Corporate Governance and Ethics - Assignment Example

Running Header: Corporate governance and Ethics Student’s Name: Course Code: Instructor’s Name: Date of Submission: Corporate governance and Ethics Introduction Due to the collapse of high profile large corporations, there has been renewed interest on the importance of maintaining corporate governance. Some of the reasons that caused this collapse include fraud and focusing on other benefits other than maintaining shareholders’ interests. Anand and Rosen (2008) describes that corporate governance is referred to the set of processes, customs, policies and laws that affect the manner in which a country or a company is directed and controlled. It also includes relationships among various stakeholders and the goals governing a particular corporation. In the modern businesses, shareholders are referred as the main external stakeholders of a company other include debtors, suppliers, customers and communities. The internal stakeholders include executives, board of directors and the employees. One important factor showing the nature of corporate governance is the extent of accountability in an organizational setup. The other factor is the techniques used in eliminating the principal-agent conflicts. Corporate governance strongly emphasizes on the importance of shareholders’ welfare that is mostly applied in the contemporary public developments. Embinski et al. (2006) shows in US for example large corporations collapsed due to fraud such as Enron Corporation and the MCI Inc. This problem was linked to the Sarbanes-Oxley Act that was passed by the federal government in 2002 that was intended to renew public confidence in corporate governance. There were other companies failures experienced in Australia for example the HIH and One Tel where the problems were caused by the ultimate passage of CLERP 9 reforms. Corporate failures in other countries have increased interest on regulations and maintained public and political interest in regulating corporate governance. Corporate governance complies with legal and regulatory requirements and ensures that environmental and local community needs are effectively met. Considerable interest shows how the external systems and markets influence corporate governance. Crawford (2007) describes that most public companies view shareholders as owners of the company and this affects the definition of corporate governance. One example is where the SEBI committee in India showed that corporate governance is where managers accept absolute rights of the company shareholders and consider them as owners whose role is to delegate duties to their agents in this case the management. The company trustees should be committed to values and be able to distinguish between personal and corporate funds. This Indian approach is derived from the Gandhian principle of trusteeship where managers act as trustees. It is complex how shareholders own public traded corporations and this ownership may lead to ambiguity where these shareholders fail to exercise ownership rights. Corporate governance is the way power is exercised for the management of social and economic resources in order to attain sustainable human development. It maintains a dynamic balance between the importance of order and equality in the society. It also facilitates efficient production and delivery of goods and services through accountability and the use of power. Importance of corporate governance Corporate governance promotes efficient, effective and sustainable businesses that creates wealth, employment and solves societal problems. Secondly, corporate governance promotes responsive and accountable companies. It also promotes legal companies managed with full integrity, probity and transparency therefore reducing misuse of power from management. It also recognises and protects the rights of stakeholders eliminating exploitation of some stakeholders such as employees. Corporate governance is shown as the way the power of a company is applied in the stewardship of the total portfolio of assets and resources used in the company. This is important as it maintains and increases shareholder value and satisfaction of the rest of the stakeholders. A balance between individual and communal goals is created therefore encouraging efficient use of company resources, accountability and stewardship. Corporate governance also shows a commitment to ethical behaviour in forming business strategy, operations and culture. In today’s globalised and interconnected world, investors and other stakeholders have realized that environmental, socials and governance responsibilities are the integral part of a company and that they enhance performance and long term sustainability. These recent concerns enable most companies determine their profits. To facilitate successful performance and sustain company growth, it is important that the managers incorporate new dimensions set to the core decision making processes. The global financial crisis for example has facilitated the need for provision of well informed strategic direction by the company’s board of directors. This engages oversight and goes beyond achievement of short term financial performance (Crawford 2007). These strategies prepares companies to cope with comprehensive financial risks and enables then anticipate for potentially adverse impacts caused on individuals and the business environment. Companies are also able to manage tangible and reputational risks. Corporate governance creates shareholder value for example by increasing business opportunities. Wealth is also generated through broader access to global markets. The practice of corporate governance introduces new vision of business where the core values, human rights and environmental protection guide the strategies set by board of directors. Other values include the relationship with management and the accountability of company shareholders. Well practices corporate governance instills essential vision, processes and structures that make overall decisions. It also ensures that the company achieves long term sustainability. Shareholders prefer companies that can be profitable and at the same time can achieve environmental, social and economic value for the entire society (Clarke 2004). Most managers and especially in the public traded companies acknowledge creating value for their shareholders and this is their corporate objective. Shareholders are therefore considered as important components in the management’s assessment of key decisions. The CEO of the Indian Head Mills states that the objective of their company is to increase the intrinsic value of the common stock but not to grow bigger, nor to be diversified nor to provide jobs. They are also not in business to lead in new product development or to achieve any status. He says that any of the above aspect may come time to time as a means to the main objective of the company which is to improve the inherent value of their stockholders. Corporate directors being appointed by the shareholders also receive restrictions for control and decision making. Shareholders therefore tend to influence company’s policies and directors fear being fired if they do not satisfy the needs of their shareholders. However, most shareholders are interested in increased return on investment and do not necessarily play a major role in corporate governance. Unlike individual investors, institutional shareholders own large quantities of company’s stock. Shareholders use various techniques to link top management and shareholders goals. This is by giving managers options of purchasing stock in future at a predetermined price. If this stock price rises over time, the shareholders receive a substantial profit opportunity. This technique is preferred as it benefits both the managers and the shareholders (Anand and Rosen 2008). A well governed company employs a long term view of the company therefore integrating the environmental and the social responsibilities of analysing corporate risks. Managers are also able to discover opportunities where they can allocate capital for the interest of the shareholders. This method restores public confidence and builds progressive future for both businesses and markets. It is stated that good corporate governance is the glue that holds together various business practices that facilitates positive workplace management. It also ensures marketplace responsibility, community engagement and sustained financial performance. The duties of the shareholders include protecting stakeholder rights and interests, managing risks and creating a long term business value. The board of directors protects stakeholder rights by being accountable to shareholders and by taking ultimate responsibility for the firm’s high standard of corporate behaviour and ethics. Effective corporate governance requires due diligence in order to support and be committed to the wide network of business stakeholders. Once company’s stakeholders are adversely affected by the activities of a firm, the shareholders will also suffer the consequences of these activities. The recent growth of pension and insurance funds have resulted to many shareholders being stakeholders for example some employees, customers and suppliers are also shareholders of one company. This shows that the needs of both shareholders and stakeholders are increasingly connected. By responding to stakeholders concerns, several business benefits are achieved. These include building a culture of trust and collaboration for example through the introduction of anti-corruption measures that strengthen stakeholders’ relationships. Once companies form anti-corruption initiatives for example by encouraging employees, they are able to yield relationships among individuals therefore making it easy to solve workplace dilemmas. Employees working in an environment that respects their rights and needs are capable of being more productive and deliver quality work unlike those who are normally mistreated at work. Improved levels of integrity, transparency and disclosure tend to be influential for example in restoring public and investor trust. These standards contribute to the ongoing constructive dialogue among stakeholders for example the communities who can help in determining business performance. Various companies are being green for example the Whole foods that installs solar panels and buys wind power to offset its non-renewable energy use. The General electric has also planned to decrease pollution and to double its spending on research and development on technologies in order to evaluate stakeholders’ needs. Wal-Mart Company also joined green companies for example by increasing the number of its environmental friendly stores. This move is meant to reduce consumption of energy and pollution therefore maintaining business ethics. Many businesses have now tried to determine their relationships, obligations and duties that are necessary for the interest of their stakeholders. The social responsibility of a company includes a contract made with the society while business ethics involves business rules that guide individuals in decision-making. Social responsibility of a business needs a quantitative credibility since it is considered a significant concern that increases business profits. Other stakeholders concerns that are quantified include employee satisfaction, consumer loyalty and maintaining company values. The International Organization for Standardization (ISO) regulates corporate social responsibility. It also encourages discussions on the role of social responsibility and how it helps stakeholders. The steps of social responsibilities include abiding to the legal terms, offering economic satisfaction, being ethical and finally philanthropic which involves giving back to the society. An ethical company is one that follows the standards of acceptable behavior as judged by the stakeholders. Corporations are created as legal persons guided by laws and regulations. These vary in many respects and between countries. Corporate governance allows businesses to hold property in their own right without reference to particular person. Corporations are therefore subject to common law that affects business practices and provides individual rules that tend to govern corporations and constrain decision makers. According to Clarke (2004) corporate governance principles and codes are different from one country to another. They are issued from stock exchanges, corporations, institutional investors and managers supporting government and international organisations. The compliance with this governance is generally not mandated by law except those from stock exchange that tend to be coercive. Companies quoted on the Toronto, London and Australian stock exchange for example do not need to follow recommendations of their codes. Though they have to disclose that they follow these recommendations and if not should provide explanations. The parties to corporate governance include government agencies and authorities, stock exchanges and management. This ensure an efficient and strategic allocation of resources to initiatives such as improving labour practices in supplier operations which improves productivity and reduce reputational risks. Other initiatives involve preventing workplace discrimination and promoting gender and ethnic equality in business activities. Business executives should understand that a diverse workforce and customer base improves development within new markets and untapped customer demographics. Environmental programs of corporate governance provide financial benefits for example by reducing operating costs and giving opportunities for new markets and improved technologies. It also improves employees’ morale and health. Managing environmental, social and governance performance is necessary as it strengthens company reputation and brand value. Corporate governance is therefore seen as the way boards oversee the running of a company by its managers. It is also how members are held accountable to shareholders and the company as whole. This has implications on company behaviour to both shareholders and other stakeholders such as employees, customers and the communities. Responsible management of environmental, social and governance issues is importance as it create business ethos and builds an environment of trust and integrity among society and shareholders. Business ethics According to Clarke (2004), business ethics involves adhering to criminal law in work related activities. It is also involves avoiding actions that results to civil law suits against a certain company. Finally, business ethics involves actions that reveal a company’s bad image. These actions should be given much concern as they may cause loss of company money or changing the reputation of a company. The concerns can be solved through assigning corporate attorneys who lead employees on the best activities to undertake once they stray from the narrow path of acceptable conduct. An example is the Broadway Company that was developing new games that targeted teen and when the nudity game was started, it generated more productivity for the company though it was tarnishing the company’s image as children were the main customers and the game would cause more harm to their mentality. The company therefore had to stop the game and contact an internet provider who would take the game and put it on the internet to be viewed by adults. This case demonstrates ethical business issues that are bad for the company’s image or those that do not contribute to developing the community. Employees are instructed on how to address the issues of right and wrong conduct. Business ethics also examines the principles and moral problems that arise in any business environment. It involves the conduct of employees and how they achieve business goals. This has both normative and descriptive dimensions and it is also a corporate and career practice. Today most companies promote their commitment to non economic values such as ethics codes and social responsibility through descriptive methods. Some governments use laws and regulations in pointing out acceptable business behaviour. Business ethical norms evolved according to the historical period and reflect the philosophy of business. This is because it determines the fundamental purpose of a company. For example if the purpose of a company is to maximise shareholder returns, then concentrating on other concerns would be a violation of company’s fiduciary responsibility. Corporate executives’ responsibility is therefore seen as to make as much money while conforming to the basic rules of the society for example the Broadway Company was making much money from the nudity game but was not conforming to the rules acceptable by the society. These rules should also be embodied in law and in ethical custom. An ethical business should also exhibit corporate social responsibility. This involves voluntary work that outdoes the demands of national legislation and includes environmental, social issues and human rights. It may also show provision of housing, health care and education as other activities that most businessmen engage in for the need of the society. Firms in the global market have also devoted available resources to the community for example, through the provision of social amenities in order to achieve long run interests for example through increase in profits. The strategy practiced by firms also helps to build a good reputation thus attracting desirable employees to the organisation. Other worthwhile effects of using social responsibility are to reduce wage bill or sabotage. Social responsibility as applied in organisations is meant to benefit the society through the provision of social amenities and other services. A business that practice social responsibility is one that realises that it is important to have a better world and this can be achieved through supporting communities. Many organisations have also realised that competitive advantage is achieved through several considerations of the communities such as providing social and environmental support. According to Sun (2009) some people in business argue that there exists a symbiotic relation between ethics and business ethics where ethics emerges form profit oriented business. This approach is both weak and strong. The weak version shows that good ethics results in good business which means that moral business practices are profitable for example it means that making safe products reduces product liability lawsuits therefore increase in profits. Similarly it is necessary as it is a financial interest of a business to maintain employee privacy as it improves morale and work efficiency. This version however has various problems since most moral business activities only have long term profits therefore less output for the business especially those that aim in achieving short term profits. The other problem is that moral business practices are not economically viable even in the long run. This can be explained by how some businesses retain older inefficient workers rather than replacing them with young ones who are efficient. Moral business activities depend on what produces profit at that particular period. This therefore shows that incase there is an overlap between moral and profit than it would be limited or incidental. The stronger version showing the relationship between business profits and morality shows that in a competitive and free market, profit motive yields a moral proper environment. Crawford (2007) shows if customers prefer safe products, or if worker demand privacy then they should only buy or work in businesses that provides for their needs. This shows that good business results into good business ethics therefore drive for profits creates morality. This view however has problems because it assumes that consumers demand moral things yet some consumers may opt for cheap and less safe products for example some consumers may prefer a cheaper car without air bags though this is morally irresponsible as their lives are put at risk. Workers may also forego the demands for privacy if they are compensated with a higher payment. Conclusion All approaches of business ethics have conceptual problems that show that ethics is a complex subject. Individuals should therefore expect controversies while practicing business ethics. However, the approaches bring us closer to the importance of practicing moral behavior in business. Paying attention to business profit motives and the moral interests of consumers generates moral and responsible business decisions. On the other hand, we have seen that corporate governance involves monitoring and laying in place procedures that allows for compliance and relevant regulatory and legal requirements. Companies should therefore ensure that procedures are in place to maintain adequate historical archives. Works Cited Anand, V. & Rosen, C. “The Ethics of Organizational Secrets.” Journal of Management Inquiry 1.7 (2008): 97-99. Clarke, Thomas. Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance. London and New York: Routledge, 2004. Crawford, Curtis. The Reform of Corporate Governance: Major Trends in the U.S. Corporate Boardroom. Capella University, 2007. Embinski, P. Lager, C. Cornford, A. & Bonvin, J. “Enron and World Finance.” A Case Study in Ethics. New York: Palgrave, 2006. Sun, William. “How to Govern Corporations So They Serve the Public Good.” A Theory of Corporate Governance Emergence, New York: Edwin Mellen, 2009. Read More