BACKGROUND INFORMATION FOR DISCUSSION

You have read in the unit material that wealth maximization of shareholders should be the prime motive of a companys finance manager. The raging pandemic since the end of 2019 has brought this argument into as sharp a focus as never before. On the one hand is the view that unless shareholders are compensated for the risk taken and resources committed by them, there will be no impetus for business activity and resources will no more be channelized productively. In absence of value maximization, business motivation will be dampened and that will have wider and detrimental repercussions for the society and world at large. The contrary view is that corporate houses cannot be seen as entities that are immune from social, ethical and environmental concerns and instead of only the shareholders, a stakeholder welfare approach is more justified.

A recent article in theconversation.com tackles this issue head on by positing how Pfizer is hoping to earn big through the sale of its COVID-19 vaccine. Likewise, Moderna is likely to post its first ever profit this year. The critics are unforgiving, especially when companies like Astrazeneca and J&J are brought in the picture, who committed to sell their vaccines on a non-profit basis. The counterargument is that pharma companies have a commercial as well as social responsibility to utilize their resources and models to provide life-saving vaccines to the world, which is a stance supported by law as well. The article raises a pertinent question when it asks what would the world do if both Pfizer and Moderna backed out and decided not to work on a COVID-19 vaccine for cost and reputation related reasons. For sure, the financial costs involved in developing a vaccine at a warp speed are prohibiting. And what if they failed in their respective ventures? Their goodwill and reputation as reliable pharma companies would be seriously hit. The fact that they decided to go ahead with a scientific and a potentially life-saving cause can be seen as their commitment to science, medicine and society at a time when no other plausible solution was known. They came up with vaccines that not only remained supposedly largely effective till the Omicron variant arrived but were also apparently much superior in efficacy to the other widely distributed vaccines in many lower and middle income countries. All this without any serious known side effects, at least not in the near-term, like lethal blood clots.

The article referred to in the previous paragraph is provided below so that you can read it in its entirety.

Article:

The pharmaceutical company Pfizer expects to earn up to US$26 billion (18 billion) this year from the sale of its COVID-19 vaccine. Profits for the first quarter of 2021 are apparently 44% higher than they were a year ago.

Similarly, Moderna expects to make US$18.4 billion (13 billion), and record its first ever profit this year.

This has led some to ask whether it is right for these big drug companies to effectively profit from the pandemic especially in light of commitments from competitors Johnson & Johnson and AstraZeneca to sell their vaccines on a non-profit basis.

From a moral point of view, one might think such huge sums are unacceptable when so many industries the arts, hospitality, retail, travel, to name but a few have taken such a hit from lockdowns and social restrictions.

On the other hand, it could be argued that pharma companies have both a business and a social responsibility to use their profit-making model to provide the world with vaccines. Indeed, corporate law supports this position.

Theres a long-standing divide in this area of corporate legal research. On one side are those who see the corporation as a profit maximising machine for shareholders. On the other are those who believe that while profit making is a necessary corporate objective, the corporation also has responsibilities towards its employees, the environment, its community and society at large.

Those of us who take the latter view do so partly because it is supported by practices across the common law world countries including the UK, Ireland, the US, Canada and Australia, where decisions of the most senior courts are sources of law and are binding on other courts dating back to the 19th century. This approach recognises the corporation as an entity distinct from its shareholders.

But not only is this view of corporate responsibility legally correct, it is also the socially responsible view of the corporation because it recognises the wider consequences of a profit at all costs mentality. It takes into account the human side of business, such as the impact on workers and local communities when factories close and production is outsourced to places with lower wage costs (and often less regulation).

This view of what a corporation should be fully accepts the essential role shareholders have in providing capital to fund expensive research and the development of essential products. But it also recognises those other essential roles of employees who provide their talents and labour, and of society in providing demand for goods and services.

Seeing as the corporation could not function without every stakeholder playing their part, all of these and other interests should form part of the decision making process.

And it seems as though this is what Pfizer and Moderna have done. Surely it would have been more troubling if their management teams had chosen not to work on a COVID-19 vaccine because of the huge financial costs involved, and the reputational costs that would inevitably follow if their attempts failed.

Corporations deciding to take the cheaper route to secure their bottom line is all too familiar. A big pharma executive could legitimately have argued that looking the other way during a global pandemic and thus avoiding all the potentially crippling externalities associated with the development of a brand new vaccine might be the safest option.

But this was not the path that Pfizer for example chose when it weighed up the various factors in play, including the societal benefits of a COVID-19 vaccine, the associated business risks of such a venture, and of course the chance to increase profits.

Risks and rewards

Moderna and Pfizer (and its development partner BioNTech) also did exactly what the corporate law frameworks in their respective countries

In the US, where Pfizer and Moderna are based, the Supreme Court has recognised that corporations have responsibilities beyond exclusively going after profit. Also, most states have enacted so called constituency statutes, which make it clear that management can consider any or all groups affected by the corporations actions shareholders, employees and yes, the wider community.

Read more: Donald Trump: social media ban shows corporate responsibility can win out over profit

The same is true in Germany, home of BioNTech, which first developed the Pfizer vaccine. The broad obligation on management in German corporations is to work in the interests of the company. And although these are not defined, it is generally accepted to mean that these interests include the interests of society.

So drug companies are not wrong to have made a profit from the pandemic. What would have been wrong is if they had ignored the obvious and vast global social damage of COVID-19 and focused instead on the financial and potentially grave reputational risks of developing a vaccine for the world.

Instead, they acted in accordance with what corporate law requires and what every corporation should be doing. It is acknowledging the contribution of every player in the organisation shareholders, employees, suppliers, society and rewarding them accordingly, whether thats in financial or medical gain.

QUESTION

After reading the article and conducting further research into the idea whether shareholder wealth maximization is the be-all and end-all for a company (as taught in formal finance courses), provide your own informed view on the matter in no more than 200 words and engage in a discussion with your peers on the forum about what should be the ideal way forward.