Virtually all larger corporations have established ethics codes which set out th

Question

Virtually all larger corporations have established ethics codes which set out the company's values, ethics, objectives and responsibilities. The company’s code of ethics is designed to serve as a guide to proper business conduct for all employees. With regard to project selection and capital budgeting, we have focused on the quantitative considerations in the decision process. However, decision makers need to keep in mind that nonfinancial considerations may be important elements in project selection. How does a company’s code of ethics apply to project selection and capital budgeting? For most companies, ethical considerations are mainly focused on the reduction of potential risk associated with a project. For example, a company might be concerned with employees being familiar with the regulatory and procurement laws to avoid criminal and civil sanctions for not performing according to those regulations. However, another way to incorporate non financial considerations into capital project evaluation is to take into account the likely effects of the decisions on non shareholder stakeholders. Your textbook uses the example of Chipotle’s decision on sourcing food which is better tasting, better for the animals, better for the environment and better for the farmers. The article in your textbook closes with the statement that Chipotle’s focus on doing “the right thing” has resulted in increased sales and higher stock prices. Of course, this article was based on the years before the events involved in food poisoning. Requirement: Identify a company that has taken into consideration the effect of its decisions on non shareholder stakeholders. Discuss the decision and the effects of the decision on the stakeholders and the environment.

Explanation / Answer

Ethical project selection and capital budgeting is very crucial in shareholder's wealth maximization. Ethics are followed in selecting projects that have the highest NPV, or future benefits are availed out of them. Many a times manager's just select the project to achieve their targets without giving regards to the growth prospects. The company should also follow risk matrix while deciding the projects. The projects having more than average risk should not be Selected, if selected the cost of capital needs to be adjusted.

This act of being ethical to non shareholder stakeholder is often referred to as corporate social responsibility.

One of the companies is Google who have set so far the best example of CSR. It has made multiple Moves towards good citizenship. One of them is Google Green to use resources efficiently and use renewable energy.

For Google using efficient lights, turning off lights and using renewable energies have done a lot than any other things. The power expenses of the data centres have been reduced by 50%, which has directed the saving to a better segment. This commitment of Google has been proved good for the government, the society and the investors as the share price of the company has seen new highs after this.

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