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Foundations Of Corporate Governance

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Question:

Discuss about the Foundations of Corporate Governance.
 
 

Answer:

Introduction:

There are number of firms which contribute in the economic development and also in the development of society, but still there is mistrust in the society related to business organizations. As stated by Primeaux and Stieber there is popular misconception that business only seeks self-governing objectives and does not care about the society which means they just want to maximize their profit even at the cost of consumer, community, and the environment. Therefore, profit making is considered as most important factor of any business organization[1].

On the other hand, there are number of researchers who argue that business organizations must run their business ethically. As per these arguments, business organizations are responsible towards the society as they are earning from the society. Ethical decision making and leadership is considered as basis of ethical organizations, and various other factors are also there which are included in this list such as corporate social responsibility, sustainability, triple bottom line, and other similar factors[2].

This paper states the arguments related to business ethics and profitability, their importance, and also the balance between the two. Lastly, paper is concluded with brief conclusion which contains the summary of the facts and also state which factor overrides the other factor.

Literature Review on Business Ethics:

Business ethics is usually divided into forms that are normative ethics which mainly depends on the moral philosophy and theology, and this theory guides the individuals how they should behave. Other form of descriptive ethics which mainly directs the management of the business and it mainly deals with the actual behavior of the individual (Donaldson and Dunfee, 1994[3]; Trevin˜o and Weaver, 1994[4]).

However, both the theories related to ethics are equally important, and both play important role in descriptive ethical decision making in the business. There are number of theoretical models which recognize the descriptive ethics that are mid 1980s and early 1990s (Jones, 1991)[5]. These models generally built on Rest (1986) originals framework which mainly emphasis on moral decision making and states that moral decision making include four components that are moral nature of an issue, making a moral judgment, establishing moral intent, and engaging in moral action[6].

Now day firms play very important roles in our lives, and sometime we completely fail to realize the importance of their presence and function of providing goods and services which makes our lives so much easier. This can be understood through example which states that people of generation 1960 grows with the rise of computing such as IBM, Intel, Microsoft, Apple, Oracle, Sun, Cysco, and many others. Thanks to the power of computers and speed in processing the information because of which numbers of processes have been identified in almost all the fields related to human activity such as education, medicine, manufacturing, transportation, etc. it usually covers almost all the basic and other needs of human beings.

 

Introduction of computers were considered as revolution related to information, and its comparison with the social impact is considered by Gutenberg printing press in the 15th century. Now no one can imagine the world without internet and companies such as Google, Facebook, twitter, etc. contribution of this information revolution is goes beyond the fulfillment of basic general needs of human beings. It must be noted that this revolution extend to those remote areas also where still human rights are under threat. Therefore, in case of free economies, firms perform their social roles by manufacturing the goods and providing the services which are demanded by the people or might be demanded in future.

Therefore, in competitive markets maximization of profit creates job in the process of production, and introduce those goods in markets which are wanted by consumers at the smallest possible cost quoted by the technical constraints. This activity helps in generate the surplus related to consumers, which is defined as the difference between the willingness of consumers to pay for the goods and what is actually paid by the consumers to get the goods. In this context this activity is considered as ethical because in this situation god for the company is also good for everyone. This argument is stated by Primeaux and Stieber (1994: 289), and they stated when any business maximize its profit which means allocate resources in efficient manner, now people have more things to fulfill their demand and it is considered as ethical business with profit maximization. If these activities does not maximize the profit which means does not allocate the resources in efficient manner and demands of the people are not met then it is considered as bad.

Adam Smith outlined the good ethical outcome many years ago. He is the father of modern economics and with the help of invisible hand metaphor he developed this good ethical outcome in case of those firms which are driven by self-interest only. These firms are defined as level one by Wagner-Tsukamoto (2007) in context of moral agency firm[7].

As per referred by Goodpaster and Mathews (1982), competition in market for the purpose of delivering an ethical quality independent and any moral projections of the managers as the systemic morality related to market economy. Therefore, in context of ethic manager of hypothetical neoclassical firm can go beyond the immoral decision making[8]. As stated by Athannassoulis (2004)[9], if any function is involved then good thing is considered when all the functions are performed well. This can be understood through example which states that knife has function to cut and it performs its functions in well manner when it cuts well. Therefore, if any manager wants to maximize the profit must first minimize the cost, and the goal of manager is to efficient use of scarce resources is high on the agenda of neoclassical firm. Real world are completely different from the perfect competition in many situations, and there are number of neoclassical economist who are agree that state must consider and take actions to correct the market failure or unacceptable wealth inequality[10].

Benefit to Society from adopting the approach related to Business Ethics:

Generally, people think that business is established for making profits, and business organizations make profit at every cost. In other words, business organizations are not ethical and business is the pool of greed. From last few years, this conception has been changed. Fact that business organizations earns profit through unethical way is proved false because there are number of companies which are good and contribute in the development of society which means there are number of peoples who are doing right thing.

Now business organizations try to solve the major issues face by society at global level, and there are number of peoples who believe this fact. After observing things from last three decades, it can be said that number of things are changed[11]. Thousands of business organization are working for making the world better place, and add value to the daily lives of the people. Therefore it is necessary to change the view we think about the business especially during the period of global financially crises in which old concept of profit maximization. As per the stakeholder’s theory, stakeholders are the owners of the business and business organizations bear primary responsibility towards them. In other words, business organization must earn profit for their stakeholders such as suppliers, investors, employees, customers, and the community.

The old concept related to business stated that main aim of business is to earn profits. This concept is based on the approach that breathing is the main purpose of life and in similar way most important aim of business is to earn profit. The only difference is that business is conducted by passionate entrepreneur for the purpose of fulfilling their dreams to change the world. This can be understood through example, John Mackey, co-CEO of Whole Foods Market is the great and successful business leaders who practice conscious capitalism[12]. As per john, those business men who want to make money start business out of passion. He further stated, Physicians make money but there main aim is to heal, teachers make profit but also educates the society.

There is one more example; CEO Tom Gardner of Motley Fool’s main mission is to help people for becoming better investors. CEO of The Container Store that is Kip Tindell explains that he believes in taking good care of 6000 employees will result in taking good care of consumers by employees, and this result in profit[13].

After considering the above facts, it become clear that if organization management work ethically and good then organization definitely earns profit, and if organization management does not work ethically and good then organization does not earns profit for long term.  Usually, profit is described as earning more money than it spends. Distribution of profit is decided by the owners themselves and it also play key role in motivating the employees to earn ethically[14].

There are number of companies who earn profit through ethical ways but there are some companies also who earn profit by choosing unethical way. Many companies are there which toe the line between the ethical perspective of the business and profitable perspective of the business, and sometimes this line is crossed while making profits for the organization. Those companies which cross this line for making the profits face various legal issues and issues related to their reputation by proving costly and damaging their brand. A recent example related to this is Recreational Data Services (RDS), this company is the small Alaskan software company won a $51.3 million settlement over GPS giant, Trimble Navigation. In this, Trimble was forced to pay the RDS for loss of earnings after being found guilty of stealing the confidential information of RDs and also create carbon copy of the same project. This example make it clear that main aim of CEO is to maximize the profit of the business for satisfying the demands of Pushy shareholders who wants higher returns on their investment. However, it is also the obligation of CEO to maximize the profit by choosing ethical way[15].

 

Justice and Normative morality in business ethics:

There are number of business insolvencies which are occurred without any signal, and these business collapses affected all the related parties such as shareholders and stakeholders. This is the only reason because of which all related parties must force on good corporate governance which must be complied by the company. Theory of justice was developed by the John Rawls in his book, and this theory is against the idea generated by Utilitarianism theory. Utilitarianism theory sated that outcome is considered ethical if it provide benefit to the maximum number of people, but on other side some people also get negative effect from this theory. However, it is possible that some people or minority group would get bad outcome from the decision, therefore there is need to establish the rule which solve this unfair result. From the justice theory of Rawls a fair social contract can be introduced from the original position and as per this position all the members are put in the state of ignorance and no one has knowledge related to their position in the society.

Each member has no awareness related to their social advantage and disadvantage, which means person does not have any knowledge, related to their own future what they become in society in future. This situation is possible with any individual either belongs to highest class or lower class in the society. Therefore, it is necessary that social contract must be designed in fair manner because everyone wants the contract to be fair for every position stated in Constitution. Therefore, rule must not be designed in favor of particular person, and the original position has two principles which result in justice of fairness. First principle is related to equality which states that everyone has same right, opportunity, and liberty. Second principle is related to inequality in context of social and economic reasons, and the unbalances have been managed by allowing the greatest advantage to the less disadvantaged group. After considering these above stated principles rule of justice and fairness is stated in the context of corporate governance. A theory of justice in part of the original position can be applied to use in the moral reasoning by considering the original position stated above without any bias[16].

Normative theory consists three theories that are stockholder theory, stakeholder theory, Social contract theory. On current basis, stockholder theory is not accepted by ethics community, but shareholder theory is adopted by various communities of business. This context is not right as stakeholder theory is not an outward theory[17].

 

Other Theories:

Agency theory is considered as the relationship between the principles of the corporate which includes shareholders with the agents such as executives and managers. As per this theory, shareholders appoint agents for the purpose of performing their work.  Clarke (2004[18]) stated that principles delegate their work for running the business to the directors or mangers that are considered as shareholders agents.  As per the argument stated by Daily et al (2003) two factors influence the existence of this theory. First factor states that theory is conceptually simple which just consider the corporation of shareholders and managers[19]. Second factor states that both employees and managers in the organizations are self- interested, and this theory expects that agents must take decision in the best interest of their principles.

This problem was first highlighted by Adam Smith in the 18th Century and after that investigated by Ross (1973). However this theory is fades away with the changing context of Corporation[20].

Other theory in this context is political theory, and this theory brings the approach of developing the voting support from the shareholders instead of purchasing the votes. Therefore, political influence play very important role in corporate governance and it direct the corporate governance in organization[21]. Interest of general public is much reserved as government participates in decision making of corporate. Various cultural challenges are taking into consideration and political model also highlights the allocation related to power of corporate, profits, and other privileges are determined in developments of government. From last few years, government of country has been seen to have strong influence in context of politics on the firms. Therefore, it is clear from the above facts that politics entered into the government structures and other corporate governance[22].

 

Conclusion:

After considering the above facts, it is clear that both ethics and profit play important role in the business administration, and while maximizing their profits business must consider the ethics. Usually, business is established for making profits, and business organizations make profit at every cost. In other words, business organizations are not ethical and business is the pool of greed. From last few years, this conception has been changed. Fact that business organizations earns profit through unethical way is proved false because there are number of companies which are good and contribute in the development of society which means there are number of peoples who are doing right thing. Therefore, after considering the above facts both ethics and profits are necessary to sustain the business.

 

References

Edward Freeman, (2014). Darden Ideas to Action, < https://ideas.darden.virginia.edu/2014/08/is-profit-the-purpose-of-business/>, Accessed on 18th October 2017.

HBR, (1980). Strategic Management for Competitive Advantage, < https://hbr.org/1980/07/strategic-management-for-competitive-advantage>, Accessed on 18th October 2017.

Law Teacher, Company Ethics And Profit, < https://www.lawteacher.net/free-law-essays/business-law/company-ethics-and-profit.php>, Accessed on 18th October 2017.

Linked in. Ethical Business vs Maximizing Profits, < https://www.linkedin.com/pulse/20141006191205-68335342-ethical-business-vs-maximizing-profits>, Accessed on 18th October 2017.

Law Teacher. A Theory Of Justice, < https://www.lawteacher.net/free-law-essays/business-law/a-theory-of-justice-business-law-essay.php>, Accessed on 18th October 2017.

John, H. The Normative Theories of Business Ethics: A Guide for the Perplexed, < https://www.jstor.org/stable/3857520?seq=1#page_scan_tab_contents>, Accessed on 18th October 2017.

Athanassoulis, N., 2004. Virtue Ethics,<https://www.iep.utm.edu/v/virtue.htm>, Accessed on 18th October 2017.

Bénabou, Roland and Jean Tirole, 2010, Individual and corporate social responsibility, Economica, 77, 305, pp. 1-19.

Primeaux, Patrick and John Stieber, 1994, Profit maximization: The ethical mandate of business, Journal of Business Ethics, 13, 4, pp. 287-294.

Camenisch, Paul F., 1987, Profit: Some moral reflections, Journal of Business Ethics, 6, 3, pp. 225-231.

Donaldson, T., Dunfee, T.W. 1994‘Toward a Unified Conception of Business Ethics. Integrative Social Contracts Theory’Academy of Management Review19252284.

Treviño, L.K., Weaver, G.R. 1994‘Business Ethics/Business Ethics. One Field or Two?’Business Ethics Quarterly4113128.

Jones, Donald G. and Helen Troy: 1982, A Bibliography of Business Ethics: 1976–1980 (Colgate Darden Graduate School of Business Administration, University of Virginia).

Rest, James R.: 1979, Development in Judging Moral Issues (University of Minnesota Press, Minneapolis, MN).

Wagner-Tsukamoto, Sigmund, 2007, Moral Agency, Profits and the firm: Economic revisions to the Friedman theorem, Journal of Business Ethics, 70, 2, pp. 209-220.

Goodpaster, Kenneth E. and John B. Mathews, Jr., 1982, Can corporations have a conscience?, Harvard Business Review, January-February, pp. 1-9.

Beger, Ida E., Cunningham, Peggy H and Minette E. Drumwright, 2007, Mainstream corporate social responsibility: Developing markets for virtue, California Management Review, 49, 4, pp. 132-146.

Clark, T. (2004) “Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance” London and New York: Routledge.

Daily, C.M., Dalton, D.R. and Canella, A.A. (2003) “Corporate Governance: Decades of

Dialogue and Data”. Academy of Management Review, Vol. 28, No. 3, pp. 371-382.

Ross, S.A. (1973) “The Economic Theory of Agency: The Principal’s Problem”. The American Economic Review, Vol. 63, No. 2, pp. 134-139.

Pound, J. (1993) “Proxy Contest And The Efficiency Of Shareholder Oversight”. Journal of Financial Economics, Vol. 20, pp. 237-265.

Hawley, J.P. and Williams, A.T. (1996) “Corporate Governance in the United States: The Rise Of Fiduciary Capitalism”. Working Paper, Saint Mary's College of California, School of Economics and Business Administration.

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