Global Financial Ethics - Coursework Example

Name: Instructor: Course: Date: Part 1: corporate governance In today’s corporate world, good corporate governance is mandatory. Every stakeholder group requires the practice of good corporate governance in business corporations. Poor corporate governance can contribute to the failure corporate organizations. Good corporate governance helps to maximize the value of the shareholders ethically and legally sustainable basis. This helps to ensure equity and transparency to the business shareholders. Effective corporate governance is essential because it helps to improve the performance of corporations through good management. According to Clarke T. 2004, pp 34, corporate governance refers to a set of systems that are used to steer and monitor the operation of business organizations. This set of systems affects the operation of companies because it influences the goals and objects that the company had set. There are various theories of corporate governance. Some of the key theories of corporate governance are agency theory, stewardship theory and stakeholder theory. The agency theory of corporate governance shows the allocation of resources in corporate organizations to be based on market exchange. Agency theory explains a firm as a nexus of contracts among individual factors of production Clarke T. 2004, pp 42. The proponents of this theory argue that economics was able to analyze the workings of the firm by explaining it as a constantly negotiated contact contrived by an aggregation of individual each with the aim of maximizing their own utility. The agency theory separates management and finance of a business. The agency theory offers shareholders a pre-eminent position in the firm legitimized not by the ideas that they are the firm’s owners but instead its residual risk takers. Agency theory shows that corporate organizations should be run in the interest of the shareholders. It encourages the separation of decision-making and risk bearing to control the problems of the agency. According to this theory, shareholders have a right to residual claims since they are the residual risk bearers. Agency theory has several strengths. It is emphasizes on the fact that efficient markets are the solutions to corporate governance, Clarke T. 2004, pp 52. The main approach of the agency theory is the elaboration and facilitation of market mechanisms that can mitigate the agency problem. It aims at finding an efficient market for corporate control, management labor and corporate information. In this connection, the management bears the costs of its own misconduct and this will therefore create incentives for self-control. The weakness of the agency theory of corporate governance is that it is a self-interested utility maximizing motivation of individual investors and this can lead to a problematic relationship between managers and shareholders. Stakeholder theory is another key theory of corporate governance. This theory defines organizations as multilateral agreements between the enterprise and its stakeholders, Clarke T. 2004, pp 64. The organization is a system of stakeholders who operate under the larger society that provides business opportunities for the organization. The stakeholder theory defines the purpose of the firm as creating wealth for the stakeholders. The relationship between a company and internal stakeholders is defined by formal and informal rules developed through the history of the relationship. While management may receive finance from shareholders, they depend on employees to fulfill strategic intentions. External stakeholders are equally important and relationships with customers, suppliers, competitors and special interest groups are constrained by formal and informal rules. Governments and local communities set legal and formal rules within which businesses must operate. Management must consider the effect of corporate decisions on all stakeholders in the firm. According to Clarke T. 2004, pp 78, the stakeholder theory explains the governance of multinational corporations due to the value placed on the stakeholders of the corporation. Modern multinational corporations show interdependence between the company and its shareholders and hence can be said to be using the stakeholder theory of corporate governance. The stakeholder theory of corporate governance has various strengths. One of these strengths is that defines stakeholders as those who have contributed to the firm’s specific assets. It is essential in the corporate governance because it emphasizes on the increment of the firm’s specific skills. The other strength is that its conception of the company as a set of relationships rather than a series of transactions represents an important step towards a sense of corporate citizenship. This theory of corporate governance also has a weakness. The theory emphasizes on customer relations, employee relations, and supplier relations. This is an indication that managers have to grapple with the imperatives to satisfy interests of more complex constituencies. The stakeholder theory helps business leaders to work efficiently because it defines their goal as improving wealth creation in the organization, Clarke T. 2004, pp 83. The stewardship model is another theory of corporate governance. According to this theory, managers are good servants of the business corporations, Clarke T. 2004, pp 104. They work diligently to improve the profit for their shareholders. The needs for achievement and responsibility are what motivate managers in the stewardship theory. Individuals who support the stewardship theory of stewardship contribute money to non-profit organizations in order to become directors in such organizations. Stewardship theory relies on non-executive board of directors that are not effective in governance. The weakness of the stewardship model of corporate governance is that it has no division of powers, as their power is not distributed to all stakeholders. Moreover, the boards can become redundant when there is active stakeholder. Some boards can also be established from cultural habit, blind faith or family looks and this shows inefficiency in governance. The political theory is another model of corporate governance. Unlike the stewardship model, the political theory of corporate governance recognizes that the allocation of corporate power is determined by the government’s favor. This model also differs with the agency theory that bases the allocation of resources on market exchange. The macro framework of corporate governance determines the ability of corporate strategies to influence the allocation of resources in the organization. The political theory of corporate governance limits the traditional economic analysis of corporate governance problems. The other key theory of corporate governance is the convergence theory. The convergence theory is characterized by the dispersed ownership and primacy of shareholder value Clarke T. 2004, pp 108. The principal agent problems are assumed paramount. Though there are cultural and institutional differences, the convergence theory can allow a more fundamental compatibility. Corporate governance systems are embedded in legal traditions that are unlikely to change in the near future. The corporate governance model interacts in complex ways with other institutional features that are tightly coupled with the ways in which firms compete in global economy. The weakness of the convergence theory is that any process of change in corporate governance whether brought by globalization or not is affected by political dynamics whose outcome is hard to predict. Part 2. How to maximize shareholder wealth in an agency theory framework Maximizing shareholder wealth involves maximizing the value of a civic organization’s common stock Solom J. 2004, 23. Various strategies are used in maximizing of common stock in organizations. Maximizing of shareholder wealth is one of the most important targets of any company. Companies use various strategies to maximize their shareholder wealth. In the bottom line strategy, profit is required to increase dividends paid to each of the company’s shareholders. This means that companies have to be concerned with profit making in the organization in order to maximize shareholder wealth. Managerial incentives are another strategy of maximizing on shareholder wealth. Companies ought to provide incentive for managers in order to motivate them to serve the company appropriately. Lastly, companies can also use initial public offering to maximize the shareholder wealth. The question on whether companies can maximize shareholder wealth in an agency theory framework while satisfying a wide range of stakeholder needs tries to show the consistency between stakeholder and agency theory of corporate governance. This is the crucial question due to the pervasive impact that businesses have on a society in our consumer led multinational driven world. It is necessary for companies to maximize the profits that shareholders get from the companies while putting into consideration the various needs of the stakeholders. The current business frameworks show sustainable organization culture within a corporate community that also recognizes the interdependencies and synergies between the company, its stakeholders and society. This approach to business seeks to maximize value creation through simultaneous maximization of economic social and ecological welfare Solom J. 2004, 23. Research shows that stakeholder management leads to improved shareholder value. However, the stakeholder theory is an abhorrence of shareholder based on agency theory. According Solom J. 2004, 24, managers are faced with a moral obligation of maximizing shareholder return as these results in the best allocation of social resources. The conflict between stakeholder theory and agency theory of corporate governance shows some kind of an ongoing struggle between economic views of the firm that are decidedly silent on the moral implications of the modern corporation. The agency theory is a narrow form of stakeholder theory and this means that companies can maximize on shareholder wealth in an agency framework while satisfying a wide range of stakeholder needs. The agency theory can be incorporated into the stakeholder theory since the stakeholder theory is the necessary outcome of the agency theory Solom J. 2004, 26. Human behavior and motivation implicit in agency theory is also evident in the agency theory. Similarities between the stakeholder and agency theory can be seen from a close examination of the two theories. The management groups of stakeholders are in a position of ultimate control as they have decision-making powers allowing them to allocate the company’s resources in a manner most consistent with the claims of other stakeholders, Solom J. 2004, 26. In this connection, the company management is ultimately responsible for satisfying stakeholder’s needs and expectations. Using agency theory terminology given their unique position of responsibility and accountability, managers’ interests need to be aligned only with shareholder’s interests but also with the interests of all other stakeholder groups. There is a conflict between stakeholder-agent relationships and principal agent relationships shown in the agency theory of corporate governance. Both stakeholder-agent and principal-agent relationships have an implicit or explicit contract. The purpose of implicit or explicit contract is to reconcile the varying interests of the stakeholders, Solom J. 2004, 27. It is difficult to balance the different needs and interests of stakeholder groups. However, this does not mean that companies should not make efforts to balance the needs and interests of their stakeholders. The idea of agency theory can be applied in stakeholder-agency relationships. Principal agent relationships described in agency theory can be seen as subsets of the more general class of stakeholder agent relationships. In developing stakeholder-agency theory, the agency theory has to be modified to accommodate theories of power arising from a stakeholder perspective. This means that stakeholder-derived agency theory perspectives on corporate governance can be viewed as mutually exclusive interpretations. They can also be interpreted as one model by making a series of assumptions about market efficiency. Agency theory and stakeholder theory are very different. One perspective of the agency theory leads to discourse based on self-interest while the other perspective leads to duty and social responsibility. These two perspectives on agency theory can be merged in order to combine the extremes of profit making, self-interest and moral responsibility to society. Companies can adopt business case for governance rather than adopting pure ethics in order to maximize on shareholder wealth while still satisfying the wide range of needs and interests of the stakeholders, Solom J. 2004, 27. The business case allows companies to adopt a stakeholder-oriented approach that is based on the notion that good ethics is good business. This means that companies have to ensure good ethics in their governance because this can make them maximize on shareholder wealth but still consider the various interests and needs of their stakeholders. The adoption of stakeholder-oriented approach in corporate governance requires company managers to employ ethics as strategic management tool that helps to increase the value of the company. Managers can choose an approach of corporate social responsibility in order to maximize shareholder wealth. This is to say that, corporate social responsibility is paramount in businesses that need to maximize on shareholder wealth. Corporate social responsibility is essential in businesses because it helps to balance the wide range of needs and interests of the stakeholders of a particular business. Corporate social responsibility is a modern approach that is used in corporate governance to maximize shareholder wealth. Corporate social responsibility and accountability help in increasing shareholder wealth. Companies should accept ethics because they are more profitable and acceptable for businesses in order to maximize on shareholder wealth while still satisfying the wide range of needs and interests of the stakeholders, Solom J. 2004, 28. In conclusion, it is possible for companies to maximize shareholder wealth in an agency theory while satisfying a broad range of shareholder needs. This is achieved by modifying the agency theory and incorporating stakeholder-oriented approach that helps to cater for the wide range of stakeholder needs and interests. References: Clarke T. 2004. Theories of corporate governance. New York. Routledge publishers Solom J. 2004. Corporate governance accountability. New York. John Wiley and sons Read More