Financial Management - Role of Ethics in Corporate Governance

This article discusses the role of ethics in corporate governance and the importance of proper corporate governance policy in business management. It also includes significant theories related to corporate governance concepts such as stakeholder’s theory and agency theory.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Part A...............................................................................................................................................2
Requirement 1..............................................................................................................................2
Requirement 2..............................................................................................................................2
Requirement 3..............................................................................................................................3
Requirement 4..............................................................................................................................3
Requirement 4..............................................................................................................................4
Part B...............................................................................................................................................5
Introduction..................................................................................................................................5
Discussion....................................................................................................................................5
Conclusion...................................................................................................................................8
Reference.........................................................................................................................................9

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Part A
Requirement 1
The shares were traded on 30th June 2018 on market price which is shown to be $ 0.1532 per
share.
The market capitalization is shown to be $ 2,000,000 for the year end as shown in the
question. As per the price-earnings ratio of the company which is shown to be 7.66 is much
lower than Industry average which is shown to be 18.3 for the year (Csimarket.com. 2018).

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Requirement 2
The current ratio and quick ratio of the business reflect the liquidity position of the
business. The current ratio of the business for the year 2018 is shown to be 3.34 which has
significantly improved which shows that the business has favorable liquidity position and
therefore has the capacity of meeting the current obligations of the business. The quick ratio of
the business shows similar estimates which reflects the liquidity position of the business.
Requirement 3

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The working capital of the business is shown to be $ 9,486,000 for the year 2018 and the
same has significantly improved in comparison to previous year figures which shows that the
business has a strong working capital source and the liquidity position of the business is also
secure. The working capital of the business for the year 2016 is shown to be 4,933,000 which is
the lowest.
Requirement 4
The profitability ratios which are computed and shown in the above table comprise of
operating profit margin of the business and net profit margin. The operating profit margin was
2.16 in 2016 from where it improved to 3.26 in 2017. In 2018, the estimate is shown to be 3.21
which is lower than previous year estimate which suggest increase in operational costs of the
business. The net profit margin of the business has also reduced and the estimate is shown to be
0.10 in 2018 which is due to the higher amount of costs incurred by the business.

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Requirement 4
In order to analyze the solvency of the business, the bank needs to consider debt to equity
ratio in order to establish the percentage of debt which the business uses in the capital structure
of the business. The debt equity ratio is shown to be 4.30 which suggest that the business uses
high proportion of debt capital in the capital mix of the business. Then the business needs to
analyze the interest coverage ratio which is shown to be 1.04 which is favorable and suggest
good servicing of debt capital by the business. Finally, the bank needs to consider the liquidity
ratios which is also shown to be favorable for the business and ideal for meeting obligations.
Therefore, the bank can allow the loan to the business.

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Part B
Introduction
The main purpose of this assessment is to analyze the role of ethics in corporate
governance of the business. Corporate Governance may be defined at the structure and
frameworks which is used by the management of the company to bring about corporate behavior
in the business. Corporate Governance also refers to maintenance of ethics in business is
essential to bring about an integrity and honesty in the practices of the business (Tricker and
Tricker 2015). The assessment considers the business organization which are operating in
Australia and how the same have impacts on the overall business operations of the business. The
report will also be discussing the AMP scandal which has affected the banking industry severely
and brought about disrepute to the business of AMP.
Discussion
In today’s business, the principles of corporate governance are applicable on all business
organization and are essential to enable performance management of the business. The early
developments which were focused on theoretical aspect of corporate governance which put more
emphasis on the financial aspect of corporate governance of a business. In later era, most of the
businesses shifted their focus from profit maximization as their purpose to maximization of
wealth following corporate governance principles (Harrison and Wicks 2013). As per the
stakeholder theory and stewardship theory, the facts were established that Corporate Governance
focuses on the maximization of wealth of the shareholders and also protect the interest of the
stakeholders of the business (Jensen, 2017).

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The corporate governance principles of businesses are formulated in such a way which
can ensure that all the relevant regulations which are applicable to the business and also the
interests of the stakeholders are considered. The businesses in Australia are driven by wealth
maximization principle following relevant code of conducts and ethical principles along the way.
In order to evaluate the corporate governance practices in a business, the management of
companies often makes changes in board structure, conduct audit for the business and make
internal investigation in order to ensure that there is corporate compliance for the policies
established by the business (Starbuck 2014). As the corporate governance principles gained
importance organization started to comply with relevant rules and regulations which were
established in the country which brought about compliance in rules and regulations but was not
able to prevent corporate violations of ethics and norms in a business. It was then the focus was
shifted to bring about ethics in corporate governance practices of a business. The code of ethics
which are stated by researchers are not any fixed rules or regulations but are general guidelines
for personnel to follow in a business environment. A code of ethics in a business organization
helps management to solve ethical issues which arises in a business environment. Another major
argument is that the ethics already forms part of corporate governance principles of the business
and is a regraded to be a subset of corporate governance practices of a business (Larcker and
Tayan 2015). Therefore, it can be said that ethics already forms part of corporate governance
principles which is followed by businesses implicitly. In general terms, it is expected of an
employee or executive to act ethically in business and carry out his duties with honesty and
responsibility.
An example of a theory which is closely related to corporate governance principle is the
agency theory. As per the agency theory, there exist a relationship of a principle and agent

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between the shareholders and the directors of the business and the latter is responsible to act in
the best interest of the shareholders of the business. The agency theory was developed with a
view point of tackling the agency problems of a business (Bosse and Phillips 2016). The
problems that arises is that the ownership and control are different aspects in a business and
therefore the shareholders do not have much confidence that the agents who are the directors will
act in the best interest of the shareholders of the business. This problem can be effectively solved
with the help of a proper corporate governance principle as formulated by the management of the
company. An effective corporate governance policy allows the management of the company to
effectively follow ethical principles and also act in the best interest of the shareholders of the
company (McCahery, Sautner and Starks 2016). An effective corporate governance policy also
gives assurance to the shareholders of the business regarding the fact that the directors will be
operating the business as to the best of interest of the management.
In recent times an unethical scandal was reveal in the banking sector where AMP was
involved in misleading the regulators regarding the money which the business had taken from the
customers for providing advices to the customers which were actually never provided in the first
place (SBS News 2018). The business of AMP and some of its advised business misled the
Australian Securities and Investment Commission around 20 times between the period of 2015 to
2017. The scandal was related to the fees which was charged by the business for advisory
services which was not provided by the business. Due to the unethical practice of the business,
the management of the company had to step down and also the business is likely to face criminal
charges for the conduct of the business. Thus, the discussion shows that there is clear depletion
of corporate governance in the business and therefore the ethical norms of the business have also
not been followed.

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Conclusion
Thus, from the discussion which is provided in the above paragraphs, the role of ethics in
corporate governance is clearly evident and also the requirement of proper corporate governance
policy in a business management. The above discussion also includes significant theories which
are closely related with corporate governance concept such as stakeholder’s theory and agency
theory. The assessment also describes the scandal which is related to AMP which is the largest
wealth manager in Australia who was involved in taking money from customers without
providing any services in return.
Reference
Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of
Management Review, 41(2), pp.276-297.

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Csimarket.com. 2018. Specialty Retail Industry Price To Earnings Ratio Valuation Information
and Trends by quarter - CSIMarket. Retrieved 12 September 2018, from
https://csimarket.com/Industry/industry_valuation_ttm.php?pe&ind=1307
Harrison, J.S. and Wicks, A.C., 2013. Stakeholder theory, value, and firm performance. Business
ethics quarterly, 23(1), pp.97-124.
Jensen, M.C., 2017. Value maximisation, stakeholder theory and the corporate objective
function. In Unfolding stakeholder thinking (pp. 65-84). Routledge.
Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational
choices and their consequences. Pearson Education.
McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance, 71(6), pp.2905-2932.
SBS News. 2018. AMP could face criminal charges for misleading regulator, banking inquiry
hears. [online] Available at: https://www.sbs.com.au/news/amp-could-face-criminal-charges-for-
misleading-regulator-banking-inquiry-hears [Accessed 12 Sep. 2018].
Starbuck, W.H., 2014. Why corporate governance deserves serious and creative
thought. Academy of Management Perspectives, 28(1), pp.15-21.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices.
Oxford University Press, USA.