REVIEW QUESTIONS 1–7 What is the goal of the firm and, therefore, of all managers and

6 REVIEW QUESTIONS 1–7 What is the goal of the firm and, therefore, of all managers and

employees? Discuss how one measures achievement of this goal. 1–8 For what three basic reasons is profit maximization inconsistent with

wealth maximization?

1. Robert A. Cooke, “Business Ethics: A Perspective,” in Arthur Andersen Cases on Business Ethics (Chicago:

CHAPTER 1

The Role of Managerial Finance

focus on ETHICS Will Google Live Up to Its Motto?

in practice Google offers an inter- Google’s business goal is “instantly During the first quarter of 2010, esting case study on

Google’s share price declined by 8.5 value maximization and corporate

delivering relevant information on any

topic” to the world. However, when the percent, compared to an increase of ethics. In 2004, Google’s founders pro- company launched its search engine in

45.2 percent for Google’s main rival in vided “An Owner’s Manual” for share-

China, Baidu.com. holders, which stated that “Google is

China in early 2006, it agreed to the

Google’s founders seemed to antici- not a conventional company” and that

Chinese government’s request to censor

pate the current situation in the firm’s the company’s ultimate goal “is to

search results. Some observers felt that

“Owner’s Manual.” According to the develop services that significantly

the opportunity to gain access to the

firm, “If opportunities arise that might improve the lives of as many people as compromise its principles.

vast Chinese market led Google to

cause us to sacrifice short-term results possible.” The founders stressed that it

but are in the best long-term interest of was not enough for Google to run a

In January 2010, Google

our shareholders, we will take those successful business but that they want to Chinese human-rights activists and a

announced that the Gmail accounts of

opportunities. We have the fortitude to use the company to make the world a

do this. We would request that our better place. The “Owner’s Manual”

number of technology, financial, and

shareholders take the long-term view.” also unveiled Google’s corporate

defense companies had been hacked.

It remains to be seen whether Google’s motto, “Don’t Be Evil.” The motto is

The company threatened to pull out of

short-term sacrifice will benefit share- intended to convey Google’s willing-

China unless an agreement on uncen-

holders in the long run. ness to do the right thing even when

sored search results could be reached.

Two months later, Google began rout-

doing so requires the firm to sacrifice in ing Chinese web searches to their 3 Is the goal of maximization of the short run. Google’s approach does uncensored servers in Hong Kong, a

shareholder wealth necessarily not appear to be limiting its ability to

move that was cheered by activists and ethical or unethical? maximize value—the company’s share

3 How can Google justify its actions price increased from $100 to approxi- the Chinese government. In the short

human-rights groups, but criticized by

in the short run to its long-run mately $500 in 6 years.

term, Google’s shareholders suffered.

investors?

Source: 2004 Founders’ IPO Letter, http://investor.google.com/corporate/2004/ipo-founders-letter.html

1–9 What is risk? Why must risk as well as return be considered by the financial manager who is evaluating a decision alternative or action? 1–10 Describe the role of corporate ethics policies and guidelines, and dis- cuss the relationship that is believed to exist between ethics and share price.