Reading 28: Corporate Performance, Government and Business Ethics

Question 1

Stakeholders in a company

Answer 1

External
-Government, unions, local communities, customers, suppliers and general public
Internal
-Shareholders, employees

Question 2

Stakeholder Impact Analysis SIA

Answer 2

Identify the most important stakeholder and give highest priority to pursuing strategies that satisfy their needs.

Question 3

Steps in SIA

Answer 3

• Identify the stakeholder
• Identify the stakeholder’s interests and concerns
• Identify what claims stakeholders are likely to make on the organisation
• Identify the stakeholders who are most important from the organisation’s perspective
• Identify the resulting strategic challenges.

Question 4

Three stakeholders that have to satisfied

Answer 4

• Customers
• Employees
• Shareholders

Question 5

Interest of key stakeholders

Answer 5

Stakeholder-Resource-Interest

1. Shareholders-Risk capital-maximise the return on investment
2. Creditors-capital-repaid on time with interest
3. Employees-labor and skills-income,job satisfaction and security, good working conditions
4. Customers-revenues-high quality reliable products
5. Suppliers-inputs-seek revenues and dependable buyers
6. Government-rules&regulations to maintain fair competition-adhere to the rules
7. Unions-productive employees-benefits for their members
8. Local communities-local infrastructure-responsible citizens
9. General public-national infrastructure-assurance of improved quality of life

Question 6

Unique role of stockholders

Answer 6

-Stockholders provide risk capital and hence the company is obliged to pursue strategies that maximise their wealth

Question 7

Agency Theory

Answer 7

Problems that rise when one person delegates the decision making authority to another.

Question 8

Principal-Agent Relationships

Answer 8

Stockholders-principal, management-agents. Agents required to use the capital in the best interest of the principal.
Senior management delegates authority to the lower level managers who are then the agents of the senior management

Question 9

Agency Problem

Answer 9

• Agents have different goals than the principal
• Agents -more information(information asymmetry)
• Some info withholding might be good(to protect the company from competitors)
• Trust the agents: mechanisms in place to monitor and evaluate the performance of agents Eg: Board of directors, filings with SEC, internal control
• On the job consumption
• Desire for status, security,power and income
• Trading long run profitability for greater company growth
• Agency problem not restricted to relation between Stockholders and CEO but also between different levels of management

Question 10

Mechanisms to mitigate the agency problems

Answer 10

• Shape the behaviour of the agents so that they act in accordance with the goals set by the principals
• Reduce the information asymmetry between agents and principals.
• Develop mechanisms for removing agents who do not act in accordance with goals of principals and mislead them. - Governance mechanisms

Question 11

Unethical behaviour

Answer 11

• Potential conflict between the goals of enterprise, or goals of individual managers, and fundamental rights of important stakeholders.
• Attainment of personal goals above the enterprise goals.
• Information manipulation
• Anticompetetive behaviour
• Opportunistic exploitation of other players in value chain
• Substandard working conditions
• Environmental degradation
• Corruption

Question 12

Roots of unethical behaviour

Answer 12

• Individual ethics
• Business people failing to ask relevant question: Is this decision or action ethical?
• Organisational cultue
• Pressure from top management
• Unethical leadership

Question 13

Behaving ethically

Answer 13

• Favor hiring and promoting people with well-grounded sense of personal ethics
• Build an organisational culture that places a high value on ethical behaviour
• Make sure that leaders within the business not only articulate the rhetoric of ethical behaviour but also act in manner hat in consistent with that rhetoric
• put decision-making process in place that require people to consider the ethical dimension of business decisions
• hire ethics officers
• put strong governance processes in place
• act with moral courage

Question 14

Philosophical approaches to ethics

Answer 14

• Friedman Doctrine
• Utilitarian and Kantian Ethics
• Rights theories
• Justice Theories

Question 15

Friedman Doctrine

Answer 15

“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say that it engages in open and free competition without deception or fraud.”
Criticism:
Rules of games not clearly defined

Question 16

Utilitarian Ethics

Answer 16

An action is judged to be desirable if it leads to best possible balance of good consequences over bad consequences
Criticism:
- measuring the benefits, costs and risks of course of action
- does not consider justice - might result in injustice for minority

Question 17

Kantian Ethics

Answer 17

People should be treated as end and not as means to an end of others
Criticism:
No place for emotional sentiments

Question 18

Rights theories

Answer 18

Rights theories recognize that human beings have fundamental rights and privileges. Rights establish a minimum level of morally acceptable behavior.
-Rights come along with obligations

Question 19

Justice theories

Answer 19

“Justice theories focus on the attainment of a just distribution of economic goods and services. A just distribution is one that is considered fair and equitable.”
“Rawls argues that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage”
Two principles of justice
-Maximum amount of liberty compatible with similar liberty for others
-Inequality in basic goods is allowed only if it benefits everyone