University of Immaculate Conception

Jacinto St., Davao City

MBA201 Bus. Phil. W.Ethics

Camille Christine L. Tan Dr. Rolando G. Borja

Student Professor

Case Number 5: Do Managers do Good with Other People’s Money?

BACKGROUND OF THE CASE

Milton Friedman (1970) who wrote the “The only responsibility of

corporations is to make profits,” view CSR as a symptomatic of agency problems
and deleterious to shareholder value. .Corporate Social Responsibility is one of the
programs where many firms especially large corporations invested substantial
resources such as employee and community development, energy conservation,
philanthropic activities, etc. Corporate social responsibility spending represents
important positive net present value investments. However, other economists also view
CSR as a minor in contrast to capital investments.

In the case, two quasi-experiments were used basing on the hypothesis that
corporate social responsibility is due to agency problems. First, using the 2003 Dividend
Tax Cut which increased after-tax insider ownership, they find that the firms with
moderate levels of insider ownership cut CSR by more than firms with low levels and
high levels. As stated in the case, moderate insider-ownership firms experienced larger
increases in valuation.

On the other hand, the second quasi-experiment is motivated by the following

approach to agency theory which recommends that there are two identical ways to
boost managers to increase firm value which are the following:

1. Increase their incentives which is the center of the dividend tax cut analysis;
2. Increased monitoring through improved governance.
STATEMENT OF THE PROBLEM

Milton Friedman suggest that cutting CSR would be good for society, the study
finds it that it may have been wrong as this may aggravate the under provision of public
goods. CSR spending touches a wide variety of public goods such as greener and
pollution-mitigating technology.

Overall, improvements in managerial incentives lead to reductions in firm

goodness, implying that the marginal dollar spent on corporate goodness is a result of
agency problems.

The significant amount of the firm’s corporate social responsibility spending is

due to agency problems which are associated with significant consequences for firm
valuation and social welfare. As a result, high ownership managers are likely to spend
less and likely reduce agency motivated goodness after dividend tax cut has been
made. Prediction from agency model comes out that managers with medium firm
ownership react more to CSR spending cutting compared to managers with low or high
ownership stakes.

SWOT ANALYSIS:

Strengths

The Good Reputation as CSR will bring an overall positive impact to the society.
It increases brand images which lead to an increase in profitability of the business in the
long run. CSR aids attraction, retention and morale of the staff and builds strong
relationships between the company and its staffs.

Weakness

Distraction is needed resources for improving the business into other social
responsibility projects which could put a company at a competitive disadvantage.
Lose focus on the business goals while focusing goals related to good corporate
citizenship and a breach of the principle of profit maximization since it is costly to
maintain.
Opportunities

It Attracts green and ethical investments as customer’s loyalty as to the products

and services of the company. It gives access to the market due to stronger relationships
between customers, suppliers and networks and raises positive publicity and media
opportunities due to media interest in ethical business activities.

Threats

Expansion of CSR in the society may lead to price increase in products and services of
the company which put the latter in competitive disadvantage.

ALTERNATIVE ACTION

The company itself should set standard policies and procedures to whether
allow or disallow insider ownership in the firm. This should be strictly followed to
avoid manager’s conflict of interest between profit maximization and social
responsibility of the company. The company should assess through monitoring if
some social responsibility activities are efficient and would do well to the company
because an outlay of cash for such activities is against the principle of the company
which is to maximize profits.

PROS & CONS TO ALTERNATIVE ACTION

Pros

Managers with ownership in the company would be able to know their limits as to
what extent of income in the company will be given to them. This will minimize and
eliminate self-interest of the managers as to the profitability of the company. Controlling
CSR activities would help minimize spending cost of the company that would result to a
better profit margin.

Cons
Since incentives will be given basing on what is stated on the regulations of the
company, Managers might feel unmotivated because of the limitations they have.
Regardless if the latter becomes more profitable, they would get almost same amount of
incentive which is not pleasing to their senses.
RECOMMENDATION

It is recommended that corporate companies should set regulations when it

comes to insider ownership in the firm and giving incentives to the managers. In making
such regulations, the company should weigh all the pros and cons of such regulations
and should consider both quantitative and qualitative effect to the managers and to the
organization as well. Control outlay of cash in unproductive activities and redirect to
either more productive investments or dividend pay-outs should be managed.

REFERENCES

• https://corpgov.law.harvard.edu/2012/01/30/do-managers-do-good-with-other-
peoples-money/#printable
• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1962120
• https://www.investopedia.com/terms/c/corp-social-responsibility.asp