Traditional Wealth Maximization vs Triple Bottom Line Flashcards
- Traditional wealth maximization strategy:
o maximization of the shareholder’s wealth as a result of increase in share price thereby increasing the market capitalization of the company.
o concept of increasing the value of a business in order to increase the value of the shares held by its stockholders
o Share price increase is a direct function of how competitive the company is, its positioning, growth strategy and how it generates profits.
- What is an important aspect of wealth maximization?
o The concept requires a company’s management team to continually search for the highest possible returns on funds invested in the business, while mitigating any associated risk of loss.
o This calls for a detailed analysis of the cash flows associated with each prospective investment, as well as constant attention to the strategic direction of the organization.
- What is the most direct evidence of wealth maximization:
o Changes in price of a company’s shares
o Company needs to take into account how investments will affect the cash flows. Positive future cash flow equates to higher company share price
- Cost of wealth maximization
o Sole focus on shareholders
o Does not take into account all stakeholders include suppliers, employee, and local communities
o May minimize investment into safety equipment to saver cash
o Always in pursuit of the lowest possible price from suppliers
o Minimal invest in sustainability efforts
- Benefits of wealth maximization
o Based on cash flows rather than profits, which are more exact and defninite
o Long-term strategy
o Considers the time value of money because future cash flows take into account discount rate to represent present value
o Takes into account risk and uncertainty because the discount rate can fluctuate with time and risk
a. Triple Bottom Line Strategy:
i. instead of one bottom line, there should be three: profit, people, and the planet.
ii. The triple bottom line aims to measure the financial, social, and environmental performance of a company over time.
iii. seeks to gauge a corporation’s level of commitment to corporate social responsibility and its impact on the environment over time.
b. Aspects of triple bottom line approach:
i. companies should commit to focusing as much on social and environmental concerns as they do on profits
ii. a company can be managed in a way that not only makes money but which also improves people’s lives and the well-being of the planet.
iii. holds that if a firm looks at profits only, ignoring people and the planet, it cannot account for the full cost of doing business.
Profit
This is the traditional measure of corporate profit—the profit and loss (P&L) account. look at profits in terms of not just what they can do for shareholders, but also how they can help the broader community.
People
: This measures how socially responsible an organization has been throughout its history. measures businesses’ impact on human capital. A company using the triple bottom line has a responsibility to not only shareholders but also employees, vendors, customers, the community where it does business and anyone else impacted by the organization, whether directly or indirectly.
Planet
This measures how environmentally responsible a firm has been. Companies following the TBL model work to reduce their ecological footprint. They recognize that the smaller environmental impact a company has, the longer it can operate.
Costs of TBL
i. Difficult to measure social and environmental bottom lines because it is subjective
ii. Difficult to balance deployment of money and resources to each bottom line without favoring one
iii. May create conflict between management and shareholders because social and environmental efforts may have short term negative impacts on profits
Benefits of TBL
i. Engage less in activities that generate pollution which benefits society in the long run
ii. recognizes the interdependency of all the human relationships and interactions that enable the company to operate. Translates into better benefits, flexible work schedules, professional and educational advancement, safe work environment, fair labor practices
iii. smaller environmental impact a company has, the longer it can operate. Reduce consumption, waste and emissions. Renewable energy sources, reduce energy use, green corporate policies
iv. Ethically driven decisions about how and where to source materials, products, and labor
