The Ethics of International Business - Essay Example

1 Introduction Business has become complex and large and is now spread over vast geographical areas. With a few exceptions, it is also no longer individually owned. Modern companies are now owned by vast number of shareholders and are managed by people who my have no shareholding in the business they run, except for some directors who may have small holdings. These managers may not run the company very competently unless the board of directors exercises vigilance and control over them. The relationship of the managers, including the directors, with the stakeholders is mainly fiduciary. They are after all paid for working for the primary stakeholder, the shareholder to create value and profit for him. It is incidental that for earning this profit, they have to be equally mindful of befitting the secondary stakeholders. Contrary to common belief, there are many stakeholders in the business apart from the shareholder or the stockholder. They are the employees, customers, suppliers, bankers and even the society at large who look for some benefit from the company, and in turn are also its well wishers. The question is how to determine that the managers are acting in the best interest of the shareholders? One way is to read the annual financial results that reveal the results of their efforts in realizing profit and value for the owners of the company. But this does not reveal their competency level. The various audits and financial data only show that these are results of activities that have been checked for correctness but they do not reflect on what level of competence was exercised. The better and more comprehensive method is through Corporate Governance. 2 The Role of Manager The company is a legal entity and therefore has to enter into commercial transactions all the time for carrying on its business activities. These transactions are concluded by the managers on behalf of the company since the legal entity is not a person and needs agents to carry out these duties for it. This ability of the managers to enter into legal contracts and agreements makes them the agent of the company with the liability resting with the company. This situation gives rise to irresponsible behaviour on the part of managers who do not carry the burden of any wrongdoing on their part. It is to control this likely misuse of power that Corporate Governance assumes importance. As the managers are the agents of the shareholders there exists an agency relation ship between the two that is described as a contract under which the principal engages the agent to perform some service on their behalf (Jensen and Meckling 1976). This contract defers the right of decision making on the agent on behalf of the principal. Problems arise as every action of the agent will affect the welfare of the principal and the impossibility of having a perfect contract to ensure this (Brennan 1995b). This raises the question as to how to encourage the agent to ensure the welfare of the principal. The most appropriate way to bring managers to account for their actions is setting rules and procedures of Corporate Governance. This will bring forth the results of their actions in shape of financial reports that will be scrutinized by the principal as well as the markets in general. The Board of directors is in a critical and central position in this situation. It act as an agent of the principal in the formation of strategies that will result in profits. For this it appoints managers with mandate to manage the daily affairs and enter into commercial transactions. It also acts a trustee for the principals adding value for them by strategizing the role of the company in the marketplace. The delegation of responsibility to the managers was a risky business as there was no association of liability involved in their decisions and this could erode both profits and values. The ability of managers to engage in transactions without any ownership rewards coming to them also separated the risk to reward possibilities that led to less responsible behavior. The principal thus become vulnerable. There is an absence of similarity between the agent and the principal and if left to their own devices the agent is likely to prefer actions that will be different than the one likely to be chosen by the principal (Eisenhardt 1989) 3 The Agency Theory This has given rise to the agency theory. It proposes that the management is required to carry out its duties on behalf of the principal stakeholders, the shareholder. The ability of the managers to make commitments on behalf of the organisation explicitly expects them to behave in a responsible manner in the discharge of their duties. It is implicitly understood that besides the shareholders, the managers will also look after the interests of all other stakeholders too. Rappaport (1986) and Stewart (1991) are of the opinion that besides the principal stakeholders, the society at large, as well as all the stakeholders will benefit as a result of better management that can be seen form the performance of the organisation in this responsible manner. Taking this view it becomes important to find how to report upon that performance to the shareholders (Myners 1988). This view has been disputed by Kay (1998) who states that organisations maximize value by focusing on its objectives and are not concerned with either the principal stakeholder or the secondary ones. The equitable accrual and distribution of the value is not their prime purpose of making decisions. Another view is that it is quite appropriate for the agents to use the funds given by the principals specifically for the purpose that they have been given to the agents (Hasnas, 1998; Smith and Hasnas, 1999). Indeed this is very explicit and therefore the management strategies must be devised for these objectives only. The main aim of the shareholder is to maximize his return therefore the managers are under obligation to fulfill his wishes and the argument is that the shareholder has full right to expect his property to be used for his/her benefit. Etzioni (1998) suggests that this view of shareholders property rights, which are both moral and legal, is ‘widely embedded in the American political culture. This has introduced the Moral argument in the Agency theory. Morals are the foundation of the Stakeholders theory which upholds the obligation on the organization to offer benefits to other stakeholders besides the shareholder by right. Therefore Donaldson (1982, 1989) suggests that use of shareholders funds for furthering public interest is acceptable. In interesting turn has been taken here by Smith and Hanas (1999) when they point out that this would contravene Kant’s (1804) principle of ethics that a person should be treated as an end in his own right and not as a means for another persons end. Honore (1961) provides another twist by stating where use is harmful for someone else the right of use should be restricted. To this Donaldson and Preston (1995) retort that since property rights are restricted then there is need for distributive justice to justify them. This makes the argument very interesting and along these lines Sternberg (1998) elaborates that business itself must be founded on basis of distributive justice, adding the words ‘ordinary decency’ to cement the foundations of these thoughts. Since the relationship between the agent and principal is primarily fiduciary in nature it has been argued that the original purpose of the fiduciary theory as well as the agency theory is to prevent any misuse of funds for the personal benefit of the agent (Marens and Wicks 1999). The agent’s duties simply require that they maintain an honest and open relationship with the shareholder and do not attempt to gain unlawfully from their position as agents. 4 Critique The premise of the Agency theory is that the managers of a company are agents of the primary stakeholder, the shareholders. They are obliged to carry out the mandate of objectives given to them by the principals. As agents they must be honest and primarily concerned for the well being of the principal for which they are given fiduciary compensations. The proponents of the theory advocate a narrow view that propels the principal above all others. They even suggest that the principals have the right to have their property used for their sole benefit. The opponents argue that no organisation can prosper, or even survive, unless it also serves the cause of others who are also involved in its daily affairs. They contend that without the support of these others the objectives of the organisation, even if they are skewed towards the principal alone, cannot be achieves. They also argue that in modern society distributive justice is necessary to realize objectives and that it is also the ordinarily decent thing to be done. Then again there is another anomaly. The Directors of the company, especially the no-executive ones are really playing a dual role. They are principals in one sense as they are the trustees of the shareholders and appointed to look after their interest, and agents in the other sense as they are formulating strategies that will be based on morality and distributive justice, although the weightage would be in favour of the shareholder. These contrary roles really make the agency theory rather irrelevant except for the fact that it helps to define various relationships. 5 Corporate Governance Corporate Governance is the set of systems and processes that provides the means to make sure that a company is managed well in the best interest of all stakeholders. Corporate Governance can also be called a trusteeship where all the stakeholders give the power of management to a few people to look after their interests. This is different from the agent and principal relationship and is much broader in scope. Its purpose is not to keep a check and balance between the stakeholders’ interests. It is in fact a measure of the successful handling of its affairs that result in some measure of benefit to all stakeholders. Another use of Corporate Governance is that it is a means to create an organisation that is result oriented and responsible. It makes the organisation that will create and enhances value for not only the shareholder but for all stakeholders. 6 Conclusions The relation ship between two persons, an agent and his principal, ordinarily signifies their proximity, knowledge, physical closeness and physical presence. In the context of an organisation or a company with limited liability this definition seems to be lacking in a big way. Modern companies, with rare exceptions, are no longer owned by individuals or a few identifiable persons. They are legal entities with thousands even millions of shareholders who together can be called the owners. But this is not a stable ownership. It is also not constant. There is no pride of belonging or of owning a piece in the normal sense that conveys ownership. There is also no concept of entrepreneurship involved. Under such circumstances it is difficult to justify that the shareholders are owners in the ordinary sense of the term and that they have a relation of being principals to the mangers who manage the company as agents. The agency theory alone therefore cannot be a foundation of good Corporate Governance as it is narrow in approach and confines itself to reporting to only one stakeholder, even if he is the principal or primary stakeholder. Business today is a participatory effort. There is a strong linking of every stakeholder and each contributes to support the organisation and in return each is benefited out of it. These relationships have not only to be acknowledged but fostered for optimization of business. Business strategies and processes have to be tailor made to serve every stake holder. Similarly Corporate Governance rules and processes have to encompass all activities that have a direct or indirect bearing on different stakeholders. It will not be far from truth to say that the agency theory has little relevance on Corporate Governance. Bibliography Brennan, M.J. (1995b), ‘Corporate Finance Over the Past 25 Years’, Financial Management 24, 9-22. Burkart, M. Donaldson, T. (1982) Corporations and morality, Prentice Hall, Englewood Cliffs, NJ. Donaldson, T. (1989 The ethics of international busines, Oxford University Press, New York. Eisenhardt, K. M. (1989) ‘Agency theory: An assessment and review’, Academy of Management Review,, 14, pp57-74. Etzioni, A. (1998) ‘A communitarian note on stakeholder theory’, Business Ethics Quarterly, October, 8 (4), pp679-691. Hasnas, J. (1998) ‘The normative theories of business ethics: A guide for the perplexed’, Business Ethics Quarterly, January, pp19-42. Honore, A. M. (1961) ‘Ownership’, in A. G. 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