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Business Ethics and the role of Corporate governance

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Dipesh Meisuria

on 22 April 2013

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Transcript of Business Ethics and the role of Corporate governance

Business Ethics and The Role of Corporate Governance Dipesh Meisuria 11062160 Business Ethics is the study of business situations, activities and decisions where the issues of right and wrong are addressed. (not commercially, strategically or
financially, but Morally)
(Crane & Matten, 2010)
The Oxymoron of corporate governance (Collins, 1994)
‘Many businesses require the maintenance of basic ethical standards such as honesty, trustworthiness and co-operation’
Purpose of Leadership is to provide wealth legally and ethically Why is it important?
75% of residents in the top 20 leading economic nations believe that large companies have too much influence on their governments decisions (Cywinski, 2008)
Potential to provide a major contribution to our societies: The Mckinsey Quarterly (2008) survey showed that 50% of executives think corporations make a positive contribution to society
Business malpractice can inflict enormous harm on individuals, communities and the environment.
Provides managers with the appropriate knowledge to tackle ethical problems and dilemmas.
Ethical Misconduct
happens in all sectors (Crane & Matten, 2010) CORPORATE GOVERNANCE OECD Principles of Corporate Governance:Ensure a basis for an effective CG Framework, The rights of shareholders and ownership functions, Equitable treatment of shareholders, The role of stakeholders in corporate governance, disclosure and transparency, responsibilities of the board.
Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals.
The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interests of individuals, corporations and societySir Adrian Cadbury
The process by which shareholders seek to ensure that ‘their corporation is run according to their intentions.Goal Definition Supervision Control Sanctioning(Parkinson, 1993)
Importance of Corporate Governance:
Integrity: can be encouraged, measured and projected
Bonus Culture: Highlights the need to assess the quality of system checks and balances
Regulatory Framework: control circumstances that are yet to emerge, changing corporate culture.
Director Training: Corporate Behaviour(Applied Corporate Governance, 2012)
A corporation without a system of corporate governance is often regarded as a body without a soul or conscience.
Weak corporate governance leads to waste, mismanagement and corruption. Strong and healthy corporate governance recognize the diverse interests of shareholders, lenders, employees, government etc. It enhances company’s values and stakeholders’ trust resulting into robust development of capital market, the economy and also helps in the evolution of a vibrant and constructive shareholders’ activism.
(Roy, 2010) Serving stakeholders brings forward their corporate social responsibility (Rushe, 2013) (Inman & Tryhorn, 2009) Locus of Control:

Control lies in the hands of the Directors, the Board and other committees

Managers have been given the duty to run the company in the interests of the shareholders Moore, 1999)

Duty to act for the Benefit of the Company: ST Financial Performance and LT Survival of the Company

Duty of Care and Skill: Achieve the most professional and effective way of running the company

Duty of Diligence: Invest all effort in running a company in the most successful way

(Parkinson, 1993) CADBURY REPORT 1992GREENBURY REPORT 1995HAMPEL REPORT 1998COMBINED CODE 1998TURNBALL REPORT 1999MYNERS REPORT 2001SARBANES OXLEY ACT 2002SMITH REPORT 2003TYSON REPORT 2003HIGGS REPORT 2003CORPORATE GOVERNANCE CODE 2010
Revised in 2012

Sets out the standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders
(FRC, 2012)
How Ethics Relate to Corporate Governance:
Accountability for practices such as mismanagement and corruption
Sino-Forest Corporation massively exaggerated their assets

‘Market capitalization fell from $2.6 billion to under $400 million over the course of a few weeks’ (Flannery,2011)

Missed a $10 million interest payment, defaulting on $1.8 billion worth of debt. Governance policies at Chinese listed companies continue to face scrutiny from international investors Tsuyoshi Kikukawa, Hasashi Mori and Hideo Yamada pleaded guilty to hiding loss making investments of over $1.7bn (Soble, 2012)
“Responsibility for the governance and culture of a corporate reside with the board and chair. They must delegate responsibilities to management, but also ensure that management is accountable to them.”
(Corporate Risk & Insurance, 2012)
‘The board has to provide the corporate conscience’
(BBC,2012) (Tricker, 2012)
KEY BOARDROOM ISSUES:

•Bribery and corruption
•CEO and board chair roles
•Executive compensation and say on pay
•Financial regulatory reform
•IFRS
•IT governance
•Mergers & acquisitions

•Proxy access
•Risk management
•Strategy and growth
•Succession planning
•Sustainability and climate change
•US GAAP convergence & IFRS
•Whistleblower bounty program
(PWC, 2013)
Ethical Issues in corporate Governance Accountability and Control of Executives:

Single Tier/ Dual Tier: Independence of the Non-Executive Directors

Boyd (1996) discussed the importance of precluding conflict of interest:

NED’s drawn from outside of the corporation

Have no personal financial interest other than the interest of the shareholders

Appointed for a limited period

Competent to Judge the business Executives and Employees received over $16bn in bonuses between 2004-2007

Because interest was low, they indulged in high risk real estate as the housing market appeared to be stable.

Loans and mortgages were given to anyone regardless of credibility and then the mortgages were sold to other financial institutions (Castellano, Lightle & Baker, 2011). Executive Remuneration:
Executives in bankrupt or failing companies continued to earn millions.
Porsche CEO in 2008 earned €77m (Focus, 2009) even though most of the profits came from speculative investments by their finance department and by May 2009 they were days away from Bankruptcy (Schneider & Buchenau, 2009)

Ethics to consider-
Performance Related Pay- salaries increase as they include shares.
Market for executive talent is global so the highest level of pay is across the board and further rises are to be expected
Influence of the board is limited
Mergers and Acquisitions:
Executive prestige: Managers may pursue interests that are not of the interest of the shareholdersInvestor Hostile Takeoversa)Owners purchase a majority stake of the corporation against the wishes of its boardb)Remaining shareholders may not want to sell
Golden Parachute: Paid a large sumGreenmail: Not lose job by buying back shares for a higher price using corporate money
Financial Markets:
Speculative ‘Faith Stock’: Stock Markets do not reveal the amount of uncertainty – Abuse of trust makes pensioners lose their funds
Insider Trading: Undermine investor trust
SAC Capital pays $614m over insider trading (BBC, 2013)
Unfair, misappropriation of property, harm to investors and the market and undermines fiduciary relationship. (Moore, 1990)
Financial Professionals and market intermediaries:
Fitch Ratings, Moody’s Corporation and Standard & Poor are a global Oligopoly of credit rating agencies
Audits vary from country to country making them influenced by CRA’s by targeting firms with future potential firms influencing creative accounting; Audit firms may present a share as faith stock or repackage one that is useless.
Ethics: Power and influence in the market, conflict of interest, seek long-term relationship clients, size of firm can influence the diligence of the auditor and it will intensify competition between financial intermediaries.
Private equity and Hedge Funds:

PE: no longer many obligations for public information about the company; lack of consideration for other stakeholders such as employees and earlier investors

HF: Transparency issues (do not have to report to regulators in the same way as other investment firms and do not fully disclose strategies to their own investors- Hides systematic risk) Findings:
Llopis, Reyes & Gasco (2007) found that organisational ethical values cannot be imposed. Instead, they must be managed through a corporate governance ethical culture.
Hashemi & Rabiee (2011) study demontrated that governance reforms that encourage firms to adopt better governance practices reduces the likelihood of earnings management.
‘With moral dilemmas in business it is often not a matter of right or wrong, but what’s best for all concerned, both in the company and among all those affected by its actions’
(Tricker, 2012)
Summarize:

Board of Directors:
Accountable to stakeholders
Directs management

Shareholders & Stakeholders:
To participate in appointing of directors
To hold the Board accountable for governance via proper disclosures

Management:
Follow Directions of the Board and provide accurate information to them
Implement and monitor control systems Conclusion
Business ethics is part of Corporate Governance: Corporate Governance works as a form of Risk Mitigation to help avoid ethical breaches and scandals
Neccesary to ensure predictability, sustainability and profitability
Keeps in view the interest of other stakeholders to build trust and confidence
It promotes investor activism as it can have a positive influence on the share price as well as strengthening creditor relations
Governance will change over time
Ethical Issue for YOU:
The European commission adopted Viviene Redings proposition to attain 40% of women in board member positions in largely publicly listed companies by 2020. (Twaronite, 2013)
Promote Diversity in the Board
or
Rejects considering the best candidate for the Job?

References
Applied Corporate Governance (2012) The importance of Corporate Governance: Why do we have to take corporate governance seriously? [Online] Applied-Corporate-Governance. Available at http://www.applied-corporate-governance.com/importance-of-corporate-governance.html Accessed: [17/03/2013]
BBC (2012) Timeline: Libor Fixing Scandal. [Online] British Broadcasting Corporation. Available at: http://www.bbc.co.uk/news/business-18671255 Accessed [26/02/2013]
BBC (2013) SAC Capital fund pays $614m over insider trading. [Online] British Broadcasting Corporation. Available at: http://www.bbc.co.uk/news/business-21809590?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bbc_news+(BBC+News+-+Home) Accessed [18/03/2013]
Boyd, C. (1996) Ethics and Corporate Governance: The issues raised by the Cadbury Report in the United Kingdom. Journal of Business Ethics. 15 p167-182
Castellano, J., Lightle, S., Baker, B. (2011). The Role of Boards of Directors in the Financial Crisis. The CPA Journal, September 2011, 81 9 54-57
Collins, J W. (1994) Is Business Ethics an Oxymoron? Business Horizons. 1 8
Corporate Risk & Insurance (2012) Did Rupert Murdoch fail to exercise good corporate governance? [Online] Risk Management Magazine. Available at: http://www.riskmanagementmagazine.com.au/article/did-rupert-murdoch-fail-to-exercise-good-corporate-governance-128712.aspx Accessed [14/03/2013]
Crane, A, Matten, D. (2010) Business Ethics. Third Edition, New York: Oxford University Publishing
Cywinski, M. (2008) Influence of Large Corporations on Government too strong, Survey says. [Online] Canadaone. Available at www.canadaone.com Accessed [16/03/2013]
Flannery, N P (2011) The Great Wall: How Transparency Problems and Governance Risk Are Shaking Investor Confidence in Chinese. [Online] Forbes. Available at: http://www.forbes.com/sites/nathanielparishflannery/2011/06/17/the-great-wall-how-transparency-problems-and-governance-risk-are-shaking-investor-confidence-in-chinese-companies/ Accessed [18/03/2013]
Focus. (2009) Wiedeking, der Top-Verdiener Europas. Focus Online
FRC (2012) UK Corporate Governance Code. [Online] Financial Reporting Council. Available at: http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx Accessed [12/02/2013]
Hashemi , S A, Rabiee H. (2011) The role of corporate governance in Real Earnings Management: Evidence from Iran. Interdisciplinary Journal of Contemporary Research in Business. 3 6 p848-857.
Inman, P, Tryhorn, C (2009) Sir Fred Goodwin shreds his pension by £200,000 – but will still get £342,500 a year. [Online] The Guardian. Available at: http://www.guardian.co.uk/business/2009/jun/18/rbs-sir-fred-goodwin-pension Accessed [16/03/2012]
Llopis, J, Reyes, G M, Gasco, J L (2007) Corporate governance and organisational culture: The role of ethics officers. International Journal of Disclosure & Governance. 4 2 p96-105
McKinsey Quarterly (2008) From Risk to Opportunity: How Global Executives View Sociopolitical Issues. McKinsey Quarterly. Available at: www.mckinseyquarterly.com. Accessed [14/03/2013]
Moore, G. (1999) Tinged Shareholder Theory: or what’s so special about stakeholders? Business Ethics: A European Review, 8 2 p117-27.
Moore, J. (1990) What is really unethical about insider trading. Journal of Business Ethics. 9 p171-182
PWC (2013) Center for Board Governance: Key Boardroom Issues. [Online] Pricewaterhouse Cooper. Available at: http://www.pwc.com/us/en/corporate-governance/index.jhtml Accessed [12/03/2013]
Roy, S K (2012) Corporate Governance in India: An Intropection. Indian Journal of Research. 1 10 p17-19
Rushe, D (2013) Former BP boss Tony Hayward defends company's actions before Gulf disaster. [Online] The Guardian. Available at: http://www.guardian.co.uk/environment/2013/feb/27/bp-deepwater-oil-spill-hayward Accessed [19/03/2013]
Soble, J (2012) Former Olympus Executives Plead Guilty. [Online] Financial Times. Available at: http://www.ft.com/cms/s/0/7fb1e160-06c0-11e2-abdb-00144feabdc0.html#axzz2NxkKHASN Accessed [16/02/2013]
Schneider, M C, Buchenau, M W. (2009). Wiedeking Kampft um Machterhalt. Suddeutsche Zeitung.
Tricker, B. (2012). Corporate Governance: Principles, Policies and Practice. 2nd Edition, Oxford: Oxford University Press.
Twaronite, K L. (2013). Women On Boards: Moving From 'Why' To 'How'. Available: http://www.forbes.com/sites/forbeswomanfiles/2013/01/08/women-on-boards-moving-from-why-to-how/. Accessed 03/01/2013.
Questions?
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