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Chapter Three Corporate Governance and Ethical Management

Chapter Three Corporate Governance and Ethical Management. What is Business Ethics. Core values and standards adopted to guide decision making Consider the interests of stakeholders Owners Shareholders Creditors Employees Suppliers Customers

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Chapter Three Corporate Governance and Ethical Management

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  1. Chapter ThreeCorporate Governance and Ethical Management

  2. What is Business Ethics • Core values and standards adopted to guide decision making • Consider the interests of stakeholders Owners Shareholders Creditors Employees Suppliers Customers Government Agencies Society at large

  3. Ethical Issues in Business • Honesty and fairness • Obligation to be honest and trustworthy • Treating others equally • Conflicts of interest • Situation in which private interests or personal considerations may affect or be perceived to affect an employee’s judgment • Fraud • Deliberate misrepresentation to gain an advantage • Discrimination • Information technology

  4. Aids in Increasing Fraud Detection • Sarbanes-Oxley Act (SOX) • Hot Lines • Implementation of control procedures • Corporate Governance • SAS No. 99 • Ethics officers, training, code of ethics

  5. SOX Internal Controls over Financial Reporting • Reasonable assurance • Reliability of reporting and preparation • Required policies and procedures • Maintenance of records • Recording of transactions • Prevention or detection of fraud • SOX controls reduced fraud losses by 70 to 96%

  6. Definition of Corporate Governance • Set of rules that define the relationships between • Stakeholders • Management • Board of Directors • Influence how the company is operating • Issues of separation of ownership and control • Pillars of Corporate Governance • Responsibility • Accountability • Fairness • Transparency

  7. Importance of Good Governance • Better access to capital • Aids economic growth • Positive impact on stock prices • Ensures that business is fair and transparent • Ensures that companies can be held accountable • Leads to sustainability

  8. Agency Theory • Corporate managers and directors are agents • Shareholders are the principal • Construct rules and incentives to align the behavior of agents with the desires of the principals • Agency Problem • Desires and goals of agents and principals may not be in accord • Difficult to verify the activities of the agents

  9. Agency Costs • Agents likely to place personal goals ahead of corporate goals • Results in conflict of interests between agents and principals • Consistent with egoism • Information asymmetry • Occurs if BOD fails to exercise due care in oversight

  10. Stakeholder Theory • Stakeholders other than shareholders • Employee governance • Employee share ownership • Employee representation on Board of Directors • Employee involvement in governing committees

  11. Governance Mechanisms • Internal: • Independent directors • Audit committee • Management • Internal controls • Internal audit • External: • Financial markets • State and federal laws and regulations • Court decisions • Shareholder proposals

  12. Internal Controls • Prevent and detect errors and fraud • Asset misappropriations • Materially false and misleading financial reports • Inadequate disclosures • Ensure management policies are followed • Can be overridden by top management • Do what CEO says, not what he does • Creates cynical attitude • Objectives: • Effectiveness and efficiency of operations • Reliability of financial reporting • Compliance with applicable laws and regulations

  13. Audited Financial Statements • Prepared by management • Report financial results in accordance with GAAP • External auditors render an independent opinion • Used to mitigate conflict between owners and managers

  14. Corporate Values • Ethical behavior/integrity • Commitment to customers • Commitment to employees • Teamwork and trust • Honesty/openness • Accountability • Corporate citizenship

  15. Codes of Business Ethics SOX requirements • Whether companies have codes of ethics • General • Separate code for senior management • Waivers on the code of ethics for senior management • Any changes to the code of ethics • If no code, must explain why

  16. Whistle blowing • Employees who report suspected violations • Protection provision (SOX) • Prohibits discharge, demotion, discrimination, threatens or other harmful action to employee • Employee can file a compliant with Secretary of Labor (delegated to OSHA) • Remedies for employee include reinstatement, back pay, litigation costs and attorney fees

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