Ethics,corporate governance,social responsibility

Question 1

Government intervention in business:

Answer 1

• Macroeconomic environment
• Legal and market regulations
• Corporate governance -social responsibility

Question 2

Objectives for governments macroeconomic policy:

Answer 2

1. Economic growth-GDP(within borders income) and GNP(+oversees-by oversees residents)/demand generates employment ,wage increase,more demand-economy expands /-balance trade negatively,gap rich and poor,enironment impact
2. Controlled inflation( certainty if stable,fairer if income is stable/low,more spending(interest rates lower,more saving (higher prices less spending-real balance effect),distortion of price mechanism,civil unrest
3. Employment-demand falls,welfare payment increase,societal problems)

Obj affected by fiscal and monetary policy.

Question 3

Fiscal policy and taxations:

Answer 3

Definition:Government spending and taxation policy.

Based on Keynes theories:goverment influensy macro productivity by increasing or decreasing tax levels and spending.

Goal :inflation low (2 or 3%) and high employment-balancing act

• Direct tax:on earnings eg income tax ,special one -off
• Indirect :Value added tax,preferable as easy and cheap to collect
• Proportion of tax individ-corporations
• Proportion direct -indirect

Question 4

Monetary policy

Answer 4

• Government policy on money supply,monetary system,interest rates,availability of credit.
• Interest rate increase:

1. Spending falls
2. Investment falls(opportunity costs increases and reduces NPV of investm)
3. Attracts foreign funds
4. Exchange rate rises
5. Inflation rate falls-deflationary impact

Question 5

Corporate political activity(CPA)

Answer 5

• Involvement in political process to gain favour-lobbying /donating on political campaigns

2 types:

Buffering:warning the government on the impact of pending legislation,influence the content

Bridging:Ensuring company is aware and compliant with proposed new legislation.

Situations when dealing with government necessary

1. Multinational companies-terms of invest
2. MC lobby government to provide conditions in the economy that benefit them-min wages
3. New industries may seek protection (import restrictions)
4. Developing industries -support/tax breaks to compete in the global market

Question 6

Institutions involved in Global trade and growth:

Answer 6

1. World trade organisation-free flow of trade,trade agreements ,disputes,policies.
2. G8-no official powers ,economics,trade,politics,global warming,aids,poverty
3. IMF(international monetary fund)-goal rebuild national economies,exchange rate stability ,major role in workd affairs (former communisyt nations to market economies),international liquidity.
4. World Bank:help nations to reconstruct their economies after world war 2,after attention to developing world ,5 main bodies:

• IBRD-loans
• IDA-poorest countries -interest free loans
• IFC-private sector in developing countries
• Miga(multilateral inv guarantee aency)-guarantees against losses
• ICSID-conciliation and arbitration of inv disputes

5. EBRD(european bank for reconstruction and dvt-world s only transition bank
6. Central bank-bank acts on behalf of the government

Question 7

Functions of central banks:

Answer 7

1. Monetary stability(setting interest rates to meet inflation targets)
2. Stability of the financial system-regulate banking system
3. Lemder of last resonrt -banking system is out of money
4. Banker to commercial banks-net balances with other banks settled through clearing accounts at central bank-funds act as liquid reserve controlled by fractional reserve ration
5. Banker at the central government and holds the public deposits
6. Centrak note -issuing authority in the country
7. Manages the national debt
8. Holds the countries foreign currency reserves
9. Advisor to the government on the monetary policy

Question 8

Regulation -def and effectiveness:

Answer 8

• Any form of state interference with the operation of free market
• Efficient when:

1. Total cost of reg is less than the benefit it provides to the society
2. The function of the business is not impeded
3. The end -product /service being controlled is safe and it works as it should

Question 9

Regulation and competition policy:

Answer 9

Involves regulating:

• demand,supply
• profit ,price
• quantity,quality
• entry ,exit
• information ,technology
• any aspect of consumption.production
• In UK much regulation around competition-delegation to individ/orgs
• Government plays part in regulating externalities
• Action of business people controlled(cease trade of insolvent companies,insider dealing ,money laundering

Question 10

Competition act 1988 and industry regulators:

Answer 10

• Anti-competitive arrangements illegal
• Office of fair trading -controls and imposes fines up to 10% of revenue

Industry regulators:

Aim :promote competition by imposing price caps,performance standards,removing barriers for new companies to enter

OFCOM -UK telecommunications

OFGEM-UK gas

Question 11

Other regulatory bodies/types:

Answer 11

• Competition Commision(CC) -In the UK ,role :promote competition-eg investigate proposed mergers when assets exceed a certain value.
• Restrictive Practices court-agreenents contary to public interest
• EU competition policy:ensure fair and free competition in EU.The commission of EU has authority to prohibit price fixing and other uncompetitive arrangenments,prevent subsidies that will distort competition across the wider market
• Self regulation

Question 12

Cost of regulation:

Answer 12

1. Enforcement costs-reg agencies set up,cost of regulated org to conform
2. Regulatuore capture-regulator dominated and controlled by regulated companies
3. Unintended consecquences of regulation-business move away from regulated activities

Question 13

Adv,dis of deregulation(liberalisation):

Answer 13

+

• Increased incentive to find internal cost saving and efficiency
• Improved allocative efficiency-prices closed to marginal output/socially otimal output level

-

• Loss of economies of scale(more competitors)
• Lower quality of quantity of service
• Need to protect competition

Question 14

Knowledge gap or agency problem-corporate governance def:

Answer 14

• Owner- managed companies:directors and shareholders same people,same info and are in position to direct comp policy
• Bigger companies :no access to day to day company mgt

Corporate gov:system by which companies and entities are directed and controlled.

Question 15

Stakeholders def and types-stakeholder theory:

Answer 15

• Stakeholders:persons or groups that have a legitimate interest in business conduct(business strategy) and whose concerns should be adressed as a matter of principle.
• stakeholder theory:shareholders not the sole focus of orgs attention
• 3 constituencies of stakeholders:

1. internal-empl,mgt
2. external-community,gov,trade unions,pressure groups
3. connected-customers,suppliers,financiers

• Also primary(formal contractual relationship) and secondary stakeholders.

Question 16

Stakeholder conflict:

Answer 16

• Mostly interested in the success of the business
• Incompatible interests between different groups of stakeholders
• Example of conflicting interests

1. shareholders-profit vs customers-quality
2. employees pay rise-mgt max profit
3. community (min environm impact vs shareholders cheaper way of disposing waste.

Mendelow ‘s matrix (pg 50)

Vertical:power/infl Horiz: level of interest

• Key players :High both.Any strategy should be acceptable to them (major customer).Participate in decision-making.
• High power/low interest:Treated with care.While often passive they might change to key players so they should be kept satisfied.
• Low power,high interest:no ability to influence strategy but may influence more powerful stakeholders by lobbying.Should kept informed(community reps,charities)
• Low both.Minimal effort(contractors empl)

Question 17

Corporate governance-reasons,facts

Answer 17

• Scandals:polly peck,Bcii,Maxwell communications,Enron,Parmalat

1. Domination by a single individual-single exec with other board members acting as a rubber stamp.Presence of non exec directors on board-important safeguard against domination
2. Lack of involvement of board.
3. Lack of adequate control function-inffective internal audit,lack of technical knowledge (compliance positions),rapid turnover staff in accounting makes control difficult
4. Lack of supervision-segregation of duties
5. Lack of independent scrutiny -Barlow clowes case -audit failed to identify illegal activity
6. Lack of contact with shareholders
7. Emphasis on short term profitability
8. Misleading accounts and info

Question 18

Uk corporate governace code-key principles

Answer 18

1. Leadership-(role of NED attend board and board comittee meetings and constructively challenge and help develop proposals on strategy).
2. Effectiveness-board should have experience,skills,knowledge,independence ,elected through nomination comittee
3. Accountability-audit comittee (non exec directors) to monitor integrityof accounting policies and financial statements,review of internal controls,ext auditors independence
4. Remuneration: remuneration comittee by NED to determine pay ,same number as audit comittee.
5. Relation with shareholders:annual general meeting,dialogue satisfactory

Question 20

Ethics in orgs:

Answer 20

Ethical approach towards:

• stakeholders
• Environmental issues
• Disadvantages
• Dealings with unethical companies or countries

Pressure comes from :

• Gov
• UK and European Legislation
• Treaty obligations
• Consumers
• Employees
• Pressure groups
  *

Question 21

Advantages of CSR strategies:

Answer 21

1. High quality employees
2. Reduce packaging costs,env taxes
3. Improves image
4. Differentiation from competitors
5. New markets for goods/serv attracts new likeminded customers
6. Positive impact on profitability

Question 22

Carol and Buchholtz’s layers of CSR:

Answer 22

1. Economic responsibilities-properly functioning economic units
2. Legal responsibilities-more emphasis in Europe and Anglo-american economies
3. Ethical responsibilities-act in a fair and just way
4. Philanthropic responsibilities-desired rather than required (charitable donations)

Question 23

Corporate citizenship-views on how it should extend:

Answer 23

1. Limited view:voluntary philanthropy,loc communities and employees-limited focus projects
2. Equivalent view:Partly voluntary and partly imposed,wide range of stakeholders,focused on legal requirements and ethical fulfillment
3. Extended view:promotion of social ,civil and political rights

Question 25

CSR stances Johnson,Scholes,Whittington:

Answer 25

1. Laissez faire -short term interest of shareholders-meet only min obligations
2. Enlightened self interest(long term shareholder interest)-social action makes good business sense/corporate image enhanced by undertaking such responsibilities (promo exp)/less less pressure for legal obligation
3. Multiple stakeholder obligations-legitimacy of the expectations of stakeholders other than shareholders for sustainability
4. Shaper of society-financial considerations secondary importance

Question 26

Against corporate social responsibilty- M Friedman

Answer 26

1. Only people have responsibilities-not businesses
2. General aim make as much money as possiblewhile conforming to the laws,ethics
3. Manager with social responsibilities-translated to acting in a way that is of no interest of his employer.
4. Manager spending money for social reasons not right-gov s responsibility/wasting stakeholders money

Maximisation of wealth should be best way society can benefit from business activities:

• increase tax
• trickle down effect on other disadvantaged members
• Many company shares-pension funds (not the wealthy anyway)