Exam For Law And Ethics - Assignment Example

1. One of the attributes to the current financial crises is the failure of corporate governance principles and practices. Discuss. The increasing integration of the global economy during the 21st century has resulted in the increased transparency and scrutiny of corporate practices. When in the past, the activities of, say, Nike in the United States, did not have any bearing elsewhere around the globe, today the case is different. A policy decision made from its headquarters back in the US canbe of interest in China, because the company operates a facility in the country. This highlights the internationalization of corporations in such a way that practices are now being required to conform to some universal standards in order to maintain competitive advantage, among other benefits. It is in this respect wherein the concept of the best practices in corporate governance emerged. An important element that constitutes best practices in corporate governance is transparency. This can be in the form of disclosure, which most capital markets require from its listed companies. What is recommended here is for such corporate policy to be codified as part of the organization’s rules and regulations. For example, Berghe wrote that majority of best practices in corporate governance in the area of transparency is the explicit rule in the code that financial performance, including the related interests of the members of the board should be reported in the annual report to shareholders.1 In addition to the disclosure of the financial reports, best practices mandate that other pertinent information should also be made available, including, but not limited to, instances of share ownership and voting rights. The names of the board members, managers (including their compensation) should not remain hidden as well. The significance of these variables variable has been demonstrated in the bankruptcy of Enron. It was only during the intense media and government scrutiny after the company announced its financial woes that the exorbitant compensation packages of its executives were revealed along with its “creative” accounting practices. Certainly, the importance of disclosure in corporate governance is particularly highlighted during crises. If full transparency is ensured, audit, performance evaluations, and other assessments and mechanisms can function properly in order to ensure that the organization is on track in achieving its objectives and compatible with sound corporate governance. Another component of best practices is the explicit rule in a corporate code of best practices to establish ethical and corporate governance standards. A number of stock markets require this from its members. In the case of Thailand, for instance, there is a continuing evaluation, assessment and modifications of standards being set for all its member-companies. The stock exchange adopted the code called, The Code of Best Practices for Directors of Listed Companies, immediately after the Asian financial crisis back in 1997. It sought to correct the corporate practices that have contributed to the country’s dramatic financial crash. From 1997 until today, the code has undergone a series of revisions and the information on companies who meet the requirements or fail to comply are made accessible to investors for their review. 2 An ethical issue being addressed by the code, for example, is the way members of the board tend to hold interlocking directorship in numerous companies. Ethical and best practices standards will reveal that this is incompatible with good corporate governance. In the context of averting crises, best practices in corporate governance helps to prevent fraudulent activities that can damage an organization internally because they aim to govern the behaviors of individuals. Japan’s banking industry crashed back in the 1990s when it allowed loans released to property developers. More recently, during the global financial meltdown that originated in the US housing bubble, the lack of best practices has also been exposed, triggering a massive financial reform in America. 2. Analyze the negative practices of the “rentier state theory”. If one merely reads the definition of the “rentier state”, the weakness of this concept becomes readily apparent. The theory about the “rentier state” is that it is a country that is dependent largely on its natural resources instead of taxation. DiJohn explained that a country can become a rentier state once mineral, fuel or a valuable resource production claim at least ten percent of a country’s GDP. 3 The concept was developed by Middle Eastern scholars who wanted to explain the experiences of oil-rich and wealthy Gulf countries. The revenue or “rent” generated from the exploitation of natural resources such as oil enables these countries to sustain its economy, dole out cash rewards to its citizens, subsidize basic services, and so forth, without asking its population for a pittance. This kind of practice is disadvantageous in several fronts. Most rentier states are authoritarian countries – Saudi Arabia, Venezuela, Algeria, etc. Through its wealth, each of these states’ government or leader can buy the silence and obedience of its people. This has been mistaken by the theory’s proponents as stability. However, such twisted relationship between the government/governing body or individual stunts the political development of the country because it encourages corruption, abuse of power and does not empower the people to hold the government accountable for its decisions. In Algeria, for example, the state-run energy company Sonatrach remains as the main driver of the economy at the same time a major source for cases of embezzlement and a tool for the country’s elite to further amass wealth. 4 Here, the citizenry is powerless to object or perhaps know because they do not have fair representation, access to information, and voice in the management of their own affairs. Sonatrach and the distribution of hydrocarbon rate in Algeria has been a primary tool of the government to perpetuate itself (i.e. through patronage politics) and to keep social stability. When the situation is reversed, a political and civil strife may ensue, as people would certainly clamor for representation once the wealth, privileges and benefits are withdrawn. On the economic front, the dilemma is obvious: What happens when the natural resources used as a backbone of the economy runs out or depleted? A state that has been used to wealth and actually did nothing to earn it would definitely have difficulty in coping with earning money the hard way. In addition, The rentier state also faces tremendous challenges in the wake of the integration of the global economy. Countries such as Dubai, Bahrain and Qatar are in the process of liberalizing their economy. Rentier state gets in the way as investors and businessmen demand more freedom and representation in policymaking especially in the business environment. According to Carroll, capitalists insist on their participation on government affairs and policymaking as well as the democratization of the system of government.5 The transition from closed, authoritarian regime towards a freer business, political and social landscape can prove daunting for rentier states. Finally, the rentier state undermines a country socially, starting from its people ending with the erosion of its institutions. Yates identified the emergence of his so-called rentier mentality and the rentier class. 6 Here, people would come to rely on government dole outs, subsidies on welfare services, never attempting to be more productive. 3. Takeover defenses can impose some ethical challenges. Discuss. Like hostile takeovers, takeover defenses can also entail some ethical questions. However, navigating this issue can be complicated from a moral perspective because it is difficult to say when a particular defense strategy could be considered morally wrong. It would be helpful to outline some takeover defense strategies. Boatright cited at least ten defense strategies in order to thwart the raider – corporate restructuring, defensive acquisition, Pac-Man defense, scorched earth defense, crown jewel defense, defensive repurchases or recapitalizations, voting control issues, and, a set of tactics classified under state law defenses, among others. 7 A number of these tactics involve initiatives that are designed with the primary aim of making the target company less attractive to the company launching a hostile takeover. For instance, there is defense acquisition, which involves the target company also acquiring for itself another firm with the aim of making it less attractive for the raider. An excellent example is when Hyundai Heavy Industries took over the shares of Merchant Marine in an acknowledged bid to stop a company called KCC from taking over. 8 Then, there is also the scorched earth defense that requires the target company to embark on selling a number of assets as well as the depletion of the company’s cash reserves. The examples above demonstrate how easy it would be for the target company to overstep its bounds just to fend off the raider’s efforts. For example, the board of directors decides, without the knowledge of its stakeholders, to sell important assets just so it could discourage any attempts to take over; or, the management decided to incur an exorbitant amount in debt. It might not be simple to raise ethical problems against defense strategies. However, a factor that can be used as to evaluate whether a defense tactic is ethical or not is the personal interest variable. For example, a manager in a company should not, as a rule, adopt a strategy or a policy that would benefit him or her personally. He should also not embark on a defense strategy just out of spite or anger or pride or some personal vendetta. Particularly, the former is difficult to achieve. It is easy to understand how managers of companies are often of the opinion that they have the right to protect their jobs and, hence, can adopt a tactical defense even if this means significant losses for bondholders who have no say in the decision-making process. According to Frederick, the ethical defense is legitimate if the manager is acting in he best interest of the company.9 Beatty and Samuelson added some ethical points in adopting defense takeover strategy: that managers are obligated not to take advantage of opportunities that rightly belong to his organization; and that managers, in their decision to defend must exercise extra care in making honest as well as informed decisions that are reasonable and aligned with the objectives and welfare of his organization.10 This is highlighted by the fact that an organization, from a legal perspective, is a juridical person with separate interests and rights independent of those people and parties who collectively are entrusted with dispensing corporate action. Bibliography Beatty, Jeffrey and Samuelson, Susan. Business Law and the Legal Environment, Standard Edition. New York: Cengage Learning, 2006. Berghe, Lutgart. Corporate governance in a globalising world: convergence or divergence? : a European perspective. Berlin" Springer, 2002. Boatright, John. Finance Ethics: Critical Issues in Theory and Practice. John Wiley and sons, 2010. Carroll, Katherine. Business as usual?: economic reform in Jordan. Lexington Books, 2003. DiJohn, Jonathan. From windfall to curse?: oil and industrialization in Venezuela, 1920 to the present. Philadelphia: Pennsylvania State University, 2009. Frederick, Robert. A companion to business ethics. Wiley-Blackwell, 2002. Kanda, Hideki, Kim, Kon-sik and Milhaupt, Curtis. Transforming Corporate Governance in East Asia. Taylor & Francis, 2008. Montreevat, Sakulrat. Corporate governance of listed companies in Thailand. Institute of SEA Studies, 2006. Werenfels, Isabelle. Managing instability in Algeria: elites and political change since 1995. New York: Routledge, 2007. Yates, Douglas. The rentier state in Africa: oil rent dependency and neocolonialism in the Republic of Gabon. Africa World Press, 1996. Read More