with public morals. In addition, companies should not assume any social
responsibility. At the same time, the ownership of a business belongs only to its shareholders, and
apart from that, everyone else in the company, including middle and top managers, are employees of
the shareholders. All employees are responsible for conducting business as intended by their owners.

Freeman:
Quote1: “One of Stakeholder Theory’s premises is the “responsibility principle,” which says that
people want to and should consider how their actions impact on others. ”
Quote2: “There may be conflicting interests between groups of stakeholders and the manager’s job is
not to trade-off these conflicts, but to work out a way to create value for all parties.”

In Freeman's theory, the foundation of a company's behaviour should consider how it affects others.
In its theory, the company's operating behaviour includes the value of the company's relevant groups,
that is, the interests of stakeholders, rather than the interests of shareholders. At the same time, value
is not limited to wealth. Stakeholders include shareholders, employees, customers, etc. The
responsibility of the business manager is seen as creating value for all stakeholders.
Hart:
Quote1: “Firms should therefore actively seek shareholders' preferences and values, and act
consistently with those.”
Quote2: “instead of making money at the expense of all, the pro-social concerns of shareholders
should be accounted for when building a strategy.”

In Hart's theory, companies should consider shareholder welfare, not just wealth. Welfare includes
wealth, social value needs of shareholders, and moral needs. All shareholders are social participants.
When the company's business behaviour affects the social attributes of shareholders, shareholders will
pay social costs, such as paying money for psychological comfort. Therefore, corporate actions should
take into account the values of shareholders. In addition, business managers should actively consider
and align as much as possible the values of shareholders when conducting business or developing
strategies.

Stout:
Quote1:“Firms can pursue several objectives, and try to do decently well (or at least sufficiently well)
at each rather than maximising only one.”
Quote2: “The disappointing results of shareholder primacy suggest the satisficing approach may be
better not only for shareholders, but for the rest of us as well.”

Stout's theory believes that a company can satifcing multiple goals at the same time, because
shareholders, as a diverse group, have different demands, and optimising a single goal will not
maximise the interests of shareholders. Managers should serve the interests of many different
shareholders, at the same time, corporate managers should consider other goals, such as long-term
planning and risk control, while ensuring returns.

Q3. Short answer: What business strategy would each of the Authors (i.e. Friedman, Freeman, Hart,
Stout, see Module 1 on LearnX and Tutorial 1 materials) have advised to the CEO of GM when posed
with the question on whether to replace the key ignition-switch component when the fault was known?
Make sure to refer to the case, and whether the strategy is close to what GM did in the past and
presently (answer in no more than five complete sentences per view). (16 marks)

Friedman:
Friedman would choose not to replace the key ignition-switch component. Because according to his
theory, it would be in the company's best interest not to replace the component rather than pay the
consumer. A possible accident due to a car breakdown is not on the radar of companies whose goal is
to maximise profits.

Freeman:
Freeman would propose to replace the key ignition-switch component. In his theory, customers and
communities are considered among stakeholders, while, based on his theory, companies should
consider how corporate actions affect others. Without replacing the key ignition-switch component,
although it will increase shareholders' profits, it will harm the interests of customers and cause bad
social impact. This is not in line with the principle of creating value for all parties.

Hart:
Hart would propose to replace the key ignition-switch component. According to his theory, the social
attributes and humanity of shareholders should be taken into account when the company formulates
its strategy. Choosing not to replace parts will lead to accidents, and the loss of consumers' lives is
against people's common value, which is against the social attributes of shareholders. Furthermore,
this situation may lead the shareholders involved in the decision to spend money to alleviate their
moral pressure and external distress, which is sub-optimal.

Stout:
Stout will advise management to replace the key ignition-switch component. Based on her theory, a
diverse set of shareholders should be considered. In the strategy of not replacing parts. Choosing not
to replace the parts that caused the accident would also fail to satisfy pro-social and consumer-focused
shareholders. In addition, managers should not only focus on shareholders' equity when specifying
strategies, but also consider diverse corporate goals. Not replacing parts is against customer and social
impact.

Q4. Short answer: What do you think the CEO of GM should have done in regards to replacing the
key ignition switch component when the fault was known? (8 marks)

Provide relevant information and apologies for press and consumers to minimise the possibility of
accidents.
Offer solutions to consumers, recall crashed cars, or send car engineers to rebuild.
Immediately set up a design department to redesign the new ignition-switch design.
A new emergency handling department was established to be responsible for relevant consumer
compensation, press conferences, and internal reviews. This event can also be responsible for
handling other events.
Hold a board of directors to establish future business strategy, balancing consumer rights and
shareholder rights.