Corporate governance has lured a lot of both research and public interest over the past recent years due to its apparent significance for economic health of companies and society in general. Corporate botches, suspicious accounting practices, abuse of corporate power and criminal investigations linking companies over the past decade show that the entire economic structure, upon which stock returns have relied, dents the investors’ confidence. Some companies have radically changed over a comparatively short time via acquisitions financed by inflated share prices. In other companies, it appears as if checks and balances that should safeguard stakeholder interests were ignored. Whereas some of the botches are a product of falsified accounting and other unscrupulous practices, the majority of enterprises continue exhibiting actual corporate governance vulnerabilities such as inexperienced directors, disproportionately lucrative compensation or imbalanced share voting entitlements. Being vital among corporate governance models, the shareholder model has been under scrutiny for these corporate malpractices. Against this background, this paper uses three different ethical perspectives to argue that the shareholder corporate governance model is not fit for the purpose.
Corporations can be governed through internal, external and financial reporting (Ackermann & Eden 2011). The internal corporate governance mechanisms include internal auditors, board of directors, shareholders, balance of power and remuneration (Ackermann & Eden 2011). External sources of control include competition, debt covenants, government laws, managerial labour market and media pressures among others (Ackermann & Eden 2011).
Here you can get a price quote:
Corporate governance covers various distinct concepts and phenomena which is evident in Keay’s (2010) definition. Keay (2010) defines corporate governance as a system by which business organisations are controlled and directed. According to Keay (2010), the structure of corporate governance specifies the distribution of rights and responsibilities among participants in the companies. Essentially, the key participants in a business organisation include shareholders, managers, employees, consumers and the society (Wagner Mainardes, Alves & Raposo 2011). Corporate governance also regards the procedures and regulations for making decisions in corporate affairs. By dictating the decision-making process, corporate governance offers a structure through which the organisational objectives and ways of achieving these objectives are established (Adams, Licht & Sagiv 2011). It is evident that corporate governance constitutes the association between the company and the shareholders, as well as the society. This relation is often based on transparency, promotion of equality and accountability.
Irrespective of the corporate governance model used by an organisation, ethics are inescapable. Therefore, the important points in corporate interest in relation to ethical issues include transparency and accountability, the regulatory and legal environment, information flows and necessary risk management measures (Brochet, Loumioti & Serafeim 2014). Most business organisations have implemented legal compliance mechanism that addresses ethics or conduct issues in formal documents.
Corporate Governance Theories
There are three important corporate governance theories that reveal the strengths and limitations of governance models: the shareholder theory, the stakeholder theory and the enlightened shareholder value (Purnell & Freeman 2012). Milton Friedman initially proposed the shareholder theory, which supports the shareholder model of corporate governance (Purnell & Freeman 2012). According to Purnell & Freeman (2012), the shareholder theory is based on the idea that management is hired, as the agent of the shareholders, to run the enterprise for their benefit. Based on this notion, the management is only required to serve the interests of the shareholders rather than that of the entire society. Therefore, profit maximisation is at the core of the shareholder model of corporate governance (Wagner Mainardes, Alves & Raposo 2011). The shareholder theory is in line with extreme capitalism, which is an economic system in which private owners, instead of the state, regulate the nation’s trade and industry for profit (Ronnegard & Smith 2011). Contemporary organisations have realised that there are limitations linked to focusing only on the interests of shareholders. Some of the inherent limitations involved in pursuing the shareholder theory, as well as the shareholder model of governance, include a greater focus on a short-term strategy while neglecting the long-term ones. The demise of prominent organisations, such as WorldCom and Enron, is the evidence of the impacts of the shareholder theory (Fassin & Gosselin 2011). In these companies, the continuous pressure on the managers to increase the returns to shareholders compelled them to engage in an unethical behaviour of manipulating company accounts (Fassin & Gosselin 2011).
On the contrary, the stakeholder theory holds that the corporation has a responsibility of meeting the expectations of the wide group of stakeholders, other than just the shareholders (Grassl & Habisch 2011). In this context, stakeholders denote any person or group that can sway or be swayed by the actions of the organisations. Stakeholders include customers, workers, creditors, suppliers, competitors and the wider society. Modern companies, engaging in genuine corporate social responsibility (CSR), apply the stakeholder theory which strongly opposes the shareholder model of corporate control (Keay 2010). Presently, most of the world’s largest companies claim to be participating in economic, legal, ethical or even philanthropic activities that benefit the wider society. The CSR strategies in modern times also act as a means of public relations (PR), which enable organisations to improve their image and reputation (Brown & Forster 2013). It is also important to note that not all organisations with the CSR initiatives are ethical since some are indirectly adopting the shareholder model of governance with purely pretentious CSR messages (Brown & Forster 2013). The recent debates concerning the tax affairs of well-recognised firms, such as Facebook, Google and Starbucks, put the stakeholder theory into spotlight in the United Kingdom (Fassin & Gosselin 2011). Whereas the regulations adopted by these companies might appear legal, they might be taking advantage of the drawbacks in the tax systems (Fassin & Gosselin 2011).
The enlightened shareholder value (ESV) theory holds that companies need to pursue shareholder interests with the long-run alignment, which seeks maintainable growth and profits based on the responsible focus on the full range of pertinent interests of the shareholders (Purnell & Freeman 2012). Typically, the ESV makes emphasis on generation of shareholder value while having consideration to the long-term external effects of wealth generation (Ronnegard & Smith 2011). In other words, the focus given to the shareholders by the management is influenced by the effect on stakeholders’ interests. Companies using the ESV theory tend to choose decisions having minimal negative impacts on stakeholder interests while maximising the value of shareholders. The significance of the ESV theory was acknowledged in the United Kingdom when it was enacted as a law in the Companies Act of 2006 (Fassin & Gosselin 2011).
Perspectives on Corporate Ethics
Ethics refer to the moral codes governing the group’s or individual’s behaviour. There are various well-known ways of looking at ethical issues. Some of these ways have been in existence for several centuries. It is essential to know that several scholars who think a lot about business and ethics have deeply held opinions concerning the perspectives that are appropriate to be employed (Mansell 2013). Here, the three important perspectives for assessing the lack of fitness of the shareholder governance model include the utilitarian, deontology and social justice and social contract theory.
Utilitarian Ethical Perspective
Utilitarianism is a prominent ethical perspective. It is well-aligned with the outlook of free market and economics, which have come to dominate the present thinking, decision-making and management in business (Ronnegard & Smith 2011). Jeremy Bentham is frequently regarded as the pioneer of utilitarianism (Renouard 2011). According to Renouard (2011), the utilitarianism perspective focuses on the results rather than the rules. Consequently, an action is regarded ‘good’ or right if it can maximise the pleasure or happiness throughout the society. Despite being initially intended for legislators charged with seeking the greatest good for society, this perspective has also found applications in corporations. With regard to the shareholder governance model, one can ask whether the model results in happiness or pleasure for all the participants in the organisation (managers, stakeholders, customers, board of directors and shareholders) (Renouard 2011).
The best way of obtaining consensus on organisational policies or society would be to assess various policies and compare the negative and positive impacts of adopting them (Ronnegard & Smith 2011). The appropriate course of action with regard to utilitarian stance would be to select a strategy that produces the highest amount of utility or usefulness to all the stakeholders. In general, the utilitarian belief indicates that an action is ethical only if the summation yielded by that action is greater than the sum of utilities from any other possible act. In light of this principle, the determination of the unfitness of shareholder governance will involve assessing the utility that it delivers to entire organisation and the participants, as well as the society. It is important to note that emphasis is placed on finding the best possible outcome, and the presumption is that utilities are measurable. In addition, the “summation of total utilities” apparently implies that, undertaking a utilitarian approach, it is hard to achieve satisfaction if an act offers the greatest utility to a corporation (Fassin & Gosselin 2011).
The utilitarianism perspective of ethics strongly opposes the use of the shareholder model of governance because of its emphasis on the interests of shareholders while neglecting the interests of other stakeholders at large. Utilitarianism supports the stakeholder theory, as well as the stakeholder model of corporate governance, mainly because of its emphasis on the interests of the entire community. The stakeholder model of corporate governance ensures that the utility of decisions made by the organisation is delivered to the entire organisation and stakeholders. Consequently, the utilitarian perspective considers the shareholder model of governance unethical and unfit for the purpose (Harrison & Wicks 2012).
Polishing Your Writing to Make it Shine
1. New Custom Writing Order
The process starts when you place your order and tell us what you need
2. Order Pre-Screening
Our support team review orders to make sure instructions are clear
3. Draft Submission
The writer submits a draft of the order, making sure to follow instructions
4. Editing Process
An editor carefully review writer's work to ensure the instructions were followed
5. Quality Control
We need to be sure that a paper meets our quality guideliness and follows best practices
6. Plagiarism Scan
We check the final draft with our anti-plagiarism software to ensure that's completely original
7. Final Delivery
You will get an email notification letting you know that the order is ready for downloading
8. Revision Option
You have an option to request a free revision within 2 days after the deadline
Contrary to the utilitarian perspective, the deontological perspective, as presented in the claims of Immanuel Kant, states that having a moral intent and conforming to the right regulations and rules are the better ways of ensuring ethical conduct than attaining results (Mansell 2013). Unlike the utilitarian perspective, deontological perspective does not make emphasis on results. Deontologists, such as Kant and other researchers, including Mansell (2013), are likely to believe that ethical behaviour emanates from one’s obligation and the obligations are defined by rational thinking. According to deontologists, obligations are not specific to certain forms of human beings but are owed globally to all human beings (Mansell 2013). Therefore, deontological perspective stresses universalism as a form of rational thinking that presumes the intrinsic equality of all human beings. Mansell (2013) suggests that universalism regards all human beings as equal but not in their social, physical or economic aspect. Rather, they are equal before God, whether they are female, male, simian, Christian, Islamic, gay, healthy, young, old or sick (Grassl & Habisch 2011).
Brown & Forster (2013) indicate that the basic principle of deontology implies that people should be capable of universalising any specific action or law in order to determine whether it is ethical. For instance, if one were to regard the shareholder model of governance as an action, he or she would put it in a universal context. Kantian ethicists would answer that the shareholder model of corporate governance should only be ethical if it is universal, that is if it is good for all individuals at all times (Mansell 2013). “The good for all” characteristic of deontology shows some similarity to the utilitarian theory. Both utilitarianism and deontological perspective seem to advocate for the welfare of the entire society but through different approaches. Utilitarianism argues that utility must be delivered to the entire society, whereas the deontological perspective argues that the universalised action is good for the entire society (Brown & Forster 2013). The shareholder model of governance cannot be universalised in any form. Based on the Kantian ethical philosophy, the fact that it is not a universal concept implies that the shareholder model of corporate governance is not godly, and therefore unfit for the purpose (Mansell 2013). In addition, the failure of the shareholder model of governance to meet the condition of universalism renders it the unethical way of controlling the organisation. Perhaps, this elucidates the present shift towards the stakeholder theory.
In terms of corporate governance theories, the deontological perspective partially agrees with the stakeholder theory while totally disagreeing with the shareholder theory (Grassl & Habisch 2011). The latter, which is the foundation of the shareholder model of governance, emphasises the generation of shareholder value while neglecting the interests of the society and other stakeholders. The emphasis placed on the interests of the entire society by the stakeholder theory, which is the foundation of the stakeholder model of governance, is rather in line with both the deontological and utilitarian ethical perspectives. This further emphasises the unfitness of the shareholder model of corporate governance (Gond, Kang & Moon 2011).
Social Justice Theory and Social Theory
The social justice perspective is concerned with the distributive justice. In other words, this perspective tries to assess the best way of distributing goods among a group of people. Marxist theories strongly emphasise that society members ought to be given goods based on their needs (Gond, Kang & Moon 2011). However, this redistribution of goods would necessitate a governing ability to determine the goods to be distributed and time for distribution. The social justice perspective considers giving goods to the society based on their needs as an ethical activity. Consequently, it disagrees with the shareholder theory as well as the shareholder model of governance. According to the social justice perspective, ethical companies must be concerned with the needs of the entire society by giving goods based on their needs. The shareholder model of corporate governance, which is substantially based on capitalist principle of profit maximisation, rejects the involuntary giving to the society. Some economists, especially supporters of the shareholder theory and governance, have also rejected the notion that the company has the obligation of giving to meet the needs of the society. According to Gond, Kang and Moon (2011), the government has a role to play in such scenario, and it is not the obligation of corporations. Gond, Kang and Moon (2011) claim that even the most dedicated free-market capitalism will frequently admit the need for some government-facilitated services such as social security, medical insurance and donations to AIDS patients.
There are two important concepts linked to the social justice perspective: public goods and social contract. The former refers to goods that are important to society, which would ordinarily not be produced by the private sector. Some of these goods include national defence, highways, parks and education. Individuals who do not see the need for public goods frequently question what is the need for the government at all (Gond, Kang & Moon 2011). According to Gond, Kang and Moon (2011), companies cannot exist without government. On the other hand, social contract refers to a concept that individuals in a civil society have voluntary abandoned their freedoms in order to have ordered liberty with the help of the government which supports that liberty (Adams, Licht & Sagiv 2011).
Shareholder Model of Corporate Governance: Fit or Unfit
It is widely acknowledged that shareholders are the organisation’s most significant participants. Organisations must create value to survive and offer returns to the owners if its goal is to maximise profit as well as if the firm’s investors and owners have the biggest loss when the company closes (Ronnegard & Smith 2011). Managers supporting the view of maximising the shareholder value also support the shareholder model of corporate governance. From an economic perspective, such a standpoint makes sense. Business organisation cannot survive without making profit. Even visionary business organisations, including P&G, Google and Apple, cannot pursue their mission and goals if they do not earn profits for turning goals into reality (Adams, Licht & Sagiv 2011). The argument over the unfitness or fitness of the shareholder model of governance is double-sided when ethics is brought into the equation. Early theorists advocated for managerial strategies that considered various stakeholders (the shareholder model of governance). Whereas the stakeholder model of governance has ethical considerations, it has one limitation: different stakeholders seem to have different concerns, some of which might conflict (Brochet, Loumioti & Serafeim 2014). For instance, the community might demand the corporate social responsibility, while shareholders might oppose the idea because of the high costs involved (Brown & Forster 2013). This should not imply that shareholders are unethical; it makes sense to guarantee the survivability of the organisation by making profits. The supporters of the shareholder model of governance have claimed that pursuing various goals, as required in the stakeholder model of governance, increases smugness while muddling the organisation’s identity. However, a deeper assessment of ethical consideration using the above perspectives apparently classifies the shareholder model of governance as purely unfit. By eliminating the ethical considerations from the equation, the stakeholder model of governance would fit the purpose (Grassl & Habisch 2011).
Huge First Discount
Mobile Friendly Website
Friendly Support 24/7
On the other hand, managers adopting the stakeholder model of corporate governance, as well as the stakeholder theory, recognise that they have an obligation to other stakeholders (Adams, Licht & Sagiv 2011). Nevertheless, while executives with this standpoint recognise the significance of all participants, they also acknowledge that companies must prioritise some stakeholders over others. It is extremely hard to give all the stakeholder equal attention. Some companies might choose to focus on their consumers, whereas others might concentrate on their employees, or even the community, depending on their mission. Firms that have the mission to improve the living standards of the community might give more attention to the community through CSR. Despite not being viewed as a guarantee for survival, this model has received prevalent support from successful administrators over the years. For example, during the tenure of Steve Jobs, Apple prioritised consumers. On the other hand, Google seems to focus on its employees. By prioritising the appropriate stakeholder while not neglecting the others, benefits to shareholders and community at large can be realisable. A deeper assessment of ethical perspectives classifies the stakeholder model of corporate governance as fit.
There are two dimensions related to the fitness or unfitness of the shareholder model of corporate governance. The first one, which actually neglects the interplay of ethics, argues that the shareholder model is fit for corporate governance because of its capability to maximise the shareholder value while ensuring company survival. The fact that this dimension does not consider ethics and neglects other stakeholders makes it not fit for the purpose. In addition, the three ethical perspectives reviewed fail to identify any element of ethics despite their variations in explanation. Even without considering the interplay of ethics in governance, the shareholder model is not fit for corporate governance because it seems to promote short-term results over the long-term profitability of the company.