Corporate governance: Business Issues and Ethics

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Q1.
  1. Corporate governance is defined the process, such as the processes of goal definition and control, by which shareholders seek to ensure that ‘their’ company is run in accordance with their intentions. In a broader sense, it comprises all actors that contribute to the achievement of stakeholder goals outside and inside the company. In the narrow sense, it comprises the management and shareholders of the company as the main actors.

In public-listed organization, corporate governance is needed because there is a principal-agent relation arose by the separation of ownership and control. The relationship is delicate due to being not framed in a contract. The following will analyse:

The shareholders have some rights, for example, voting in the general meeting, selling their stock and suing the managers for misconduct. Besides, managers are responsibility for managing the property of shareholders in their interests, including planning strategies and decision making. They also have some duties, such as acting for the benefits of the company, duty of care and skills thanks to effective and efficiency operation and duty of diligence. Thus, the relationship between shareholders and directors should be close.

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In the situation, the managers control the company but shareholders only control indirectly their properties. It seems the shareholders are principal and management is an agent to act in their interest with the boundary of the company.

In fact, both have conflict of interest. The reason is that the expectations of shareholders are to seek profit and increase share price and reputation of the company. They think managers act in shareholders’ best interests. However, managers expect to have more power and higher remuneration, including bonus and benefit. Their action is based on their self-interest, not shareholders. For instance, the managers may reduce the quality of products for saving money in order to themselves interest. Sometimes, it leads to drop the company’s reputation. Hence, their behaviour differs from shareholders’ expectations. Besides, the higher the manager salary is, the more the expenditure of the company is.

In addition, informational asymmetry is that shareholders have limited knowledge and insight into the goals and qualifications of managers. Managers know more superiorinformation of the company than shareholders’. In other words, a party knows some relevant information but not all parties. Sometimes, managers pursue self interest so that it leads to shareholders loss and inefficient operation of the company.

In the above dilemma, corporate governance can balance the interests of many stakeholders in a company, for example, its shareholders, community, customers and management. What is more, it provides a framework for achieving the objectives of a company. It has various frameworks in global, including Asian model and Anglo-American model.

  1. There are three main ethical problems arose by corporate governance, as following:

First of all, the ethical issue is financial markets and insider trading. Although the assumption of a perfect market is that stock price reflects all publicly available information, in fact, it is difficult in the world because of speculative faith stocks. The ‘dot-com’ bubble means a company does not make any or make less profit but there is worth on the market. The bond is based on speculation without fully revealing amount of uncertainty. Moreover, a lot of pensioners use their funds to invest in many bonds lost some parts of their income. That is to say, stock market does not fully show the amount of uncertainty when stock price consists of an element of speculation. Nevertheless, institutional investors use other people’s money to invest the stocks. The situation reflects the investors entirely abuse others’ trust.

Insider trading is that a part of investors in the market have superior knowledge compared with others. When stock is sold or bought based on non-public information, insider trading arises at the moment. The reason is that staff and management of a company must know early events which impact on its share price, insiders may take abnormal profit or avoid loss. Sometimes, staff in the company decides to exercise their options or sell their shares based on their inside information. At the same time, the action also leads to unfairness, misappropriation of property, undermining of fiduciary relationship and harm to traders and the market.

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Secondly, there is executive remuneration. ‘Fact cat’ salary is a charge for the expenditure of CEO and managers, such as commission and bonus. The amount of salary is too massive. The problem is that there is a serious contrast between their salaries and performance. And then, it is important about the interest of shareholders and managers. In lots of countries, the growth of their salaries outstrips shareholders’ returns. If their remuneration is higher, it damages shareholders’ value and increases the company’s burden even liquidation. The reason is that higher salary paid leads to the lower profit attribute to shareholders. Thus, a great deal of executive salary consists of share and share options to align shareholders and managers’ interest nowadays. If the salary is related to performance-related pay, executives would strive to increase share price and shareholders’ returns. It leads to higher salaries and bonuses for the executives.

Finally, the ethic problem is about mergers and acquisitions. The original objective of mergers and acquisitions is to acquir an asset transferred from an owner to another owner because it will increase wealth on the company. Leaving the asset can reduce ineffective management and higher costs. Sometimes, the mergers and acquisitions may be unsuccessful. It leads to waste money, resource and time. It is vital that the objective would be distorted by managers because managers may pursue interests that differ from shareholders interests and it exist conflict of interest. On one side, executives pursue prestige and reputation. On the other side, shareholders seek profit and share price.

Hostile takeovers, which are one of mergers, occur when an investor or a group of investors want to buy a major stock of a company against the desire of its board. The shareholders of the company want to sell but the rest shareholders do not want to sell. In a company, there is different opinion on the event. Only if shareholders are willing to sell their shares, the hostile takeovers would quickly interfere the remaining shareholders’ properties. At the same time, it also arise other problems. For example, they provide golden parachute, a lot of money. Or, managers secretly send greenmail to the hostile takeovers because they intend to keep their position after mergers. Apart from that, the company may restructure and downsize and it will arise more ethical issue, such as firing staff.

Except the above three ethical problems, corporate governance would cause other ethical problems.

Q2.

  1. Suppliers and buyers always cause many different problems. One of them is the misuse of power which is unequal situations between both parties and would affect industry profitability. Generally, the power of buyers and suppliers is based on resource dependence theory. The theory depends on the degree on the party’s resources. The power is affected by two factors, as following:

Resource scarcity is the degree to which the parties have or lack the products. That is, it is the extent of the goods’ scare. For instance, the supplier has enough resources, and buyers are less importance and dependence on the supplier so that the supplier wields power over the buyers, or vice versa.

Resource utility is the level to which the parties need or do not need the trade. In other words, it is the extent of the goods’ usefulness for the party. For example, the supplier’s resources are useful and the buyer dependence on the supplier, as a result, the supplier wields power over the buyers, or vice versa.

Bargaining poweris the ability of a party (A) in a situation to exert influence over another party in a trade in order to achieve a deal which is benefit to A. According to the above factors, there is a simple summary. When a supplier’s resources are sufficient and not important to buyer, or the buyer’s resources are scarce and vital to the supplier, the buyer may have more bargaining power than the supplier’s. Conversely, if the supplier’s resource has less scare and is important to the buyer, the supplier has bargaining power over the buyer.

When a party exercises power over another’s one, the power may be abused or used legitimately. Thus, the power should be used appropriately. In short term, suppliers obtain benefit and profit advantages if they gain exercising excess power. In long term, however, the cumulative situation has disadvantages because the buyers find other suppliers who lose the customers. Besides, potential buyers may join with other buyers to increase pressure on the supplier, or suppliers compose cooperatives to face the powerful buyers. Therefore, they may change the situation. They can argue selling price, restricted conditions and so on.

  1. There are two important factors that affect the process of globalization. They drive globalization in business, as following:
  • Cost advantages
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Parties pursue the lower cost for production, including raw material, labour and components.

  • Government influence

There are different standards for regulation, such as working practices, safety and environment protection.

When suppliers put into global, they should consider four situations, as following:

  • Different way of doing business

There are various culture and notions in the world. When people from different countries face same situation, they have different thinking and evaluation so that their behaviour is easily contradiction.

For giving gift, bribery and corruption between suppliers and buyers, various countries have various attitudes, for example, citizens in China like giving gift which is friendly politeness. Sometimes, a gift is difficult to decide whether it is bribery or courtesy. On one hand, the behaviour of bribery is an offence. On the other hand, rejecting gift also harms the business relationship and jeopardises the trade. There are ethical dilemmas so that many countries would have tolerated gift-giving practices and apply various limitations on gift.

Besides, the intention of giving present is considered. It should be regarded as acceptable when giving gift is without an intention to obtain advantages, if it is not perceived and if it does not have any effect. If a supplier and a buyer exchange gift and it is not that only one party provides gift to another for a long time, it is acceptable. In fact, it is difficult to distinguish which is pure giving gift, bribery or corruption. The problem still exists in different countries and firms.

  • Impacts on indigenous business

Suppliers from other counties enter into local and they would consider cost and other advantages to compare with local competitors. Moreover, they may harm indigenous firms by posing strong competition in labour and product. The meaning is that suppliers from other countries may facility local suppliers’ liquidation or relocation. It will affect local industries and lead to more fundamental social and economic decay.

  • Differing labour and environment standards

‘Race to the bottom’ occurs when the demand is for the lower-cost production in developing countries. The method can assist suppliers to save some money. It may cause some ethical issues for suppliers because lower costs consist of less environmental protection, poor labour conditions, and lower attention to safety and health.

Moreover, the suppliers may provide compulsory overtime, appointing child labour, below living wage and failed to have statutory rights to time off recognized. In addition, they may use dangerous chemicals that cause serious damage to human and environmental health in developing countries.

  • Extended chain of responsibility

The implication of global supply is that individual suppliers are faced with the prospect of an extended chain of responsibility. No longer acceptable to argue that the ethics of suppliers impact on their competitors was simply not any of their business. The various economic and social conditions show in other countries, as well as the inequalities brought to the surface by international trade. It means that the level playing field, which is caused by international business, is replaced with the sloping and bumpy playing surface of globalization.

Reference:

Andrew Crane & Dirk Matten, Business ethics: Oxford, third edition

Assignment 2