Business Ethics and Profit Maximization

Study Notes

Adam Smith's insights led to the conclusion that profit maximization is the right goal for a business, and that the free enterprise system is best for society.
A modified version of Adam Smith's theory states that a firm's principal financial goal should be to maximize the wealth of its stockholders, which means maximizing the value of its stock.
Constraints are needed to prevent firms from polluting, engaging in unfair employment practices, or creating monopolies that exploit consumers.

Finance is the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.

Financial Management: focuses on decisions relating to acquiring assets, raising capital, and running the firm to maximize its value.
Capital Markets: relate to markets where interest rates, stock and bond prices are determined, and include financial institutions that supply capital to businesses.
Investments: relate to decisions concerning stocks and bonds, including security analysis, portfolio theory, and market analysis.

Key roles include the Board of Directors, Chief Executive Officer (CEO), Chief Operating Officer (COO), and Chief Financial Officer (CFO).

Proprietorship: an unincorporated business owned by one individual, with advantages including ease of formation, low government regulations, and lower income taxes.
Partnership: a legal arrangement between two or more people, with advantages including ease of establishment, pro rata allocation of income, and individual taxation.
Corporation: a legal entity separate from its owners and managers, with advantages including limited liability for stockholders, unlimited life, ease of transferring shares, and easier capital raising.