Business Ethics and Corporate Governance - PDF

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Ethics and CorporateGovernance1
INTRODUCTIONBusiness ethics can be defined as moral functionary within the business organization so thatmanagement can take effective decision by analysing the choices if they are correct or wrong(Namazi, 2013). Therefore, to ensure the ethical practices within the organization, it is requiredto follow proper systems mainly known as corporate governance. It is defined as set of ethicalsystem through which business organizations is being governed and controlled. It mainly focuseson providing guidelines and road-map that defines how organization would be directed so that itmay result in accomplishing the objectives and it will also be beneficial for stakeholders inmaintaining long term relationship. The study will also focus on discussing agency theorywithin the organization and further it will stress on the problem while putting these theories intothe practice.The stakeholders theory is defined as any individual or group of people which aredirectly or indirectly affected by the activities and operations of an organization. One of themajor problem which is associated with stakeholder theory is that it is not specific. This theorydemonstrate no criteria related to decision making which will help in corporate governance.“CRITICALLY ANALYSE THIS STATEMENT BY DISCUSSING THEPLACE OF AGENCY THEORY, ITS ALTERNATIVES, THE PROBLEMSOF PUTTING THESE THEORIES INTO PRACTICES”The main aim of the company to operate in the competitive environment is to meet therequirement of all different stakeholders(Bonazzi and Sardar, 2007). However, the statement istrue that company mainly functions to provide benefit to all of their stakeholders. However, thecorporate governance may also provide an effective structure through which objectives of theorganization are set as well as it also determine and monitor the way in which objectives areachieved. According toIbrahim Fazila and Samad (2011) good corporate government mainlyfocuses that internal environment of the business is fair and transparent for all the stakeholdersso that it result in minimizing mismanagement within the organization (Ibrahim, Fazila andSamad, 2011). As per the view ofThomsen (2004) corporate governance is also concerned withbalancing the different interest of company's stakeholders that is management, customers,suppliers, government etc. abidance with the different principles of corporate governance isbeneficial for the shareholders as well as companies (Thomsen, 2004). According toRoberts2
(2005) different benefit of corporate governance to the companies are that it assist them to holdup within the competitive environment as ethical corporate governance practice results inensuring effective internal control system that often lead to the greater responsibility andenhance net profit edge (Roberts, 2005). However,Abu-Tapanjeh (2008) has also asserted thatcorporate governance is also beneficial to different stakeholders as it provide safety to theirinvestment as they will get proper return on their investment (Abu-Tapanjeh, 2008). In additionto this, good corporate governance also results in improving or increasing corporate worth of theorganization within the economy in which they are operating their activities. According toBhimani (2008) fairness, integrity, transparency and responsibility & accountability areconsidered as the four main pillars that mainly constitute effective corporate governance(Bhimani, 2008).Agency theoryThe agency theory is mainly used to measure and understand interrelationship betweenagents and principals. This theory is mainly defined as measuring relationship between agentswhich is mainly termed as company's managers and executives and principles that isshareholders. According toChing Tan and Chi Ching (2006) this theory considers that owner ofthe company is termed as principals that mainly hires or employ agents that is manager toperform or renders the work (Ching, Tan and Chi Ching, 2006). Principals mainly delegate ordistribute the activities and tasks to the agents to that they may perform the task which isbasically managing the company. So,Clark (2004) argued that there are mainly two factors thatmainly impact prominence and importance of the agency theory (Clark, 2004). First, it is asimple theory that minimizes corporation of associates that is manager and shareholders.However, the theory also proposes that employees within the enterprise may be self-interested.According toHarford Mansi and Maxwell (2012) the theory principals accepts that agents mayact and take effective decision which result in gaining their interest (Harford, Mansi andMaxwell, 2012). On the contrary, it is not necessary that they should make decisions in thefavour principals. The agency theory of corporate governance is implemented within theorganization as it may act as the control system within the organization. One of the key functionsand responsibility of the manager include applying control over enterprise function and operationso that agent may properly perform the task according to guidelines or strategic planning.3
Tricker (2015) has asserted that there are different element of management control systems thatinclude strategic planning, execution of the plan, comparing actual result with the standard plan,preparing performance report, measuring variances as well as making corrective decisions,evaluating the incentives and then future planning (Tricker, 2015).According toGiroud and Mueller (2010) Principals who employs agents that is directors andmanagers are accountable to the principals will follow agency theory that will also plays anessential role in the management control systems (Giroud and Mueller, 2010). The first stepfocus on strategic planning in which principals that is owner focuses on planning the guidelinesthat need to be follow by the agent that is manager so that they may carry on the task effectively.As per the view ofWintoki Linck and Netter (2012) has also stated that after that agent willexecute the plan framed by the principals so that they may accomplish the goals & objective inthe ethical manner (Wintoki, Linck and Netter, 2012). In addition to this system has also focuson the preparing the performance report of the agent from comparing their actual result with thestandard planning done by the principals. However,Blair and Roe (2010) has also asserted thatproviding incentive to the agents those who are rendering or performing the tasks in theorganization (Blair and Roe, 2010). This theory is often used to design the incentive schemes byconsidering their interest so that principal can easily motivate them to work ethically within theenvironment. On the contrary,Bebchuk and Weisbach (2010) has also stated that incentives thatpromote the unethical and wrong behaviour within the organization must be removed so thatbusiness organization may develop effective corporate policy (Bebchuk and Weisbach, 2010).Alternative theories of corporate governanceThere are different alternative theories of corporate governance that mainly includestewardship theory, stakeholder theory and resource dependency theory. Stewardship theorysuggests that ownership or the manager does not own the company it just hold the trust. Stewardsare concerned as the executives and managers of the company working for the shareholders thatmainly results in making and generating the profits for the shareholders. According toDu PlessisHargovan and Bagaric (2010) despite of agency theory Stewardship theory does not stressesupon the individualism (Du Plessis, Hargovan and Bagaric, 2010). On the contrary it focuses onthe role and function of the top management as the stewards that merges their objectives andgoals within the organization. Therefore, it has been stated that when organization or company4
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