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Shareholders and Business Ethics

Reassessing the importance of Shareholders and Stakeholders

David Mackrory

on 18 March 2014

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Transcript of Shareholders and Business Ethics

Shareholding for sustainability
Shareholders and globalisation
The Dow Jones Sustainability
Group Index
‘Best-in-class’ approach
Family of indexes comprising different markets and regions (e.g. Asia-Pacific sub-index added in 2009)
Companies accepted into index chosen along following criteria:
Environmental (ecological) sustainability
Economic sustainability
Social sustainability
Criticisms of index:
Depends on data provided by the corporation itself
Questionable criteria used by index
Focuses on management processes rather than on the actual sustainability of the company or its products
Socially responsible investment (SRI)
Ethical investment is the use of ethical, social and environmental criteria in the selection and management of investment portfolios, generally consisting of company shares
Shareholder democracy
Idea that a shareholder of a company is entitled to have a say in corporate decisions
Supported by legal claim based on property rights
Can shareholders be a force for wider social accountability and performance?
Three issues to consider:
Scope of activities
Adequate information
Mechanism for change
Shareholders as citizens of the corporation
Combating global terrorism and money laundering
Deregulated social spaces are invitation for illegal financial activities
Money laundering estimated up to $1.5 trillion/year
IMF recommendations for banks to help reduction of money laundering
‘Know your customer’
Prevent criminals getting control of key positions in banks
Identifying and reporting unusual/suspicious transactions
Raise general awareness for regulators and staff
The Tobin Tax
Effort to impose control on global markets “Tobin Tax” – tax on foreign currency transactions
Not make impossible but impede international currency speculation
‘Robin Hood Tax’
Two main problems with tax:
Global enforcement
Does not differentiate between desirable and undesirable transactions
Reforming corporate governance around the globe
Some important shortcomings in present systems of governance in many countries
Main tool in Europe is codes of governance, dealing with:
Size and structure of board
Independence of supervisory or non-executive directors
Frequency of supervisory body meetings
Rights and influence of employees in corporate governance
Disclosure of executive remuneration
General meeting participation and proxy voting
Role of other supervising and auditing bodies
Legal basis and power of these codes varies dramatically
And the crisis in late 2000s has seen deeper state involvement
US response – Sarbanes-Oxley
Global financial markets
Global financial markets are the total of all physical and virtual (electronic) places where financial titles in the broadest sense (capital, shares, currency, options, etc.) are traded worldwide
Ethical issues raised:
Governance and control
National security and protectionism
Speculation (see slide on Tobin tax)
Unfair competition with developing countries
Space for illegal transactions (see slide on money laundering)
The role of financial professionals and market intermediaries
Two crucial professions: Accountants & credit ratings agencies
Task is to provide a ‘true and fair view of the firm – i.e. bridge informational asymmetry
Five main problematic aspects of financial intermediary’s job:
Power and influence in markets
Conflict of interest (e.g. cross-selling)
Long-term relationships with clients
Size of the firm
Competition between firms (danger of corner-cutting)
The role of financial markets and insider trading
Speculative ‘faith stocks’
‘dot-com’ bubble (companies not made any profit but worth billions on the market)
Ethical issue: bonds based entirely on speculation without always fully revealing amount of uncertainty
Insider trading
Insider trading occurs when securities are bought and sold on the basis of material non-public information (Moore 1990)
Ethical arguments (Moore, 1990)
Misappropriation of property
Harm to investors and the market
Undermining of fiduciary relationship
Insider trading can erode trust in the market in the long term; hence its illegality
Executive remuneration
‘Fat cat’ salary accusations
E.g. average CEO salary in Britain £6.5m (highest CEO salaries in 2008: Europe, €77m, USA, $84m)
E.g. average annual pay rise for CEOs 11%
CEO increases outstrip shareholder returns
Ethical problems with executive pay:
Performance-related pay leads to large salaries that cause unrest within corporations
Influence of globalisation on executive pay leads to significant increases
Board often fails to reflect shareholder (or other stakeholder) interests
The central ethical issue here is the independence of the supervisory, non-executive board members
No directly conflicting interests ensured by:
Typically drawn from outside the corporation
No personal financial interest in the corporation
Appointed for limited time
Competent to judge the business of the company
Sufficient resources to get information
Appointed independently
Executive accountability and control (II)
Executive accountability and control (I)
A separate body of people that supervises and controls management on behalf of shareholders
Dual structure of leadership
executive directors: are actually responsible for running the corporation
non-executive directors are supposed to ensure that the corporation is being run in the interests of the shareholders
Anglo-Saxon model: single-tier board
European model: two-tier boards, lower tier = executive directors, and upper tier = ‘supervisory board’
Ethical issues in corporate governance
The nature of shareholder relations to the corporation
Analysis of the rights and the duties of shareholders
Specific ethical problems and dilemmas arising in the relation between companies and their shareholders
The ethical implications of globalization on shareholder relations
The notion of shareholder democracy and the accountability of corporations to their shareholders and other stakeholders
The differences in shareholder roles and corporate governance in various parts of the world
Perspectives on how shareholders can influence corporations towards sustainability
Principal-agent relationship between managers and shareholders
Divergent interests and unequal distribution of information institutionalises some fundamental ethical conflicts in governance
Shareholders have considerable opportunities to use their power over supply to influence corporations to behave more ethically
Shareholders can play a role in driving corporations towards enhanced sustainability by their investment decisions at the stock market
Rethinking sustainable corporate ownership: alternative models?
Government ownership:
Part of the landscape in many parts of the world. Resurgent in the wake of the late-2000s financial crisis (esp. banks and cars).
Family ownership
Families may have longer-term goals, but may not treat stakeholders any better than MNCs
Co-operative ownership
Hybrid businesses, not owned by investors or managers
Owned and democratically controlled by workers or customers
Not set up to make profit but to meet the needs of members
Spanish Mondragon co-operative has made a striking contribution to sustainability while staying highly profitable
Main concerns with SRI movement
Quality of information
Most information provided by firms and is difficult to verify
Dubious criteria
See table in previous slide
Too inclusive
90% of Fortune 500 firms are held by at least 1 SRI fund
Strong emphasis on returns:
Usually, SRI fund managers screen for performance first, then select using ethical criteria
Firms taking longer-term perspectives and thus sacrificing short-term profitability therefore unlikely to be included
(See Vogel, 2005)
Ethical investment
Examples of positive and negative criteria for ethical investment
Negative criteria
Alcoholic beverages production and retail
Animal rights violation
Child labour
Companies producing or trading with oppressive regimes
Environmentally hazardous products or processes
Genetic engineering
Nuclear power
Poor employment practices
Tobacco products
Positive criteria
Conservation and environmental protection
Equal opportunities and ethical employment practices
Public transport
Inner city renovation and community development programmes
Environmental performance
Green technologies
Shareholder activism
Buy shares in company for right to speak at the AGM
Voice concern and challenge the company on allegedly unethical practices
Possibility of broad media attention by ‘disrupting’ the meeting
Gets involved with ‘the enemy’
Only an option for reasonably wealthy individuals
Private equity and hedge-funds
Rise of private equity and hedge funds exacerbate issues around transparency and shareholder control
Most general concern:
There are no longer many obligations for public information about a company once it has been taken private
Hedge funds do not have to report to regulators in the same way as other investment firms
Don’t even have to report fully to own investors
Suggestion is this lack of transparency hides systemic risk
Ethical aspects of mergers and acquisitions
Acceptable if results in transfer of assets to owner who uses them more productively
Central concern is managers who pursue interests not congruent with shareholder interests
Executive prestige vs. profit and share price
Two ethically-questionable options for managers (Carroll and Buchholtz, 2008)
Seduced with golden parachute for cooperation
Greenmailing to secure post-merger job
Hostile takeovers – concern when shareholders do not want to sell
Intentions and consequences of mergers and acquisitions
Restructuring and downsizing
Corporate governance
Corporate governance definition
Corporate Governance describes the process by which shareholders seek to ensure that ‘their’ corporation is run according to their intentions. It includes processes of goal definition, supervision, control, and sanctioning. In the narrow sense it includes shareholders and the management of a corporation as the main actors; in a broader sense it includes all actors who contribute to the achievement of stakeholder goals inside and outside the corporation
Rights and duties in firm-shareholder relations
Rights of shareholders
The right to sell their stock
The right to vote in the general meeting
The right to certain information about the company
The right to sue the managers for (alleged) misconduct
Certain residual rights in case of the corporation’s liquidation

Duties of managers
Duty to act for the benefit of the company
Duty of care and skill
Duty of diligence
Crucial problem: separation of ownership and control

Peculiarities of corporate ownership
Locus of control
Fragmented ownership
Divided functions and interests
Shareholders as stakeholders
Understanding corporate governance
Shareholders and Business Ethics
Lecture 6
Ethical Investment
Top 10 stocks held in SRI funds in emerging market firms, 2009
Source: Eiris, 2009
Corporate governance: a principal-agent relation


Seeks remuneration, power, esteem etc.
Seeks profits, rising share price, etc.
Features of agency relations
Inherent conflict of interest
Informational asymmetry
Two approaches to ‘ethical’ shareholding
Avoids publicity
Seeks publicity
Seeks engagement
Seeks confrontation
Strong financial interest
No financial concerns
Multi-issue concerns
Single-issue focus
Ethical investment
Stakeholder activism
Source: Sparkes (2001)
Rhenish Capitalism
Anglo-American model
Shareholder and stakeholder relations: Different frameworks of corporate governance globally
Full transcript