Uploaded February 2025 | Updated September 2026, 1 week ago
The objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? Third, take your objective (and the measurement device you have developed) and ask yourself a cynical question: How might managers game this system for maximum benefit, while hurting you as an owner? In the long term, you may almost guarantee that this will happen.
No one has a monopoly on virtue. In the last few years, though, you have the ESG movement push for composite scores for companies, and that has created an eco system that I am cynical about, in terms of what will be ultimately accomplished. If you are interested in my perspective on ESG, please try these two posts that I have on the topic:
aswathdamodaran.blogspot.com/2020/09/sounding-good-or-doing-good-skeptical.html
aswathdamodaran.blogspot.com/2021/09/the-esg-movement-goodness-gravy-train.html
aswathdamodaran.blogspot.com/2022/03/esgs-russia-test-moment-to-shine-or.html
In addition, I did mention that the one thing that impact investing does not seem to measure itself on is actual impact, and here is the link:
aswathdamodaran.blogspot.com/2023/10/good-intentions-perverse-outcomes.html
Finally, to cement my standing as an amoral, unethical “cares only about money” standing, I wrote about the sacred cow that sustainability has become, and why it too may be heading for the slaughterhouse:
aswathdamodaran.blogspot.com/2024/11/the-siren-song-of-sustainability.html
Slides: ttps://nyu.box.com/s/zdu9wzdmn86fj2f0bu4z3htzooftqb0i
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4atest.pdf
Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4asoln.pdf
The objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? Third, take your objective (and the measurement device you have developed) and ask yourself a cynical question: How might managers game this system for maximum benefit, while hurting you as an owner? In the long term, you may almost guarantee that this will happen.
No one has a monopoly on virtue. In the last few years, though, you have the ESG movement push for composite scores for companies, and that has created an eco system that I am cynical about, in terms of what will be ultimately accomplished. If you are interested in my perspective on ESG, please try these two posts that I have on the topic:
aswathdamodaran.blogspot.com/2020/09/sounding-good-or-doing-good-skeptical.html
aswathdamodaran.blogspot.com/2021/09/the-esg-movement-goodness-gravy-train.html
aswathdamodaran.blogspot.com/2022/03/esgs-russia-test-moment-to-shine-or.html
In addition, I did mention that the one thing that impact investing does not seem to measure itself on is actual impact, and here is the link:
aswathdamodaran.blogspot.com/2023/10/good-intentions-perverse-outcomes.html
Finally, to cement my standing as an amoral, unethical “cares only about money” standing, I wrote about the sacred cow that sustainability has become, and why it too may be heading for the slaughterhouse:
aswathdamodaran.blogspot.com/2024/11/the-siren-song-of-sustainability.html
Slides: ttps://nyu.box.com/s/zdu9wzdmn86fj2f0bu4z3htzooftqb0i
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4atest.pdf
Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4asoln.pdf
