Question

The amount of xylene that can be used in household paint is legally limited to 0.03 percent. Anything beyond this amount is hazardous to health and the environment, and considered a legal offense. Consequently, CW Paints Corp. has vouched to make its products as safe as possible. Therefore, it manufactures xylene-free paints even though this increases its costs and reduces the dividends paid to its shareholders in the long run. Which of the following responsibilities is CW Paints Corp. primarily compromising in this scenario?
A) legal responsibilities toward the government
B) economic responsibilities toward its shareholders
C) philanthropic responsibilities toward the local community
D) ethical responsibilities toward the society

Answer 1

Answer: B) economic responsibilities toward its shareholders

Explanation:

The primary purpose of a company is to maximize shareholder wealth. This means that it is to pursue strategy that would ensure the maximum return to its shareholders. This is also known as its economic responsibility towards shareholders.

Producing xylene-free paints reduces the dividends that are going to shareholders so it would seem that shareholder wealth is not being maximized and they are not getting the maximum return they could get so the company is violating its economic responsibilities towards shareholders. It is for a good cause though.