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FIN516 Assessment Two

Question 1

The aspect of maximizing the value of the firm for the sake of shareholders with regards to practices of social responsibility has always been a subject of debate for some years now. There are people that think corporate social responsibility tends to diminish the value of the firm hence diminishing shareholders’ returns. However, there are other people who argue that corporate social responsibility helps in maximizing the value of the firm (Kotler & Lee, 2011).

In recent years, the abstraction of corporate social responsibility has gained considerable interest in Australia. This is mainly due to the relationship that exists between CSR and financial performance. In this case, Commonwealth Bank of Australia has not been left behind. CBA tends to undertake various social obligations in the day to day operations of the business. The corporate responsibility implemented in this respect is meant to ensure that the organization brings along a positive contribution to the community. There is consideration of the social, economic and environmental impacts that the business has in light of its operations. CBA’s corporate social responsibility if guided by key principles of balance, transparency and focus.

The areas of focus include corporate governance, employee engagement, environment, community and customer experience among others. When it comes to the community, the organization tends to show support for the social and environmental aspects. CBA has been a major sponsor of the Australian of the Year Awards. The organization has supported this program for more than 30 years (CommonWealthBank, 2016).  CBA is also involved with the Social Impact Scholarship and Red Cross. The scholarships tend to target candidates that work in non-profit organizations. With regards to Red Cross, CBA has opened branches and call centers to help raise money that might be needed during Red Cross appeals.  The bank also supports the Great Barrier Reef Foundation. The reef is a treasure to the world since it acts as home to more than 10% of the fish species found in the world (CommonWealthBank, 2016). CBA supports in funding research that enables to reduce effects of climate change on the reef in order to protect the available species.

These and other aspects of corporate social responsibility are the ones eliciting the concerns of my neighbor. He is not sure on the values being generated by these social responsibility projects. On the face of it, the projects tend to increase the cost being incurred by the bank. This is why my neighbor is quite skeptic on their presence.  There is always an expectation that an organization should try to maximize the value of the firm at all times. This helps in ensuring that the value of the shareholders has been maximized. When the costs are reduced, the prospect of making more profits is usually high. When the profits are high, so are the dividends that are distributed to the shareholders.  With this argument, it is prudent for my neighbor to conclude that the social projects are not adding value to shareholders.

However, this is not the case. This is because the aspect only examines the issue from a short-term perspective. If the issue is analyzed putting the long-term prospects into consideration, different conclusions could be made.  CBA experiences increased costs in the short-run as a result of the social projects. However, this aspect is neutralized in the long-run. In the long-run, corporate social responsibility helps in the increase of sales and equity. When the bank participates in various activities that involve the society, there is the ability to make favorable relationships with the people. This is because the bank is giving an indication that it has the best interest of the community at heart while making most of its decisions.

As a result, most people in the society will embrace various products or services being offered by the bank. There is a constituent of trust that has been created and it will help in this actualization. There is a belief on the side of the community that whatever the bank is offering is good for them, and they will stand to benefit in one way or another. These people go as far as being brand ambassadors (Kotler & Lee, 2011). The spread the information on how good the bank is based on its activities and the aspect brings in more customers. In the long-run, there are increased sales. This helps in increasing the company’s equity. The costs that were initially incurred while the social projects were being undertaken are neutralized. This results in increased profits hence an increase in the value of shareholders.

My neighbor is investing in superannuation. This is a long-term investment since it is paid upon retirement. In this case, the social projects being offered by CBA will be beneficial to my neighbor as a shareholder. There will be an increase in the value of the firm, hence an increased gain with time. The gain might not be immediate, but he intends to remain with this investment for sometime so he will enjoy the benefits. CSR also helps in fighting competition based on the market share that it enables the business to acquire. This ensures that it remains in operation for as long as possible. Shareholders will be actualizing their earnings all along (Kotler & Lee, 2011).

In conclusion, it is sensible to say that maximizing the firm’s value in relation to its shareholders is consistent with the firm’s practices of considerable social responsibility in the long-run.

 

References

CommonWealthBank. (2016). Social and environmental support. Retrieved April 10, 2016, from             https://www.commbank.com.au/about-us/sustainability-and-            community/community/partnerships/social-environmental-support.html

CommonWealthBank. (2016). CommBank’s Sustainability Report 2015. Retrieved April 10,         2016, from https://www.commbank.com.au/sustainability2015/approach-corporate-      responsibility.html

Kotler, P., & Lee, N. (2011). Corporate Social Responsibility: Doing the Most Good for Your        Company and Your Cause. New York: John Wiley & Sons.

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