FNCE201 Corporate Finance

Table of Contents

Question:

Discuss whether maximizing value is ethical in the context of Corporate Finance.

Does there exist a conflict between doing good and doing well?

How can government regulations and laws help the firm do good when there are conflicts?

Discuss the relationship between ethical decision-making by corporate management, and profitability.

Answer:

Introduction

This paper examines the assertion that “value maximization should always be ethical”.

Value maximization refers to the process of increasing the net worth of a company through higher share prices for common stock.

Value maximization refers to the process of increasing the owner’s wealth by increasing the value of the company’s stock on the stock market.

Maximizing value is what shareholders want to do. This will ensure that they get a high return on their investment.

Shareholders want value maximization. This is the increase in share value that provides high return on their investment.

Any company has an ethical obligation to maximize shareholder value. Therefore, value maximization should be a legitimate objective.

Value maximization is ethical

In the past, profit and value maximization were the primary objectives of a business. However, the current objective is to maximize reputation, image, and brand value on the market by being ethical.

Value maximization objectives can conflict with ethics. This is because value maximization implies that the organization considers only shareholders’ or investors’ interests to maximize their return, and does not take into account other stakeholders, such as employees, managers, clients, suppliers, managers, distributors, clients, customers, business partners, creditors, people and government. (Whittington & Delaney 2011, 2011).

This section explains the ethical constraints involved in maximising shareholder wealth or shareholder value.

Understanding the ethics is key to understanding whether value maximization is ethical.

Definition of ethics: Ethics refers to morally right and wrong.

The rules that govern behavior are based on moral principles.

Bad behavior is deemed unethical while morally good behavior can be considered ethical.

The concept of ethics in business refers to applied ethics, or corporate ethics, which examines the moral or ethical issues that arise in the corporate environment (Crane & Matten, 2016).

Business ethics refers to the study of business ethics and policies that relate to ethically controversial issues such as discrimination and insider trading.

The importance of ethics has increased in recent years. Unprofessional behavior can have a negative impact on a company’s reputation, image, wealth, and market value.

If an organization presents misleading information about their performance or makes misstatements, it can affect the trust of people and decrease the brand value, goodwill, and wealth of the company.

The organization’s ethical behavior is linked to building its reputation, image, and wealth in the marketplace that improves the performance of the business (Ayuso Rodriguez, Garcia-Castro, and Arino 2014).

A code of ethics can help organizations retain and improve the performance of their employees.

Ethics offers a lot of advantages to business firms. It also provides significant ways to effectively deal with many business problems and challenges.

Ethics could be used to improve a company’s image, value, and reputation with the public and key stakeholders.

Companies should use a variety of ethical rules, methods, and standards to achieve their key goals and objectives.

Most organizations have adopted the code of ethics to ensure that they follow ethical business practices. This code encourages or binds the management to make business decisions while considering the interests of all stakeholders. This helps to keep people engaged in business and maintain trust.

To maintain their image or reputation in the market, organizations must follow business ethics and ensure that employees are engaged with the business.

People are not able to support organizations that practice unethical business practices. They will be less inclined to buy products and services that lower the brand’s reputation, value, and wealth (Bridoux & Stoelhorst 2014).

Organizations today use ethics to improve their image, reputation, and brand value on the market in order to maximize the wealth and value for stakeholders.

Corporate governance and corporate social accountability are also a part of ethics.

Corporate management is concerned with ethical decision-making. It considers the interests of all parties, parties, and individuals while making business decisions to fulfill their obligations for society, peoples, planet, and the environment.

To ensure that all stakeholders are satisfied, organizations applied corporate governance strategies and corporate social responsibility strategies (Deng, Kang, and Low, 2013).

Ethics provides a variety of methods, standards and rules that can be used to address business issues.

It is important to remember that ethics encourage and support employees to be more ethical in their business practices.

Business firms can achieve their corporate goals and improve efficiency by following ethical standards and rules.

Because they are responsible for the environment and society, the organization is accountable. Therefore, it is the corporate social responsibility to reduce carbon emissions, waste, use renewable energy sources and decrease the use of natural resources. This will ensure the sustainability of people and the planet.

Management and employees have met their social obligations by considering the interests of all stakeholders as they perform their jobs or take action.

Organizations have also fulfilled their social and moral obligations by not causing harm to the environment, people, and planet through their business operations (Vranceanu 2014).

Global Crossing Limited Accounting Scandal 2002 is an example of how value maximization can conflict with ethics.

Global Crossing Limited was unable to meet its financial audit requirements and had poor internal control.

Global Crossing Limited bankruptcy was the fourth-largest in US history. It did not adhere to many accounting standards and broke numerous accounting laws.

Global Crossing’s rapid expansion of telecommunication services around the globe in 2001 was a result of financial misstatement. This is an unethical aspect of the company.

Global Crossing founder Gary Winnick also sold $123.5 million of shares of the company prior to the company’s eventual bankruptcy. This is an example of insider trading, which is also unethical (Sulub 2014).

It is also revealed that Global Crossing also agreed to forgive two thirds of a $15million loan to John Legere (current chief executive) shortly before the company filed for bankruptcy. This is another example of insider trading that is linked to unethical business activities.

This is an example of unethical business practices used by Global Crossing to maximize wealth and value for the owner. However, bankruptcy can have a negative impact on the chief executive, investors, markets and employees.

Agency Theory: This theory examines the conflicts and duties that occur between people who have an agency relationship.

Agency theory is the key conflict identification related to value maximization.

An agency relationship is one in which neither party has performed a task that could affect the other.

The agency theory states that management can be viewed as agents of shareholders, managers are agents of management, employees are agents of managers, creditors as agents, and store managers as agents of warehouse managers or distributors.

Hannafey & Vitulano (2013).

It is also accessible and analyzed to help explain the actions and interests of the owner, vice president, chief executives, employees, auditor, and other groups in the Global Crossing bankruptcy debate.

According to the agency theory, Global Crossing founder Gary Winnick and Global Crossing owner Gary Winnick are the agents of shareholders.

Winnick is responsible in this instance for the bankruptcy or issues of the company. This is because it has not taken any action and allowed the financial misstatements to be presented.

Winnick has failed to fulfill their obligations to shareholders. He has also not taken into account the shareholder’s interest and considered self-interest as earned from selling the company shares before the company’s eventual bankruptcy. This is unethical behavior of his (Huy 2015).

Winnick also made financial reporting errors to preserve the wealth and value at Global Crossing. This is due to Winnick’s personal gain from selling shares prior to bankruptcy.

According to agency theory, vice presidents and financial managers, accountants, auditors, and auditors are agents of the owner. Therefore, they can also be involved in financial reporting mistakes to benefit a few stakeholders instead of being considered to be of interest to all stakeholders.

This situation showed that financial reporting errors can be used to maximize the value of the business, which is unethical (Bridoux & Stoelhorst 2014).

Theory of stakeholder: A firm has multiple stakeholders, such as suppliers, owners, management, shareholders, investors, shareholders, shareholders, employees, customers and distributors.

While value maximization is achieved by balancing the interests of all stakeholders, it is ethical. Value maximization that conflicts with the interests of a few stakeholders is an unethical aspect.

The company has made the most profit possible for shareholders and owners in the past without considering other stakeholders and business ethics (Harrison & van der Laan Smith 2015).

The stakeholder theory has been explained as a way to explain that while profit maximization and wealth maximization are the primary goals of business, it is important for firms to take into account the business ethics of all stakeholders and avoid harming their interests.

It is also found that the stakeholder theory is used to limit the businesses to protect shareholders and people’s interests without losing profits. This ensures that any business activity or function does not harm or affect the interests of any stakeholder.

Global Crossing’s shareholder theory states that the owner, vice-president, accountant, finance manager, and auditor did not consider the interests of all stakeholders.

Global Crossing’s main conflict is that it failed to balance multiple interests of all stakeholders. It also considered the interests of certain stakeholders, such as owner, in order to maximize value by presenting misstatements. This is an unethical method of maximizing value.

Fraud in accounting is when the accounting standards and rules are not respected and not considered the mutual interest of all stakeholders (Pouryousefi & Frooman 2017, 2017).

Enron Corporation was forced to file for bankruptcy in October 2001 due to its biggest audit failure.

Jeffrey Skilling, Enron’s CEO, had hidden the losses of its trading business and other operations from the financial statements. He presented misleading statements to maintain market value and wealth.

This is an example of value maximization by presented misstatement, which is unethical because the CEO did not consider all stakeholder interests (Hosseini & Mahesh (2016)).

WorldCom also disclosed $3.3bn more in accounting errors, which led to the filing of bankruptcy protection in 2002.

It is important to note that this is the biggest accounting fraud or scandal in American history relating to financial misstatements reporting.

Global Crossing, WorldCom, and Enron cases showed that these companies did not follow stakeholder theory. They only considered the interests of owners or partners while making business decisions (Dodo 2017, 2017).

Sarbones-Oxlay Act (2002: Large public corporations like Global Crossing, Enron and WorldCom were implicated in accounting and auditing scams between 2000 and 2002. Therefore, the US Congress passed Sarbanes-Oxley Act of2002 to ensure financial statements and information are accurate.

The SOX Act has imposed criminal penalties on firms and the management and responsible persons who have violated GAAP (Generally Accepted accounting Principles). These misstatements mislead investors or stakeholders about the company’s financial position.

The act’s purpose is to preserve investor, shareholder, and public trust in fair financial reporting and corporate ethics in capital markets (Kohn Kohn and Colapinto 2004).

It is also suggested that the Federal government must establish this act in order to protect or prevent the interests of stakeholders and stop investors or shareholders from stealing their money.

The SOX protects whistleblowers and rewards them for their efforts in maintaining an ethical business environment. It forces top management and executives into transparency and considers the interests of all stakeholders when making business decisions and executing strategy.

Dodd-frank Act: The Obama administration passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 as a major piece of financial reform legislation.

The global financial crisis (GFC), which occurred in 2008, indicated that the US financial system was not regulated or under regulated. Therefore, Dodd-frank Act was passed to reform the market (Ciro 2016,).

The act’s purpose is to promote financial stability, provide adequate protection for customers, investors, and shareholders in financial markets.

This act helps the company maintain its business accountability, creditability and marketability in a more effective and significant way.

This business helps companies achieve their core and key goals in a more dynamic and efficient manner.

Evaluate the effectiveness laws: The GFC (2007/08) raises questions about the effectiveness of SOX regarding citing by corporations.

The financial crisis highlighted the SOX failures in preventing investors, shareholders, and customers from the capital or financial market.

James Doty, Chairman of the PCAOB, stated that inspectors from the PCAOB had reviewed 2,800 large audit firms and that many cases involved audit failures were disclosed.

This shows the decreased effectiveness of SOX requirements, which required the introduction of a new act (Verschoor 2012).

Dodd-Frank, which is more effective than SOX, allows for business ethics to be maintained in the corporate world.

This also helps business firms work in an ethical and more productive environment, which gives them competitive advantages.

Conclusion

The above discussion shows that SOX law does not have the ability to reduce accounting and auditing fraud scandals. It is necessary to create new law.

Dodd-Frank played a major role in reforming the financial system. It helped to reduce corporate auditing and financial scandals, and prevented investors, shareholders, and customers from being hurt.

The US financial market has remained stable for five years after the Dodd-Frank law was passed.

It can be concluded, in addition, that business firms must adhere to various standards, legal guidelines, and business codes to achieve long-term goals. Finally, it is possible to conclude that different laws or acts must be used in order to increase market share, profit, and revenue in a more specific way.

Refer to

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