COMPANY LAW
ETHICS & CORPORATE GOVERNANCEBM055-3-2The Objectives of
Corporate GovernanceModule Code and Module TitleTitle of
SlidesLearning Outcomes1. Appreciate the relevance and practical
application of business and professional ethics in the working
world;2. Explain how corporate social responsibility and corporate
governance relate to ethics; 3. Highlight the main ethical issues
relating to the natural environment.
Module Code and Module TitleTitle of Slides4. Recognise ethical
issues and propose solutions to these issues.5. Convey an enhanced
awareness of the role of business and professional ethics in
financial reporting;
Module Code and Module TitleTitle of SlidesContentsThe
Principal-Agent ProblemLob-sided Decision-making powersExcessive
Business Risk TakingThe Extent of Corporate GovernanceEthical
Issues and corporate governanceModule Code and Module TitleTitle of
SlidesThe principal-agent problemThe principal-agent problem has
been a well known issue in corporate structures. The problem lies
in the interests of those who have effective control over a firm
that differs from the interests of those who supply the firm with
external finance. an agent is supposed to take instruction from the
principal, who must accept theconsequences of the agents actions.
Module Code and Module TitleTitle of SlidesThis problem is
comparable to the relationship between the equity shareholders and
directors of a company. This grows out of the separation of
ownership and the control, and of corporate outsiders and
insiders
Module Code and Module TitleTitle of SlidesWhat make corporate
governance necessary is that the interests of those who have
effective control over a firm can differ from the interests of
those who supply the firm with external finance. In the absence of
the protections that good governance supplies, asmectries of
information and difficulties of monitoring mean that
capitalproviders who lack control over the corporation will find it
risky and costly to protect themselves from the opportunistic
behaviour of manager and controlling shareholders.
Module Code and Module TitleTitle of SlidesLob-Sided Decision
Making PowersKey issues about balancing the board is about
structuring the board of directors with a variety of other
directors, such as non-executive directors and independent
directors. This is important to ensure some for of objectivity and
independent views given in decision making. There are also debate
on the separation of powers by splitting the position of the chief
executive directors and the chairman of thecompany, due to enormous
power that could be centred in a single person having the two
positions.Module Code and Module TitleTitle of SlidesExcessive
business risk taking and lack of risk controlInvestors expect
higher rewards to compensate them for taking higher business risks.
If a company makes decisions that increase the scale of the risks
it faces, profits and dividends should be expected to go up.
Another issue in corporate governance is that the directors of
companies might take decisions intendedto increase profits, without
giving due regard to the risks. In some cases, companies may
continue to operate without regard to the changing risk profile of
their existing businesses. As a general rule, investors expect
higher rewards to compensate them for taking higher business risks.
Module Code and Module TitleTitle of SlidesIf a company makes
decisions that increase the scale of the risks it faces, profits
and dividends should be expected to go up. Another issue in
corporate governance is that the directors of companies might take
decisions intended to increase profits, without giving due regard
to the risks. In some cases, companies may continue to operate
without regard to the changing risk profile of their existing
businesses.
Module Code and Module TitleTitle of SlidesEthical issues and
corporate governanceEthical considerations are at the root of many
perceived problems with corporate governance in actual practice by
members of the board. Individuals are expected to behave in an
ethical way, and ethical issues are more difficult to be
regulated.Corporate governance can only provide a system and a
procedure that is seen to beethical and fair to shareholders.Module
Code and Module TitleTitle of SlidesIt is therefore important that
companies should be aware of the need to maintain a culture of good
corporate ethics, providing a code ofconduct that all directors and
employees are expected to follow in all aspects of their work and
responsibilities to the company.In addition, the perception of
ethical issuesby external pressure groups may affect the reputation
of a company, or the way it is run. Module Code and Module
TitleTitle of SlidesAn activist external group may regard itself as
having a vested interest in the activities and operations of a
company, particularly those involved in areas of advanced
scientific research.
Module Code and Module TitleTitle of Slides
