CORPORATE GOVERNANCE

BUSINESS ETHICS & SOCIAL RESPONSIBILITY

Amos Owen Thomas

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BUSINESS ETHICS

(c) Amos Owen Thomas

CORPORATE GOVERNANCE
Definition
The system used by firms to control and direct their operations: Through it, firms ensure that needs of all stakeholders are satisfied: The notion refers to performance & accountability:

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BUSINESS ETHICS

(c) Amos Owen Thomas

CORPORATE GOVERNANCE..
Role of board of directors
Its corporate governance encompasses:
1. Setting objectives 2. Competent executive team 3. Monitoring and evaluating performance of team 4. Reporting regularly to shareholders and stakeholders

Ethical obligations of board

Simply performing its role does not make a board of directors ethical; it must ensure more:

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BUSINESS ETHICS

(c) Amos Owen Thomas

ETHICAL GUIDELINES
Appoint members with ethical expertise
Should be already sensitised and/or well-trained:

Set ethical objectives

Ethics need to be integrated into the objectives that the Board sets for the corporation

Make ethics visible

The ethical objectives need to be made visible to both internal and external stakeholders:

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BUSINESS ETHICS

(c) Amos Owen Thomas

ETHICAL GUIDELINES..
Set ethical norms
Guide conduct of people via an ethical code or policy documents:

Monitor ethical compliance

Procedures for reporting unethical conduct set up: Reward compliance, punish transgressors:

Report on ethical performance

Directors should receive reports on ethical performance from management:

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BUSINESS ETHICS

(c) Amos Owen Thomas

CONFLICTS OF INTEREST
Definition
Where a person holds a position of trust that requires exercising judgment on behalf of others: Professionals as gatekeepers said to have fiduciary duties:

Responding to conflicts
Legislation often mandates having independent directors to prevent conflicts: Extraordinary executive compensation and conflicts within the accounting industry itself:

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BUSINESS ETHICS

(c) Amos Owen Thomas

CONFLICTS OF INTEREST..
Professional duties
It is universally recognised that markets must function within the law: Ensuring these conditions are met is important internal function for market-based economies:

Professions as gatekeepers
Thought of having watchdog role to ensure that those in the marketplace are playing by the rules: Source of rules from which we can determine ethical values to apply:

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BUSINESS ETHICS

(c) Amos Owen Thomas

BOARD OF DIRECTORS
Definition
Governance mechanism to help ensure that firms agents do their job of maximising returns:

Agency theory
Based on the belief that managers are agents of the shareholders:

Classifications of membership
Inside board member: Outside board member:

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BUSINESS ETHICS

(c) Amos Owen Thomas

BOARD OF DIRECTORS..
Responsibilities for members
Establishing an maintaining internal financial controls Communicating financial situations internally and externally Establishing and revising the companys code of ethics and ethical standards Selecting the external auditor Establishing different board committees

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BUSINESS ETHICS

(c) Amos Owen Thomas

BOARD OF DIRECTORS..
Typical decisions made
Annual business plan of the firm: Hiring and compensation of board members and senior managers: Capital structure and level of firm indebtedness: Acquisitions, divestitures and capital expenditures beyond a certain amount: Litigation settlements more than certain amount: Restructuring of the firm: Tax settlements greater than a certain amount:

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BUSINESS ETHICS

(c) Amos Owen Thomas

TYPES OF BOARDS
Range from least to most involved
Passive Board: Engaged board: Operational board: Certifying Board: Intervening board:

Benefits of strength
Definition of a strong board: Consequence of positive impact on the firm: Having corporate governance supports not only financial objectives established by shareholders:

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BUSINESS ETHICS

(c) Amos Owen Thomas

CEO COMPENSATION..
Compensation & ethical reputation
Stanwick & Stanwick study: Conflict between criticism of excessive compensation and defence of free market:

Ethics of compensation
Sky-rocketing packages raise ethical questions: Questions of distributive justice and fairness arise:

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BUSINESS ETHICS

(c) Amos Owen Thomas

INSIDER TRADING
Definition
Trading by shareholders with inside information that would materially impact the value of shares: Occurs also when corporate insiders provide tips to family members, friends and other parties:

The pros
If someone has a certain position in a firm and thus is privy to inside information: No legal rules exist other than traditional SEC rules on insider trading:

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BUSINESS ETHICS

(c) Amos Owen Thomas

INSIDER TRADING..
The cons
Considered unfair and unethical: If market participants know that one party has advantage over another via extra information:

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BUSINESS ETHICS

(c) Amos Owen Thomas

GOVERNANCE LEGISLATION..
US Sarbanes-Oxley Act
Passed in 2002 in direct response to the scandals at Enron and WorldCom: Established to increase transparency, integrity, and accountability of public companies:

UK Combined Code
Replaced the Cadbury and Greenbury Codes of Corporate Governance:

Egyptian Codes
More recent Codes of Corporate Governance

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BUSINESS ETHICS

(c) Amos Owen Thomas

CORRUPTION
Definition
Conscious abuse of public roles and resources

Forms
Bribery: Extortion: Embezzlement:

Grand corruption
Occurs when illegal financial incentives are given to higher-ranked public officials

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BUSINESS ETHICS

(c) Amos Owen Thomas

CORRUPTION..
Petty corruption
Occurs when private individuals give illegal financial incentives to non-elected public officials:

Influence peddling
Occurs favouritism is shown to private individuals:

US Foreign Corrupt Practices Act

Passed into law in 1977 and amended in 1988: Prohibits from giving foreign government officials any financial incentives:

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BUSINESS ETHICS

(c) Amos Owen Thomas

CRITICAL COMMENTARY
Shareholders expect the firm to perform
At the maximum level of financial performance

Other stakeholders demand accountability

Employees, suppliers & communities expect honest and transparent relationship with the firm

Challenge to directors and managers

Take on ethical responsibilities still untested, balancing demands of all stakeholders