Ethic, Governance and Accountability - Coursework Example

1 Ethic, governance and accountability A private company or corporation is involved in creation of a product or deliverance of a service. It is a structure created with men, machines, money and materials to conduct particular business. All four entities men, machine, money and materials are together and individually indispensable in the conduct of business of a company. The conduct of business may consist in shaping raw material to finished product or deliverance of service to the consumer. As an externalising agent, the corporation maximises its profit at the cost any or all of its stakeholders—the employees, the suppliers, the environment, shareholders and the consumers. We will study the role of company vis-à-vis, the employees as stakeholders. Corporation as an Externalising Agent We consider a software development company working as externalising agency in regard to its employees. The software development is a process whereby an individual worker or a group of employees pool in their intellectual resources to create software. The raw materials are the technology platforms and intellectual property already in existence. The product is priced by the corporation based on demand-supply situation or on a cost derived out of its brand power. However, what the corporation fails to appreciate is the externality of its employees. It only pays a part of the intrinsic value of the product to its employees as salaries. Salaries do not account for those costs that would be incurred if the same professionals were to render their services elsewhere. These costs are built into the cost of the product but are not passed onto the employees. Employees are marginally 2. compensated for their effort in making of a product, and the profits accrued due to sale of a product largely go to the people who control the private company. Transaction Cost Theory: Transaction cost theory advanced by Robert Coase (1937) says that the market price of product is consciously fixed by the individuals, who control the company in which the particular product is manufactured. Transaction cost theory is unambiguous on the issue of the control of internal resource control mechanism. Robert Coase quotes Robertson who says that firm functions as an ‘island of conscious power’. The means of production—the employees and the machines are directed to perform in a particular way. There is a conscious decision making, policing and exploitation of the employee to create a particular product and its deliverance to the consumer. The price of the product is not determined by the social costs of the employees. Rather it is wilfully deduced by the controllers of the company, while entering into a contract with another party for supply of a particular product. In the absence of such a mechanism, there would have to be created a whole lot of contracts with the suppliers and the buyers resulting in confusion. Instead, the entrepreneur enters into a primary contract with the buyer about the cost and supply of the product and rest of the activities fall into place. Hence according to Coase, the employer is sole decision maker of the sale and price of the product. The market forces have little role to play. Hidden Information Theory: The employees in a manufacturing unit work in top to bottom command line, where only information that is necessary for functioning of a 3. company, is percolated downwards. The employee doesn’t play any role in determination of the price of the product. This information is hidden from him. Even in the eventuality of his joining the firm, he least knows, the actual work load of executing a particular task. He commits himself to a particular remuneration for a job before joining the job. He is acquainted with the work hazards and obligations when he is actually working in the firm. Even in the contractual agreement by the entrepreneur with the buyer about a particular product, the information about the labour, and the expertise, required to create the product is wilfully concealed. The burden of this concealment also falls on the employee and its benefits accrue towards the employer. Hidden Action: When employer or the producer of a product enters into a contractual agreement with the buyer the manufacturing processes, the technology, and the labour input are effectively hidden from the buyer. Only the employer or producer of a product knows the quantum of labour input in the manufacture of the product. The employer with ‘hidden information’ and knowledge of ‘hidden action’ is in greater strength to negotiate the price than the buyer. The benefits of hiked price accrue to the employer and he may or not share them with the actual producers of goods. Externality: An externality can be defined as a situation where the private cost of the product is greater than total social costs of the product. While deciding the cost of a product the seller and the buyer do not consider the social costs of the product borne by the employees who created it. The movement of the employees is curbed in the working 4. hours and they are subject to discipline and routine of the manufacturing utility. Such a disadvantageous position of the employee leads to accrual of social costs that are not compensated in the remuneration. To offset the loss of the employees the government levies sales tax, and excise tax on the product. This tax is used for public welfare. However, in this particular case when the social costs have been levied on the employee, the taxes are used for welfare of public and only a small amount of the tax money may actually go to the welfare of employee welfare that paid it. Gratuity, pensions, and provident funds are some other means imposed by the government on the employee to offset the difference between remuneration and social cost. Agency theory: The act of making one party—the employee or the employer to act on behalf of the other is called the Agency Theory. In this case, we perceive the employers as principals and the employees as agents. Since the principals always do not know to what extent a particular task has been accomplished, they seek the participation of the agents in the management. Incentives such as profit-sharing, stock-options, commissions, and performance bonus are doled out by the principals to make the agents more responsible. In case of large corporations senior employees are taken on the Board of management. In the principal-agent role, the employer wishes to compensate the employee for those functions, which are beneficial to him and costly to the employee. Conversely, the monitoring rate of performance is so high that the employer finds it easier to part with a small amount of profits than to actually monitor the progress and performance of each employee. In the ultimate analysis, Agency theory takes to change 5 the rules of the game whereby the interests of the employee and employers agree with each other. But the governing rule here again is to make the agent (employee) work in a way that is satisfying to the principal (employer). The principal-agent relationship works only when company is a profit making machine. In the eventuality of the company failing to make any profits due to lack strategic planning and marketing by the principals the agents again are in a losing position. Importantly, in the principal-agent mechanism the deciding factor is the principal who according to his wishes confers upon the agent some perks and privileges. The agent is always the lesser of the mortals who has to depend upon the principal not only for his wages, but also for performance rewards and the criteria for sanction of such rewards. Ethical Theories Having studied the economic aspect of corporate governance in light of employer-employee relationship, we now take up the moral and ethical issues. The role of the leader— The Dirty Hands Dilemma The role of the leader, herein the employer, has to be viewed from an ethical standpoint: whether what he does is, for the personal good, or it is for the welfare of the society. The means of production—men, materials, machines and money have to be collected to perform a particular set of functions and create a product. Creation of products is necessary for sustenance of society. For example, if an agriculturist grows maize, people get to eat maize and maize products. Similarly, an industrialist who manufactures a car 6. also helps society in giving a vehicle for transportation. This vehicle on the larger scale may fulfil multitudes of functions. We see that manufacturer or the employer is part of the demand-supply system where he produces and fulfils the needs of the society. He is an indispensable link of the supply chain. If, for a moment, he were to stop producing certain product the world would certainly run short on something essential for sustenance. It is established beyond doubt that the function of the manufacturer is of utility to the world but what remains to be seen is the motive behind his actions. By manufacturing a product, he is also giving means of sustenance and livelihood to his employees. They get bread and butter from his exercise. It can be conjectured that in the absence of the employer performing this exercise the employees could well be in the ‘cold’. Each employee has a family that he looks after. The children go to school and get education. In case of ill-health, they get healthcare from the money earned by the employee. In such a way, the employer becomes a role model on whose entrepreneurial ability; the lot of large number of humans is dependant. The income tax deducted out of the salaries of the employees and the tax cuts made on his sales go into public funds. Considering all these activities we come to the conclusion that the employer performs a very important social function and is indispensable to the society. But the question that arises here is does he do so only for fulfilling his social obligations? It can be pointed out that if all the employers work with this common denominator then the world could be well imagined as a large firm that fulfils the needs of each individual member of the society. But in actual practice it is not so. If the rationale behind business activity was ‘common good’ then we would have long ago got rid of poverty, deprivation, disease and 7. starvation. On the other hand these problems are major challenges before half of the humanity. It must be pointed out that even while doing the good cause of establishing a manufacturing facility that generates employment, providing a service that is beneficial to many, it is naïve to imagine that the employer is doing it for the welfare of the mankind. Actually at the heart of it lies his personal desire of reaping profit for himself. Not satiated at a level of reaping profits, he undertakes cost cutting methods including lay offs, cutting down on salaries, raising the cost of the product, consolidating manufacturing utilities, making tie-up or mergers. He even adopts schemes beneficial to the employees such as giving performance incentives, promotions, bonuses, and stock-options. This is the Dirty Hands Dilemma of the leader. His hands are dirtied by his policy to maximise his profits at the cost of others. All his utilitarian functions recede to background in front of his grand race to hoard more for himself while denying to others their just rights. The profit maximisation is done mostly at cost of the employees, who in actuality are the true producers of a product. Their intellectual and physical labour goes into making of a product and they are only given a part of the profits earned by sale of the product by the way of wages. Deontological VS Teleological Justifications In ethics, deontological justifications are those set of principles that are based on right actions. Any end is justified if the actions adopted to achieve it are right. The employer is justified in making profits for himself, if he, ensures that in his race for profit 8 maximisation he has not impinged upon the rights, dignity, and freedom of his employees. He has to ensure that the work conditions, working hours, wages, allowances were given to the workers as per laws enshrined. From time to time, he has to elicit out of the employees their views about the work and their changing requirements with changes in social and economic circumstance. The employer has to meet all the regulatory conditions not as necessity mandated by law, but out of his own volition so as to have a deontological justification. Teleological justification in ethics stands for achievement of common good as the end result. If the result of a practice is good it is immaterial to study whether the means adopted for it were good or not. Like if a product fetched good money for the employer in the market, and he was able to make apt remuneration to the employee and kept a due proportion of the profits as his share, then we need not go into the details of how such a state of well-being of all was achieved. This is improper; the ends can never justify the means in a civil society. In our context, it can be interpreted like this: if the employer-employee relationship and the means of production and work were employed to achieve common good of all—of the employer, the employee and the society, it doesn’t matter how and what kind of work and trade practices were carried out. Such an argument is fraught with serious lacunae that deserve introspection. Nothing is justified that is reached at the cost of usurpation of the rights of a human by a human. Only that end is justified for whose achievement proper and just means were adopted. In the just means comes the proper enforcement of 9 moral and political laws of the employee in the work place. No practice that is hazardous to the health of the employee should be followed. In no way any practice should curb his moral, intellectual, and physical independence. In the modern context, the employer has to carry the social security burden of the employee for future also. In case of a sudden lock-up or going out of business by the company due to unprecedented and unforeseen circumstances, the employee has to be provided for. Hence we see in a civil society, a trade practice has to be carried in all fairness and deontological arguments are stronger than teleological justifications. The role of law: to impose minimum standards Every country has legislated laws that protect the fundamental rights of the employees. These laws are made in the light of rules and standards advanced by International Labour Organisation (ILO). It is incumbent upon all member countries of ILO to establish minimum standards at workplace. These minimum standards include restriction of number of working hours in a day to 8. There should be no forced labour and in case a company wants an employee to work for more than stipulated hours, it has to be done on mutually acceptable basis. No person who is minor in respect of law can be employed. The employer will not discriminate on basis of gender and criteria of equal pay for equal work will be followed. The work place should be equipped with minimum safety standards and be hazard proof. Minimum hourly wage rate stipulated by the law have to be followed. Tax deductions are made from the salaries and sent to public departments. 10 Similarly tax deductions are also made from profits of the company. Hence the law imposes minimum standards for welfare of employees, employer and the society in large. Conclusion: Companies manufacturing a product or delivering a service have become an indispensable part of the modern day life. It is difficult to imagine life without their utilitarian functions. But no function should be performed at the cost of rights of the employees. The employees should not only be adequately compensated for their effort financially, but also given a place of respect in the company structure. They should not be treated as inanimate entities but as living units/constituents of the company. Effective steps should be taken to give social, moral, and economic security to the employees. By a holistic approach of following sound ethical practices, good corporate governance, and intervention of law enforcing agencies, the conflict of company (as an externalising agent) with the interests of employees can be resolved. Reading The Nature of the Firm, RH Coase, Economica, Vol. 4, No. 16, November 1937 pp. 386-405, 2006 [Accessed on 8th May 2007] available from World Wide Web SourcingMag.com, 2003, [Accessed on 7th May 2007] available from World Wide Web Johnson, Paul. M. A. 1994 A Glossary of Political Economy Terms [online]. [Accessed on 8th May 2007 from World Wide Web International Labour Organization, 1996, [Accessed on 7th May 2007] available From World Wide Web http://www.ilo.org/global/lang--en/index.htm Stanford Enclyopedia of Philosophy,2006, [Accessed on 7th May 2007] available from World Wide Web Williamson Oliver E & Winter Sidney G, The Nature of the Firm: Origins, Evolution, and Development, 2005, Edward Elgar Publishing. Read More