Ethics and Governance in Business Management

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Introduction

The application of ethics in managing businesses has persisted for a long time, but the nature of ethics has changed in the present-day digital world. Globalization along with the digitization of businesses has considerably modified the ethical issues, as evidenced by the magnified frequency of complaints and problems. Currently, there are more complexities in managing a business owing to the variety of ethical issues which frequently emerge (Hertig, 2006). Therefore, an in-depth understanding of business ethics, corporate governance and identification of mitigation options is required. Two questions are particularly addressed in the paper: how organizations and specifically organizational boards can be made more accountable, and the strengths and weaknesses of the extant governance models. The research paper also underlines ethics and governance, corporate social responsibility, corporate ownership structures and their application in a business context.

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How Organizational Boards Can Be Made More Accountable

The board serves as the key accountability body in both private and public organizations. It is obligated to be answerable to the shareholders and the stakeholders as well. Given that boards comprise of a multipronged portfolio which includes strategic advice, critical scrutiny, external linkage and employment, they are charged with the task of instilling responsibility in the organization’s culture. This can be achieved by training and empowering employees as needed, developing a timeline, and emphasizing transparency in performance reviews (Schillemans & Bovens, 2019; Boyd et al., 2011). It is the board’s task to ensure that organizational transactions are completed in the best interest of the shareholders. Boards are compelled to wholly participate in the decision making on crucial issues impacting the organization. Likewise, they should apply impartial judgment and be attentive to the organizational affairs so as to warrant smooth operations (Schillemans & Bovens, 2019). The duty of obedience makes it a priority that board members should remain faithful to the vision and mission of the organization and be in compliance with the specified laws.

The requirement of board members to offer strategic direction stretching beyond the short-term performance of a business adequately prepares an entity to proactively address risks. This is possible through anticipation of adverse effects of individuals and management of reputational risks (Boyd et al., 2011). Broader access to market opportunities gives the organization a chance of accumulating wealth over time.

Applying Ethics in Business Context

Ethics connote a set of principles of human conduct critical in shaping the behavior of organizations or individuals. It is a discipline that covers obligation and moral duties, clarifying what is either good or bad for every organizational member and partner. In the course of executing duties, ethics helps in making moral decisions (Mitchel et al., 1997). Business ethics entails the application of moral and ethical norms in the management of an enterprise. It encompasses the standards and principles that guide how an entity conducts its affairs (Frege, 2005). In essence, firms are supposed to balance their desire of maximizing profits and what stakeholders need.

In order to keep the aforementioned balance in place, trade-offs are necessary as they aid in addressing the distinct business aspects. Enterprises that undertake their activities in an ethical way are reported to enjoy a significant competitive advantage over others. Such benefits include high commitment levels from employees, high-efficiency levels in operations, and loyalty from both employees and customers (Hertig, 2006; Cook, 1995). As a whole, better financial performance is experienced by such enterprises as a result of their high customer and employee retention rates.

Strengths and Weaknesses of the Extant Governance Models

Corporate governance puts businesses to check, ensuring that their operations are in line with the ethical standards, laid down rules, and regulations. The framework of corporate governance guarantees precise and well-timed disclosure on matters of the corporation. Such issues include the financial performance, governance of the company, situation, and ownership of the enterprise (Freeman, 2008). Essentially, corporate governance creates a smooth pathway to the prosperity of a business as it works to promote customer retention and loyalty.

However, different businesses feature dissimilar systems of corporate governance as portrayed by their distinct control and ownership. The systems are differentiated by the nature of the ownership and the identity of the shareholders in control. The shareholder model focuses on maximizing the shareholder wealth, while the stakeholder model’s emphasis is on fulfilling the expectations and needs of stakeholders (Freeman, 2008). The shareholder corporate systems may be characterized by concentrated control/ownership (insider systems) where the shareholder in charge is basically a person. On the other hand, the stakeholder model has wide dispersed ownership (outsider systems) (Mitchel et al., 1997). Thus, the major contention in corporate governance is either the lack of agreement between a manager and the outside shareholders, or the conflict between the outside stakeholders and shareholders.

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The main benefit of concentrated ownership is that it can readily overcome most challenges as it supports close monitoring of business situations by the management. The shareholder model argues that corporate governance is about communication and accountability (Schillemans & Bovens, 2019; Mitchel et al., 1997). Thus, an organization’s management should account for the day-to-day operations of the shareholders. Conversely, the stakeholder’s model is about the management carried out by directors to stakeholders (Freeman, 2008). It implies that an organization’s management is not only about shareholder wealth maximization but to everybody who has the power to hinder the organization’s performance.

Perspectives of Corporate Governance

The three perspectives of corporate governance include the shareholder, organization and the stakeholder perspectives. According to the shareholder perspective, which is also referred to as the capital market perspective, shareholders are the ones who provide the risk capital in a corporation (Errasti et al., 2017). As such, they are known to have the final say and control on the allocation of resources and making of major decisions. In the organization perspective, which is referred to as management or control perspective, managers are said to have control over the efforts of various factors which may affect the production of a corporation (Frege, 2002; Frege, 2005). Their skills, knowledge and creativity should, therefore, be geared towards a positive performance. Thus, managers should invest in organizational matters because their professionalism is of vital importance in the creation of profitable opportunities.

Stakeholders represent the third perspective and emphasize that an organization should not aim at maximizing shareholder value, but also focus on the well-being of all groups which have a stake in the success of the business. If this approach is exercised, the business is more likely to be sustained in the future. Organizations that have good ethical dealings with suppliers, customers, and employees stand a better chance of building trust, profitable investments, and support (Jackson & Muellenborn, 2012; Errasti et al., 2017). Conversely, neglecting other stakeholders is likely to result in the under-investment of human skills.

Key Perspectives of Corporate Social Responsibility

Corporate social responsibility (CSR) connotes the activities which are carried out by an organization during their interaction with stakeholders, and they incorporate environmental and social concerns. CRS are actions that seem to further the social good, which is practiced beyond the interests of an enterprise and what the law requires. CSR involves a self-regulating business model which is used to help a business entity to be socially responsible (Young et al., 2008). By practicing CRS, corporations take care of the kind of impact that affects them both economically and socially (Jackson & Muellenborn, 2012). CSR is beneficial both to the organization practicing it and to society at large. The activities help in boosting the morale of employees, building a greater bond, and increasing the goodwill of the company. For an organization to be socially responsible, accountability to its employees and stakeholders is key (Mitchel et al., 1997). Corporations that practice CSR can easily solve the social problems around them and gain trust among key stakeholders.

Corporate Ownership Structures and Their Features

A corporation is a legal entity that is separate from its owners and, therefore, enjoys most individual rights. It is a business type that is created by a group of people, commonly referred to as shareholders, who decide to join forces in the pursuance of a common goal. It may be owned publicly or privately but its stocks are allowed to be traded in the stock exchange (Cook, 1995). Corporations can easily acquire capital, have limited liability for shareholders, and are characterized by centralized management that allows transferability of ownership. Furthermore, a corporation has an unlimited life, unless it is formally dissolved by its owners.

The ownership structures include C corporations, S corporations, non-profit corporations and professional corporations. C corporations are held by an unlimited number of foreign and domestic stakeholders, from which the board of directors is formed to oversee the decision-making and manage the day-to-day operations (Young et al., 2008). The shareholders have the freedom of selling shares and they have limited liability. This type is subjected to double taxation; it has to pay tax on profits, and the shareholders also are taxed on their dividend earnings. S corporations enjoy some special tax provisions; unlike C corporations, they are not subjected to double taxation. The losses and earnings of the company are usually reported on the personal tax returns of the shareholders (Freeman, 2008). The company only allows a maximum number of a hundred shareholders who should be domestic, individuals, trusts or estates but strictly not corporations.

On the other hand, non-profit corporations enjoy the status of tax exemption, as they are normally incorporated for many purposes other than just making profits. Examples of such entities include credit unions, charities, clubs, political organizations, and membership clubs (Young et al., 2008). They are eligible for donations from donors and are not entitled to pay federal and state taxes. Moreover, the board members are not held liable for the losses incurred or debts accrued by the corporation. The corporation can apply for grants which aid in supporting its projects, vision, and mission statements (Freeman, 2008). Professional corporations consist of attorneys, doctors, engineers and other individuals who are licensed to act as experts. The shares are only transferable to individuals who are in the same field, or who practice a similar profession (Young et al., 2008). Due to the advantage of the limitation on member liability, many professionals choose this kind of corporation. In addition, tax deductions can be taken for fringe benefits such as disability insurance or dependent care.

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Communicating Ethics and Governance Concepts

Corporate governance tries to specify the rightful distribution of responsibilities amongst various participants, including managers, the board, stakeholders, and the shareholders. In addition, it outlines the rules and procedures which guide decision-making. The structure through which objectives are set and the various ways of achieving them are defined by governance (Schillemans & Bovens, 2019). Therefore, corporate governance is mainly the relationship of an enterprise to its shareholders and the society at large.

Ethics are the principles used in evaluating whether a certain behavior is wrong or right, good, or bad. It is concerned not only with what we do but also with what we are. Ethical issues such as child labor, workplace safety, and cybercrimes, bribery, and privacy threats are clearly observed in many different businesses (Schillemans & Bovens, 2019). In most cases, the management personnel and managers are under ethical stress and pressure from different participants such as owners, employees, or suppliers (Morck & Yeung, 2003). Therefore, they should practice trust, honesty, and integrity in their day-to-day management of the business.

Conclusion

Ethical issues influence the performance of organizations, and this is becoming the main focus of many businesses because corporate scandals and varied cases of ethical misconduct libel an enterprise and amount to the loss of public trust. Yet, pursuance of various market opportunities, as well as trying to maintain ethical integrity and accountability remains a challenge to many business enterprises. Therefore, in-depth comprehension of business ethics, corporate governance, and the identification of mitigation options are unavoidable.

References

Boyd, B. K., Takacs-Haynes, K., & Zona, F. (2011). Dimensions of CEO–Board relations. Journal of Management Studies, 48(8), 1892–1923.

Cook, M. L. (1995). The future of US agricultural cooperatives: A neo-institutional approach. American Journal of Agricultural Economics, 77(5), 1153–1159.

Errasti, A., Bretos, I., & Nunez, A. (2017). The viability of cooperatives: The fall of the Mondragon cooperative Fagor. Review of Radical Political Economics, 49(2), 181–197.

Freeman, R.E. (2008). Managing for stakeholders. In T. Donaldson & P. Werhane (Eds.), Ethical issues in business: A philosophical approach, 39–53. Prentice Hall.

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Frege, C. M. (2002). A critical assessment of the theoretical and empirical research on German works councils. British Journal of Industrial Relations, 40(2), 221–248.

Frege, C. M. (2005). Varieties of industrial relations research: Take‐over, convergence or divergence? British Journal of Industrial Relations, 43(2), 179–207

Hertig, G. (2006). Codetermination as a (partial) substitute for mandatory disclosure? European Business Organization Law Review, 7(1), 123–130.

Jackson, G., & Muellenborn, T. (2012). Understanding the role of institutions in industrial relations: Perspectives from classical sociological theory. Industrial Relations: A Journal of Economy and Society, 51, 472–500.

Mitchel, R., Agle, B., & Wood, D. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853–886. Web.

Morck, R., & Yeung, B. (2003). Agency problems in large family business groups. Entrepreneurship Theory and Practice, 27(4), 367–382.

Schillemans, T., & Bovens, M. (2019). Governance, accountability and the role of public sector boards. Policy & Politics, 47(1), 187–206.

Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1), 196–220.

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