Page 34 - FINAL CFA II SLIDES JUNE 2019 DAY 6

CONTROLLING PAR PROBLEMS READING 23: CORPORATE PERFORMANCE, GOVERNANCE, & BUSINESS ETHICS

Principals should develop corporate governance procedures that: MODULE 23.1: CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS
• Guide the behavior of agents by setting goals and principles of behavior.
• Reduce the asymmetry of information.
• Lead to the removal of agents who misbehave and violate ethical principles.
ETHICS AND STRATEGY

• Self-dealing when agents misappropriate corporate assets for personal use.
• Information manipulation such as misleading financial information or hiding a health risk created by the company.
• Anticompetitive behavior in pursuit of monopoly power. Even if legal, it is unethical.
• Opportunistic exploitation of suppliers or distributors in violation of negotiated terms when it is believed they will not have the power to resist.
• Substandard working conditions imposed on employees.
• Environmental degradation of society’s resources through pollution or improper use of resources.
• Corruption such as using bribery to gain illegal advantage.

LOS 23.c: Discuss roots of unethical behavior and how managers might ensure that ethical issues are considered in business decision making.

ROOTS OF UNETHICAL BEHAVIOR –ARISES FROM:
• Agents whose personal ethics are flawed.
• A failure to realize that an issue may lead to an ethics violation. Asking whether each decision has ethical implications will encourage business ethics.
• A culture focused only on profit and growth. Asking if it is ethical and profitable will encourage ethical business practices.
• Flawed business culture where top management sets unrealistic goals. Management must communicate that ethical behavior is expected.
• Unethical leadership that sets the tone for acceptable behavior. Formulate and communicate expectations that include sound ethical behavior.

Various stakeholders have rights that the company must respect:

• Stockholders are entitled to timely, accurate reporting, as are governments.
• Suppliers, including employees, should expect contractual obligations to be met.
• Society can expect adherence to environmental and other regulations.

Others argue that business ethics must extend beyond these basics to encompass noblesse oblige (those who benefit most from society, in this case
successful businesses, have an obligation to make contributions back to society.