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Ethics and International Business summary
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Ethics and International Business summary midterm and final exam
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Week 4Chapter 6: shareholders
Key words: ownership of corporations, Shareholder’s rights, Managers’ duties, Corporate
governance, Principle agent relation, Anglo-American model, Continental European model,
(non)executive directors,
Capitalists model: says that firms should pursue profitability to be able to provide dividends to
shareholders.
Components of ownership of corporations:
- Locus of control: control over owned property is in the hands of directors and not the owner.
- Fragmented ownership: there are lots of shareholders so individual is actually not an owner.
- Divided functions and interests: there are different interests profit versus growth.
Shareholder’s rights:
- Right to sell their stock
- Right to vote
- Right to receive information
- Right to sue managers for misconduct
- Residual rights if liquidation takes place
Managers’ duties:
- Duty to act for benefit of company short-term financial and long-term survival
- Duty of care and skill.
- Duty of diligence managers have to invest every possible effort in running the company in
most successful way.
Corporate governance: process by which shareholders seek to ensure that their corporation is run
according to their intentions. In narrow sense it includes shareholders and management as main
actors. In a broader sense it includes all actors who contribute to achievement of stakeholder goals
inside and outside corporation it includes processes of goal definition, supervision, control and
sanctioning.
Principle agent relation (agency relation): relation between shareholders and managers
shareholder is the principal and contracts management as agent to act in their interest. But there
can be conflict in interest (profit and higher prices versus higher salaries and power) and there can
also be informational asymmetry principal’s knowledge is limited.
there are two models of corporate governance across the globe:
- Anglo-American model: market-based dispersed ownership, frequent changes in
ownership, its goals are shareholder value and profits in short-term, and shareholders are
the board and are the main stakeholder. Both types of directors are grouped in one
single-tier model.
- Continental European model: also called rhenish capitalism. Network-based main
owners are banks, corporations and state. Little changes in ownership. Goals are sales,
market share and long-term ownership. Board is controlled by shareholders and employees
and they are also key stakeholders. Both types of directors are separately in contrast to
anglo-American model two-tier model.
- Corporate governance in Asia: relationship-based.
, There are 2 types of directors to ensure that principal-agent relationship is be managed effectively:
Executive directors: they run the corporation.
Non-executive directors: ensure that shareholders’ interests are being pursued includes
stakeholders other than just shareholders supervisory board upper tier.
Besides supervisory board, an independent auditor should also audit work of executive and non-
executive board.
Non-executive directors (supervisory board) should be independent, to ensure this:
- They should be recruited from outside the corporation.
- Not having personally financial interest other than shareholders’ interests.
- Be chosen for a limited period.
- Be competent to judge how the company runs need information from insiders.
- Have sufficient resources to get information.
- Be chosen independently by shareholders or the supervisory board.
Executive directors get often extreme high salary inclusive bonuses which are in shares. These
executive payments have 3 ethical problems:
- Performance-related pay: because of this the salaries are very high and results could be
different because share prices depend not only on the managers.
- Globalization: executive talents are wanted everywhere which increases the salary payment.
- Influence of the board: the board has limited influence they can’t always pursue
shareholders’ interest.
Mergers and acquisitions: can be beneficial for society if new manager is more effectively. However
the reason for M&A is often executive prestige while shareholders want increases of share prices.
Hostile takeovers: investor(s) tries to buy a majority of corporation while the board is against it
this is an ethical issue. On the one hand, such mergers are possible because shareholders wanted to
sell their shares, and on the other hand shareholders who do not to sell have a problem in such
situation there are 2 options for the executives:
- Golden parachute they agree because they extra money to accept the merger.
- Greenmail to not lose their job they can offer to buy shares of their own organization for
higher price than the market price.
Market does not always work perfectly so that stock prices reflect all relevant available information.
It can be an ethical issue:
- Speculative faith stocks: based on blind faith investing money of other people based
entirely on speculation is an abuse of trust.
- Insider trading: when securities are bought or sold on basis of non-public information which
gives them advantage over other players in the market. Ethical arguments against this are:
o Fairness
o Misappropriation of property: valuable information is property of the firm and they
have no right of access.
o Harm to investors and market: other investors are harmed and the market get
riskier and less confidence.
o Undermining of fiduciary relationship: insider traders act in their own self-interest
instead of pursuing their obligation to their principal (shareholders).
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