CRITICAL ISSUES IN EDUCATION

Critical Issues In Education

Critical Issues In Education

Despite the heightened awareness of business ethics, financial ethics education and research have not captured the attention of finance educators. One possible reason is that finance theory is rounded upon the basic objective of stockholder wealth maximization. Though this model has been viewed as unethical by some ethics researchers, we suggest that finance educators should not abandon the theory of stockholder wealth maximization, despite the appeal of the stakeholder view of the firm. (Hawley, 2003)

The latest "hot topic" in academic research and teaching is business ethics. Accreditation agencies required that business schools incorporate ethics into the business curriculum, and business ethics research is an expanding area. Nevertheless, financial ethics education and research have not captured the attention of finance educators. Managers presiding over hostile take-overs, leveraged buyouts, corporate downsizing, or other forms of corporate restructuring are often labeled "unethical" for failing to consider the interests of all stakeholders--for example, labor unions, customers, communities, suppliers, bondholders, governments, and stockholders. (Hawley, 2003)

Contrary to this "stakeholder" view of the firm, however, finance theory advocates the maximization of stockholders' wealth. Finance students are taught this basic premise throughout their finance education. However, Hawley (1991) suggests that financial educators are abdicating their responsibility for helping prepare corporate managers to recognize and deal with business ethics/social responsibility effectively. Hawley proposes that the stockholder wealth maximization model for corporate management rationalizes the commission of unethical or socially irresponsible actions and presents evidence indicating the minor presence, and in most cases the absence, of ethics coverage in introductory finance textbooks. (Hawley, 2003) The stakeholder and stockholder views of the firm thus present the finance educator with a difficult dilemma. As ethics is incorporated into business and finance curricula, should finance educators continue to advocate the maximization of stockholders' wealth? Finance educators need to be reassured, despite pressures from outside sources, that maximizing stockholders' wealth is in the best interest of society at large. As Dobson (1993) comments, "Not only is maximizing stockholders' wealth consistent with ethical behavior, it is an ethical prerogative." (Dunfee, 2002)

Stakeholder Model of the Firm

The criticisms levied against corporate restructuring activity can be traced to stakeholder theory, which calls for managerial decisions that balance the interests of all stakeholders. The opponents of the various degrees of corporate restructuring point out that gains to stockholders represent a redistribution of wealth from other stakeholder groups. Because of these potential redistributions of wealth, stakeholder theorists view some forms of corporate restructuring as unethical behavior and as short-sighted actions by management designed to temporarily increase the price of the stock, while imposing financial and social costs on other stakeholder groups.

A wide array of finance literature offers empirical evidence for the gains in efficiency arising from corporate re-structuring. (Hawley, 2003) Contrary to these criticisms, society benefits from efficiency gains because of lower costs, new technologies and products, and ultimately, increased employment.

Stockholder Model of the Firm

Corporations require capital for investment, which ultimately leads to job creation that benefits all ...