Paul Polman is the chief executive of a multinational corporation, but he sometimes sounds more like a spokesman for Occupy Wall Street. The boss of Unilever (an Anglo-Dutch consumer-goods firm with bra

ASSIGNMENT QUESTION

PART  1

REQUIREMENT:

Read the article and answer the questions below.

Taking The Long View: The Pursuit Of Shareholder Value Is Attracting Criticism – Not All Of It Foolish

Paul Polman is the chief executive of a multinational corporation, but he sometimes sounds more like a spokesman for Occupy Wall Street. The boss of Unilever (an Anglo-Dutch consumer-goods firm with brands ranging from Timotei shampoo to Ben & Jerry’s ice cream) agonises about unemployment, global warming and baby-boomer greed. He puts some of the blame for these ills on the most influential management theory of the past three decades: the idea that companies should aim above all else to maximise returns to shareholders.

He appears to mean it. Since taking charge in 2009, Mr. Polman has stopped Unilever from publishing full financial results every quarter. He refuses to offer earnings guidance to equity analysts. He has introduced a lengthy “sustainable living plan” and attracted a new cadre of long-term investors, particularly in emerging markets. He even told an audience in Davos that hedge-fund managers would sell their own grandmothers to make a profit.

Mr. Polman was one of several titans to decry the cult of shareholder value at the Peter Drucker Forum (an annual gathering of admirers of the late Austrian-born management guru) in Vienna on November 15th and 16th. Roger Martin, the dean of the Rotman School of Management at the University of Toronto, called it a “crummy principle that is undermining American capitalism”. Georg Kapsch of the Federation of Austrian Industries urged the world to abandon it. Rick Wartzman, the director of the Drucker Institute, said its critics were gaining momentum.

The cult has certainly yielded perverse results. The fashion for linking pay to share prices has spurred some bosses to manipulate those prices. For example, a manager with share options gets nothing if the share price misses its target, so he may take unwise risks to hit it. Short-termism is rife on Wall Street: the average time that people hold a stock on the New York Stock Exchange has tumbled from eight years in 1960 to four months in 2010. The emphasis on short-term results has tempted some firms to skimp on research and innovation, robbing the future to flatter this year’s profits. “Long-term results cannot be achieved by piling short-term results on short-term results,” Drucker once remarked.

One study shows that listed companies have invested only 4% of their total assets, compared with 10% for “observably similar” privately held companies. A second shows that 80% of managers are willing to reduce spending on R&D or advertising to hit the numbers. John Kay, a British economist (and author of a government report on short-termism) argues that the pursuit of short-term profit may have undermined two of Britain’s greatest companies, ICI and GEC.

Economist.com/blogs/Schumpeter

Nov 24th 2012 | from the print edition | Business

QUESTION 1

1. Discuss critically the definitions of economic profit and value of the firm, focusing on their similarities and differences.

(2 Marks)

1. Using Malaysian examples and examples given in the article above, explain why economic profit vary across industries.

(3 Marks)

QUESTION 2

Based on the article above, are the critics really right to argue that modern capital markets invariably put short-term results before long-term ones? Support your answer using sound economic theories and concepts. Use examples to amplify your argument.

(10 Marks)

(TOTAL:15 Marks) 

PART  2

OBJECTIVE:

The purpose of this assignment is to provide the learners with the skill to perform quantitative analysis in economics, in particular, the use of calculus, present value and risk measurement.

QUESTION 1

REQUIREMENT

1. Use calculus to find the decision rule for the most profitable production of goods and services for a firm in general and differentiate it with a perfectly competitive firm. Assume that the objective function involves profit maximisation, π = P(q)Q – C(q) and that P(q) is the price (as a function of quantity), Q is the quantity, and total cost C(q) is an increasing function in quantity.

(3 Marks)

 

1. Akaun Teguh Sdn Bhd, a firm which supplies qualified temporary accounting and book keeping employees to firms, has determined that profits in their Putrajaya operation rise as the number of on-call accountants rises. The more accountants who are willing to work for Akaun Teguh, the more assignments they will be able to fill. However, there is a cost of recruiting more qualified on-call candidates. These costs include screening and advertising. Consequently, the profit function in Putrajaya is:

 

π = -3500 + 341L – 5L²

 

How many accountants should the Putrajaya office recruit to be their on-call workers? What is the amount of profit at the optimal number of on-call accountants?

(2 Marks)

QUESTION 2

REQUIREMENT:

1. What is the rationale behind the Net Present Value Method?

(3 Marks)

1. Show an example of how this method can be used to choose between two alternative projects.

(2 Marks)

QUESTION 3

REQUIREMENT:

1. Do shareholders want managers to avoid most risks? Explain your answer.

(3 Marks)

1. As a manager, you must decide whether or not to make a risky acquisition. The outcomes are:

Acquisition                 No acquisition

Recession        -150 million                -50 million

Boom              800 million                 250 million

1. Find the coefficients of variation for an acquisition and no acquisition.

(1 Mark)

1. Explain how it is possible that it could be riskier not to do the acquisition than to go through with the acquisition project.

(1 Mark)

(Total: 15 Marks)

(GRAND TOTAL: 30 MARKS)