Ethical theories for Corporate Governance Ethics and Social Responsibility of Business Mcom sem 4 Delhi University
Ethical theories for Corporate Governance Ethics and Social Responsibility of Business Mcom sem 4 Delhi University – Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University : History has revealed that there is a never-ending evolution of theories or models of corporate governance. One of the reasons is due to the very essence of social consciences that is minimal and profit making took center stage. All over the world, companies are trying to instill the sense of governance into their corporate structure. With the surge of capitalism, corporation became stronger while governments all over the world had to succumb to its manipulations and dominance. Hence, this article is a review of literature on the range of theories in corporate governance. The fundamental theories in corporate governance began with the agency theory, expanded into stewardship theory and stakeholder theory and evolved to resource dependency theory, transaction cost theory, political theory and ethics related theories such as business ethics theory, virtue ethics theory, feminists ethics theory, discourse theory and postmodernism ethics theory.Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
However, these theories address the cause and effect of variables, such as the configuration of board members, audit committee, independent directors and the role of top management and their social relationships rather than its regulatory frameworks. Hence, it is suggested that a combination of various theories is best to describe an effective and good governance practice rather than theorizing corporate governance based on a single theory.
Corporations have become a powerful and dominant institution. They have reached to every corner of the globe in various sizes, capabilities and influences. Their governance has influenced economies and various aspects of social landscape. Shareholders are seen to be losing trust and market value has been tremendously affected. Moreover with the emergence of globalization, there is greater deterritorialization and less of governmental control, which results is a greater need for accountability (Crane and Matten, 2007). Hence, corporate governance has become an important factor in managing organizations in the current global and complex environment. In order to understand corporate governance, it is important to highlight its definition. Even though, there is no single accepted definition of corporate governance but it can be defined as a set of processes and structures for
controlling and directing an organization. It constitutes a set of rules, which governs the relationships between management, shareholders and stakeholders (Ching et al, 2006). The term “corporate governance” has a clear origin from a Greek word, “kyberman” meaning to steer, guide or govern. From a Greek word, it moved over to Latin, where it was known as “gubernare” and the French version of “governer” . It could also mean the process of decision-making and the process by which decisions
may be implemented. Henceforth, corporate governance has much a different meaning to different organizations (Abu-Tapanjeh, 2008). In recent years, with much corporate failures, the countenance of corporate has been scared. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
Corporate governance includes all types of firms and its definitions could extend to cover all of the economic and non-economic activities. Literatures in corporate governance provide some form of meaning on governance, but fall short in its precise meaning of governance. Such ambiguity emerges in words like control, regulate, manage, govern and governance. Owing to such ambiguity, there are many interpretations. It may be important to consider the influences a firm has or affected by in order to grasp a better understanding of governance. Owing to vast influential factors, proposed models of corporate governance can be flawed as each social scientist is forming their own scope and concerns. Hence, this article reviews various fundamental theories underlining corporate governance. These theories range from the agency theory and expanded into stewardship theory, stakeholder theory,
resource dependency theory, transaction cost theory, political theory and ethics related theories such as business ethics theory, virtue ethics theory, feminists ethics theory, discourse theory and postmodernism ethics theory. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
Fundamental Corporate Governance Theories
Agency theory having its roots in economic theory was exposited by Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976). Agency theory is defined as “the relationship between the principals, such as shareholders and agents such as the company executives and managers”. In this theory, shareholders who are the owners or principals of the company, hires the gents to perform work. Principals delegate the running of business to the directors or managers, who are the shareholder’s agents (Clarke, 2004). Indeed, Daily et al (2003) argued that two factors can influence the prominence of agency theory. First, the theory is conceptually and simple theory that reduces the corporation to two participants of managers and shareholders. Second, agency theory suggests that employees or managers in organizations can be self-interested. The agency theory shareholders expect the agents to act and make decisions in the principal’s interest. On the contrary, the agent may not necessarily make decisions in the best interests of the principals (Padilla, 2000). Such a problem was first highlighted by Adam Smith in the 18th century and
subsequently explored by Ross (1973) and the first detailed description of agency theory was presented by Jensen and Meckling (1976). Indeed, the notion of problems arising from the separation of ownership and control in agency theory has been confirmed by Davis, Schoorman and Donaldson (1997). In agency theory, the agent may be succumbed to self-interest, opportunistic behavior and falling short of congruence between the aspirations of the principal and the agent’s pursuits. Even the
understanding of risk defers in its approach. Although with such setbacks, agency theory was introduced basically as a separation of ownership and control (Bhimani, 2008). Holmstrom and Milgrom (1994) argued that instead of providing fluctuating incentive payments, the agents will only focus on projects that have a high return and have a fixed wage without any incentive component. Although this will provide a fair assessment, but it does not eradicate or even minimize corporate misconduct. Here, the positivist approach is used where the agents are controlled by principal-made
rules, with the aim of maximizing shareholders value. Hence, a more individualistic view is applied in this theory (Clarke, 2004). Indeed, agency theory can be employed to explore the relationship between the ownership and management structure. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
Ethical theories for Corporate Governance Ethics and Social Responsibility of Business Mcom sem 4 Delhi University
All organisations are engaged in some economic activity where they get inputs in the form of resources from the environment to produce goods and services using internal business processes. Organisations later exchange the final products with the customer and consumers that come from outside the business boundaries. In business transactions, it is expected that corporations act in an ethical manner in their interactions with different stakeholders. The economic transactions with stakeholders should achieve a common good for the organisation, as well as for the other parties. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
Business ethics entails the study of the ethical dimensions of organisational economic activity on the systematic, organisational and intra-organisational levels (Rossouw, 2010b:20-22). Business ethics focuses on what is good and right in a particular economic activity, where an organisation engages in a moral analysis and assessment of such economic activities and practices. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
Ethics refers to a set of rules that define right and wrong conduct and that help individuals distinguish between fact and belief, decide how such issues are defined and what moral principles apply to the situation (Hellriegel, Slocum & Woodman, 1992:146). Moral principles describe the impartial general rules of behaviour that are of great importance to a society, along with the values the society represents. Moral principles are fundamental to ethics. Ethical behavior would be characterised by unselfish attributes that balance what is good for an organisation with what is good for the stakeholders as well. Thus, business ethics would embrace all theoretical perspectives regarding the ethicality of competing economic and social systems. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University. The study of business ethics is evolving, just as conceptions concerning the role and status of organisations are also changing over time. Business ethics as a field of study deploys moral analysis and assessments of economic practices and activities at the economic system (macro-economic) level, the organisational (meso-economic) level, and the intra-organisational (micro-economic) level(Rossouw, 2010b:16).
The first level is the macro-economic level, where business transactions occur within national or international frameworks (Rossouw, 2010b:20). Other business transactions occur at the meso-economic level, where an organisation interacts with other stakeholders, including society. Within the framework of societal interactions, business activities have an impact on different stakeholders, which includes suppliers, customers, the community and the natural environment. Finally, business ethics can also be applied at a micro-economic level, where the focus is on the moral dimensions of business practices, policies, behaviour and decisions executed within an org. Internal ethical dimensions include issues regarding the employees’ welfare in terms of their work environment,health and protection, and remuneration. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
GENERAL THEORIES OF ETHICS
Several theories have been developed to cover issues related to business ethics. Generally, three main philosophies of ethics have dominated discussions on ethics (Rossouw, 2010d:57-69). These three theories are Aristotle’s virtue theory, Kant’s deontological theory, and John Stuart Mill’s utilitarian theory.
Aristotle’s virtue theory
Aristotle’s virtue theory emphasises that what matters in ethical behaviour is the
integrity of an individual’s character (Rossouw, 2010:d57-62). The theory is based on the premise that different goals can only be achieved if people love themselves first. It is argued that self-love is a pre-condition for reaching one’s full human potential of having a sense of well-being and joy. Thus, morality depends on the moral character of an individual.
Kant’s deontological theory
Kant’s deontological theory on ethics propagates that there are objective ethical
standards of behaviour that everyone should respect (Rossouw, 2010d:62-65). Our moral actions in certain areas cannot be based on an individual’s practical experiences or natural instincts and needs, but is rather based on what general society expects. For example, people who are involved in corrupt practices cannot possibly offer moral guidance. Hence, the ethical focus should not be on the individual’s natural needs and inclinations, or a person’s present and past experiences. Instead, it should be based on the standard for good behavior, which is realised through pure rational reflection. Obeying objective standards of behavior from a sense of duty would be the hallmark of moral behaviour. The development of ethical guidelines and codes of ethics are premised on this doctrine. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University.
Mill’s utilitarian theory
John Stuart Mill’s utilitarian theory focuses on the quality of actions as propagated by the deontological theory (Rossouw, 2010d:65-69). The difference between the two theories is that the utilitarian theory focuses on the practical consequences of an action in order to determine whether that action was right or wrong. An action is considered good when it results in the happiness of the majority of those affected by that specific action. Ethical theories for Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University. The utilitarian theory posits that individuals should strive, not for their own happiness alone, but also for the happiness of society, as human beings are by nature social beings (Rossouw, 2010d:66-67). The theory recognises that external support is given to individuals, as everyone needs the support of others throughout life. One is likely to face a threat of rejection or even expulsion from the society in the absence of such external support. Hence, the utilitarian theory propagates that there should be natural inclination to sympathise with others through the manifestation of a moral conscience that prevents one from doing harm to others.
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