Corporate Governance And Ethics Essays

Corporate Governance and Ethics Essay

1498 Words6 Pages

As a CEO of a corporation there is nothing more rewarding then maximizing the wealth of your shareholders, in addition, to increasing the value of the firm. However, it should not be done unethically and jeopardize the financial, social status as well as the reputation of the company, ultimately causing them to suffer in the end. There are systems put into place to avoid such acts that are generally overseen by the board of the directors of organization. In most companies the board of directors consists of shareholders or former employees of the company. Due to the recent scandals in corporate America many companies have acted quickly in actually implementing rules and regulations. They are sometimes referred to as the ethical codes.…show more content…

Women are known to be a bit more “sensitive” than a man, therefore she’ more opted to working or dealing with charitable events due to their dire need of help. I am not implying that companies headed by women are more or least successful than one headed by a man. I am simply implying that they will do better in the “social responsibility aspects of the big picture.
Ethical codes are normally adopted by corporation to help set forth the moral structure of a company. They are often set up to help organizations to make the “right” decision in certain situations. Ethical codes generally has three different levels (Wikipedia, 2011), code of ethics (corporate and business ethics), code of conduct (employee ethics), and code of practice (professional ethics). Code of ethics is defined as the general principals of an organization that summarizes their beliefs (QFinance – The Ultimate Resource, 2009). Rodriquez-Dominquez, Gallego-Alvarez, and Garcia-Sanchez (2009) state “recent corporate scandals have demonstrated the need to create internal codes of conduct and apply them to the members of the board of directors and top management in order to uphold the reputation, ethical behavior and integrity of the company”. (p.187) According to (Rodriquez-Dominquez, 2009), recent research has shown a positive correlation “between corporate social responsibility and several characteristics of corporate governance”. The results also show

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THE SHAREHOLDER MODEL OF CORPORATE GOVERNANCE

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The different theories on governance were first built around works relating to the separation of functions of management and control (Berle and Means, 1932) and the contractual analysis of the firm, particularly the theory of transaction costs (Coase, 1937) and agency theory (Jensen and Meckling, 1976). The dominant trajectory of governance literature is therefore essentially contractual. It is primarily focused on resolving conflicts of interest and in particular on minimizing agency costs between shareholders and company managers.

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According to the shareholder model, the role of (formal and informal) governance mechanisms is to reduce conflicts of interests, notably between shareholders and managers. Specifically, it involves minimizing the agency costs resulting from asymmetrical information between managers and shareholders and from the existence of opportunistic behaviour and diverging interests. Governance is limited to disciplining and supervising managers? behaviour, the objective being to align their behaviour to the interests of shareholders. The performance indicator is that of shareholder value. A governance system is therefore considered efficient when it limits the possibility of managers appropriating value and when it prevents managerial behaviour departing from maximization of shareholders? value. In this perspective of monitoring managerial discretion, shareholders are obliged to establish organisational structures and an institutional system of governance capable of securing the earnings performance of financial investments (Shleifer and Vishny, 1997).

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As a result, the shareholder model of corporate governance rests on a judicious combination of internal and external mechanisms, aimed at monitoring the behaviour of company managers (Charreaux, 2004). The internal mechanisms of the company are intentionally developed by the parties or the legislator. Amongst these organisational mechanisms, shareholder voting rights, boards of directors, mutual manager oversight, managers? remuneration systems, internal trade-union associations or audits are favoured as alternative modes to disciplinary mechanisms of corporate governance. For their part, external mechanisms stem from market forces. In this context, several markets can be identified: the market for company executives (where the value of executives rises or falls in relation to their performance), the market for acquisitions (including public take-over offers, public offers of exchange, contractual guarantees, legal procedures or judicial regulation) and the market for financial information (like the market for acquisitions, this market reduces agency costs and resolves conflicts of interest from the perspective of maximizing the creation of shareholder value).

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Faced with the difficulty of distinguishing clearly between the internal and external disciplinary mechanisms, it is also possible to draw on two classification criteria initially developed by Williamson (1985) in the theory of transaction costs: specificity and intentionality. According to this vision, the specificity of assets (meaning the impossibility of alternatively redeploying an asset without incurring an additional cost) becomes central to the analysis of the coordination tools of the principal-agent relationship. These specific mechanisms are the legal and regulatory environment, national-level trade unions and consumer associations. The criterion of intentionality can be added to that of specificity. This expresses the will to establish, from an institutional perspective, regulations aimed at orientating and therefore monitoring the behaviour of managers. From this viewpoint, corporate culture, networks of informal confidence and reputation amongst employees constitute institutional mechanisms. It should be noted, however, that certain mechanisms can be simultaneously specific and intentional, including for example shareholders? voting rights, company-level trade unions, boards of directors or even remuneration systems. Although all these mechanisms are useful for shareholder-oriented governance, the fact remains that other tools are more frequently used. Indeed, it is possible to identify other management instruments that characterise shareholder governance, such as the different indicators that contribute to shareholder monitoring: free cash flow (Jensen, 1986), the creation of stock market value (Caby and Hirigoyen, 2005), fair value (Bignon, Biondi and Ragot, 2004), the distribution of stock options and the market of corporate control (Jensen and Ruback, 1983).

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In summary, the shareholder model of corporate governance proposes an attractive framework for explaining the emergence of efficient organisational forms, the behaviour of owners and managers of listed companies and more generally the way of resolving potential conflicts in situations of cooperation. It legitimises the vision of a company belonging exclusively to its shareholders, without any other consideration. Following the considerable growth of stock markets since the 1980s, Guillén and O?Sullivan (2004) recognise that a number of significant factors appeared to be moving global corporate governance in the direction of the ?shareholder value? model long adopted in Anglo-American markets. For example, empirical evidence from France (Boyer, 1996; Maclean, 2001; Goyer, 2003; Schmidt, 2003; Clift, 2004) and Germany (Vitols, 2001; Jürgens, Naumann and Rupp, 2000; Beyer and Höpner, 2003; Lütz, 2005) suggested that both countries had since the late 1980s undergone deep-seated stock-market reforms which encouraged business leaders increasingly to focus on maximizing shareholder value.

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However, according to Wirtz (2005), a critical analysis of the theoretical presuppositions underpinning the shareholder approach reveals a relatively poor representation of the concept of value, which emphasises the plundering by financial investors and the economy of costs. In addition, the explanatory power of the shareholder model appears weak. Indeed, the studies by Baghat and Black (1999) and Larcker, Richardson and Tuna (2004) call into question the link between the mechanisms of shareholder governance and the financial performance of firms. The sound functioning of the shareholder model of corporate governance is also limited by the rise over recent years of shareholder activism, whereby often rebellious shareholders apply pressure on a company?s management, through proxy battles, publicity campaigns or litigation, to pursue a particular strategic course. The role played by TCI hedge fund in scuppering the planned takeover by Deutsche Börse of the London Stock Exchange in 2004 and 2005 provides a case in point (Crane and Stachowiak-Joulain, 2006). Vehemently opposed to the conditions of Deutsche Börse?s planned acquisition, the fund?s creator Christopher Hohn systematically acquired shares in Deutsche Börse and requested the replacement of the entire supervisory board. Following sustained opposition from TCI, the chairman of the board, Dr. Rolf Breuer, and the Chief Executive Officer, Dr. Werner Seifert, finally stepped down from their positions. Finally, the shareholder model is criticised for not taking into consideration the relationships between all company stakeholders, which restricts its ability to claim to be the dominant approach to understanding the governance of companies. It is precisely on the second critical point that attempts to extend the positive theory of agency are concentrated. The positive theory of agency aims to make up for insufficiencies by exploring the stakeholder model of governance.

THE STAKEHOLDER MODEL OF CORPORATE GOVERNANCE

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In the stakeholder model of corporate governance, the company is a social construction, a container of expectations, objectives and interests of multiple stakeholders. Stakeholders include not only managers and shareholders of a firm, but also its employees, customers, suppliers and any other individual or group that could influence or, if a broad definition of stakeholder is adopted, be influenced by the decisions of the company (Freeman and Reed, 1983). According to this perception of corporate governance, aligning decisions solely to the interests of shareholders is counterproductive since it does not guarantee the sustainable development of the organization, which can only result from the convergence of all stakeholders? interests (Donaldson and Preston, 1995). The stakeholder conception of corporate governance has many concrete effects. It encourages us to reconsider the composition of monitoring and management bodies and questions the representation of stakeholders (Jones and Wicks, 1999) and the formal and informal mechanisms for taking their expectations into consideration. In addition, the stakeholder model of governance questions the issue of arbitrage between opposed interests and, as a consequence, also calls into question the legitimacies with the company and the forms of conflict resolution (Clarkson, 1995).

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In the stakeholder model of corporate governance, the stakeholders represent families of economic agents who have legitimate rights and obligations in the company. For instance, while shareholders run the risk of losing financial capital invested, other stakeholders are equally likely to suffer more or less significant losses: for example, employees risk losing their jobs, or subcontractors risk losing earnings or liquid funds in the case of unrecoverable debt (Pérez, 2003). Further, stakeholders provide critical resources and expect in return that their interests are satisfied. For example, shareholders provide equity capital: they expect that the company maximizes their return of investment in order to reward them for their determining behaviour. For their part, managers and employees invest time, competences and more broadly human capital. In return, they expect to be offered comfortable salaries and working conditions.

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Overall, stakeholder-orientated perceptions of corporate governance recognise the multiple objectives of the company, much more than solely the maximization of shareholder wealth. In a relational model of the organization, the connection between shareholders and managers is nothing more than an existing contract between productive entities. The company is considered to be a specific set of contracts applicable to customers, suppliers, employees, unions, investors and so on. In this regard, changes turn out to be particularly significant concerning consumers that would like to consume products manufactured under conditions corresponding to principles of sustainable development, or for investors that would like to invest in companies that position themselves on this objective. On the basis of this, the desire for an equilibrium between the interests of the various stakeholders of the company and the investors manifests itself in a way that the value is appreciated more broadly across a multi-stakeholder vision of the company and its governance. This new conception is supposed to result in a better distribution of the income freed up for the benefit of all the participants if shareholders are not the true ?residual claimants? (Garvey and Swan, 1994). It is in this perspective that Blair (1995) clearly shows the will to proceed to a realignment of property rights in favour of employees in recognition of the specific knowledge and competences that they invest in their companies.

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As such, gaps in the unilateral conception of the agency relation favour the emergence of integrated conceptual frameworks, such as the stakeholder-agency theory (Hill and Jones, 1992) or the vision of the company as a multi-contract organisation developed by Laffont and Martimort (1997). This work remains within the framework of the positive agency theory but shifts the emphasis from a simple model, comprising one principal (the shareholder) and one agent (the manager), to a more sophisticated model incorporating several principals (stakeholders) and an agent (the manager). According to this perspective, new monitoring and incentive mechanisms should be implemented to protect the interests of all partners and to optimize shareholder value (Charreaux and Desbrières, 1998). These governance mechanisms are inspired by the perception of the company as a coalition with a common objective, chiefly the viability and the continued existence of the company. They involve shifting from a system of governance based on agency to one based on stakeholders to achieve an equilibrium between financial investors and industrial actors (Hirigoyen, 1997). However, this approach has its limitations insomuch as it cannot satisfy the conflicting interests of all the participants and is incapable of identifying those that really count. Thus, these company models, together with the set of implicit and explicit multilateral contracts, emerge from the contradiction between the positive agency theory and the existence of transaction costs. They propose a representation of the governance system resting on a dynamic game between managers and other stakeholders in order to create and share income. Since then, several control mechanisms have been advocated. The notion of contractual costs substitute the notion of agency costs, taking into consideration the total amount of utility reductions supported by stakeholders to make disciplinary mechanisms work. Likewise, the concept of institutional structure replaces Williamson?s term governance structure by simultaneously exercising the traditional disciplinary function and guaranteeing the execution of implicit contracts between the various stakeholders.

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Other proposals, each differing slightly from the dominating conception, have also emerged. For example, Cornell and Shapiro (1987) propose the concept of organisational capital developed by implicit contracts formed with different stakeholders, which allows them to extend considerably the traditional approach of the financing structure. In addition, Barton and Gordon (1988) espouse a more enriched conception of the financing structure by integrating a strategic perspective. For their part, Charreaux and Desbrières (1998), by placing themselves within the framework of the contractual approaches to the company and broadening the thus far dominant concept of shareholder value to multiple stakeholders, studied and evaluated the governance system by virtue of its capacity to produce stakeholder value. They claim that the latter is created by reducing the loss of value which arises from conflicts based on the redistribution of the income between stakeholders. Hoarau and Teller (2001) drew inspiration from the revival of the theory of the firm which corresponds to the resource-based approach to propose a substantial value going beyond simple financial value. Finally, the practical implications of this stakeholder conception of the firm and governance are increasingly being recognised. Certain companies have decided to go beyond legal rules, to engage by the intermediary of code of good practice, to take all stakeholders into account.

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For example, IKEA feels that corporate social responsibility is part of its daily business (Bartlett, Dessain and Sjöman, 2006). In the words of Marianne Barner (2007: 59), the company?s Director of Corporate Communications, IKEA has « a list of key performance indicators to measure its progress on CSR issues, such as the environment ». Furthermore, Anders Dahlvig, IKEA?s CEO, decided in 2005 that the company should take more responsibility for its suppliers, co-workers and the environment through a dedicated code of conduct known as the IKEA Way of Purchasing Home Furniture Products, redefining IKEA?s relationship with its suppliers worldwide.

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By means of these codes, the firm attempts to reconcile the imperative of competitiveness with a conduct concerned with the interests of all stakeholders that contribute to a company?s activities. Additionally, numerous ?ethical funds? have been created over recent years which favour investments in companies that show consideration for specific criteria, such as respect for the environment. For example, the UK-based investment management fund Generation Investment Management has built a global research platform to integrate sustainability research into fundamental equity analysis and focuses on economic, environmental, social, and governance risks and opportunities that materially affect a company?s ability to sustain profitability and deliver returns. Nobel Peace Prize winner Al Gore is the Chairman of the Advisory Board and helps set the long-term thematic research agenda into global sustainability issues, including climate change, poverty and development, ecosystem services and biodiversity, water scarcity, pandemics, demographics and migration, and urbanization (Generation Investment Management, www.generationim.com, accessed January 2008).

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In conclusion, the relation between the various stakeholders of a firm raises questions about the process of value creation. As long as stakeholders have specific expectations regarding the firms in which they evolve and require specific information on the conditions of those firms, each stakeholder participates in the creation of value. Questions are also being raised regarding the measurement of each stakeholder?s contribution and the incentive methods coordinated by the firm to encourage stakeholders to adopt efficient and responsible conduct, with a common objective of maximizing value for all partners.

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These new approaches give rise to a more fundamental reflection on a new stakeholder type of governance and the development of ethical conduct. Ethics has thus become one of the reference values upon which a new pact should be built between the various actors of the organization concerning company governance.

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