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Roles of business ethics in corporate governance
Essay on the theories of corporate governance
Essay on the theories of corporate governance
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Introduction
‘Enlightened shareholder value (ESV) is the idea that corporations should pursue shareholder wealth with a long-run orientation that seeks sustainable growth and profits based on responsible attention to the full range of relevant stakeholder interests’. This concept combines two other doctrines of the corporate governance, where one doctrine (known as shareholder primacy) says that the primary aim of corporations is to act in the best interests of the shareholders, while the other doctrine (also known as pluralist approach) states that those corporations should be socially responsible in maximizing their profits. So, again, the primary aim of the ESV is to maximize the profit by acting in the favour of shareholders and taking
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In other words, directors need to act in good faith in the best interest of the company. However, once shareholders delegated their power to directors there was another issues, whether directors should act in the best interests of shareholders only, or focus on the interests of other stakeholders? So, whose interests should be promoted by the directors? Some scholars believe that the focus should be made on stakeholders, as they are under the risk of the firms` actions; they contribute to the company ‘some form of capital, human or financial, something of value, in a firm’. So, corporations should be responsible toward stakeholders. However, stakeholders is a wide range of interests that should be accounted, and when corporation is responsible to everyone it means that they are not responsible to anyone, and this theory can lead to the meaningless of the corporate governance. This happens because company is focused not on the achieving of long-term objectives, but on the customers, employees etc. instead. Notwithstanding, it does not also mean that company should act and be accountable only in respect of shareholders who delegate them the governance of the company. From the point of shareholder primacy, the primary aim of corporations is to focus on the company and be accountable to shareholders, and thus focus ‘on stakeholders only to the extent that this is required by law and by concerns for the firm`s reputation, credibility and image’. So, Enlightened Shareholder Theory stands for the rejection of shareholder primacy (the effect of the shareholder theory can be seen from the Enron crisis where managers were required to increase profit to shareholders and, thus it encouraged managers to make manipulations with accounts of the company) and focus on other stakeholders` interests
When a company decides to execute a strategic decision, the decision will concern its stakeholders, either through the making of the decision itself or through implementation of the decision. Although strategic decisions are generally made "to attain superior performance" (Hill, Charles) improving the welfare of the internal stakeholders, the attainment of this goal may cause the entity to disregard their notion of right and wrong moral principles in order to achieve that goal.
...esponsibly towards all its stakeholders. We believe that creating value for all our stakeholders is the only sustainable way for us to thrive as an independent, family-owned company. In our new framework and strategy for sustainability and responsibility we aim to integrate this mindset even further into the core operating model of the company (Welcome).”
The thesis of the aforementioned article regarding corporate law theories is that "...shareholder primacy prevails today as the dominant view, with management discretion advocates in the minority, and with advocates of corporate social responsibility (CSR) as a rearguard" (pg. 100). Bratton & Wachter discuss the three views throughout the article and clarifies errors in early interpretations of Adolf A. Berle, Jr. and E. Merrick Dodd's debate of the 1930's. Bratton & Wachter cite the early interpretations were of Berle as the grandfather of shareholder primacy and Dodd as the grandfather of CSR whereas "neither was supporting either position. Both were speaking to the politics of their day, defending different visions of the emerging corporatist state, Berle's on the left and Dodd's on the right (pg. 135)." The misunderstanding reportedly is fueled by the overlapping publishment of arguments as well as Berle's initial response to Dodd's countering views being difficult to decipher.
Lazonick, W., & O'Sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29(1), 13-35. Retrieved from http://www.uml.edu/centers/cic/Research/Lazonick_Research/Older_Research/Business_Institutions/maximizing shareholder value.pdf
A fourteen year veteran of Edward Jones counted one of the perks of her job as reading client "thank you" notes penned when children went to college, or when retirements were launched a little bit early (Wolfe, 22 Feb 2002). This veteran could have counted many other types of perks such as salary, career advancement, etc., but she did not. She stated the intangible, intrinsic benefits like “thank you” notes and personal greetings. Many other employees stated similar things like “all we do is help people obtain goals”, clients are just as likely to come in to tell of good news or show off their new car as they are to sign business paperwork, and “everyone is focused around a single mission” (Wolfe, 22 Feb 2002). Without a doubt, these are the exact reasons why Edward Jones was named first in Fortune Magazine's 2002 rankings for Best Company in America. This essay analyzes the reasons why these employees made Edward Jones the number one company in 2002. It will also discuss exactly how Edward Jones motivated its workers through its strict key values and organizational goals.
Friedman argues that, for example a corporate executive has a responsibility to his employers, which is usually to make as much money as possible for the company while conforming to the laws and ethical customs of the society. This employer, outside his work, may devote his time and money to certain charities that he regards as worthy and while these are social responsibilities they are the individual’s social responsibilities, not the company’s. Friedman in a sense says how entities have responsibilities; it is the people that have the responsibilities. A corporation in a way is too vague of an entity to assume responsibilities. Again, he feels ‘’that the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation…. And his primary responsibility is to them’’ . The only responsibility a director should have is to its shareholders and not to society or any other interest group or public good. And so if the interest of the shareho...
...ng major objectives for firms and attaining ability of balanced conflicting and demands for firm stakeholders.
In contrast , the shareholder theory organisations or organisation's decision-makers only have the responsibility to their shareholders by increasing the organisation profits and should only make the decisions to increase as much as possib...
Stakeholders are those groups or individual in society that have a direct interest in the performance and activities of business. The main stakeholders are employees, shareholders, customers, suppliers, financiers and the local community. Stakeholders may not hold any formal authority over the organization, but theorists such as Professor Charles Handy believe that a firm’s best long-term interests are served by paying close attention to the needs of each of these stakeholders. The modern view is that a firm has responsibilities to all its stakeholders i.e. everyone with a legitimate interest in the company. These include shareholders, competitors, government, employees, directors, distributors, customers, sub-contractors, pressure groups and local community. Although a company’s directors owes a legal duty to the shareholders, they also have moral responsibilities to other stakeholder group’s objectives in their entirely. As a firm can’t meet all stakeholders’ objectives in their entirety, they have to compromise. A company should try to serve the needs of these groups or individuals, but whilst some needs are common, other needs conflict. By the development of this second runway, the public and stakeholders are affected in one or other way and it can be positive and negative.
An organization needs to adhere to ethics in order to effectively implement its mission, vision, and objectives in a way in which offers a solid foundation to management and their subordinates to properly develop and implement its strategies. By doing so, the organization as a whole is essentially subscribing to one commonality that directs all of the actions of the employees of the organization. Additionally, it assists in preventing such employees from divergence in regard to the proposed strategic guideline. Ethics additionally ensures that a strategic plan is developed in accordance to the interests of the appropriate stakeholders of the organization, both internal and external (Jin & Drozdenko, 2010). Likewise, corporate governance that stems from various regulatory parties makes it necessary for organizations to maintain a high degree of ethical standards; this is done by incorporating ethics within the organization’s strategic plan so as to foster a positive corporate image for the stakeholders and general public (Min-Dong Paul, 2009).
Corporate governance implies governing a company/organization by a set of rules, principles, systems and processes. It guides the company about how to achieve its vision in a way that benefits the company and provides long-term benefits to its stakeholders. In the corporate business context, stake-holders comprise board of directors, management, employees and with the rising awareness about Corporate Social Responsibility; it includes shareholders and society as well. The principles which...
Evan, W. M., & Freeman, R. E. (1988). A stakeholder theory of the modern corporation: Kantian
...can be an arbiter of business responsibility to society through the application of tax incentives or tax credits. In good corporate governance, the management should be able to meet their social responsibilities, these include making sure that their products are not hazardous to people and to the environment, sharing their profits for the good of the community as a natural person or human being would do, donating to social causes, organizing activities to benefit the community.
K, . N., ER, w., DAVID, K., PAUL, M., WALTER, O., & EVANS, A. (2012). Corporate governance theories and their application to boards of directors: A critical literature review . Prime Journal of Business Administration and Management (BAM), 2(12)(2251-1261), 782-787.
According to Carol Padgett (2012, 1), “companies are important part of our daily lives…in today’s economy, we are bound together through a myriad of relationships with companies”. The board of directors remain the highest echelon of management in any company. It is the “group of executive and non-executive directors which forms corporate strategy and is responsible for monitoring performance on the behalf of shareholders” (Padgett, 2012:1). Boards are clearly critical to the operation of companies and they are endowed with substantial power in the statute (Companies Act, 2014). The board is responsible for directing and steering the company. The board accomplishes this by business planning and risk management through proper corporate governance.