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Flashcards in Ethics,corporate governance,social responsibility Deck (27)
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Government intervention in business:

  • Macroeconomic environment
  • Legal and market regulations
  • Corporate governance -social responsibility


Objectives for governments macroeconomic policy:

  1. Economic growth-GDP(within borders income) and GNP(+oversees-by oversees residents)/demand generates employment ,wage increase,more demand-economy expands /-balance trade negatively,gap rich and poor,enironment impact
  2. Controlled inflation( certainty if stable,fairer if income is stable/low,more spending(interest rates lower,more saving (higher prices less spending-real balance effect),distortion of price mechanism,civil unrest
  3. Employment-demand falls,welfare payment increase,societal problems)


Obj affected by fiscal and monetary policy.


Fiscal policy and taxations:

Definition:Government spending and taxation policy.

Based on Keynes theories:goverment influensy macro productivity by increasing or decreasing tax levels and spending.

Goal :inflation low (2 or 3%) and high employment-balancing act

  • Direct tax:on earnings eg income tax ,special one -off
  • Indirect :Value added tax,preferable as easy and cheap to collect
  • Proportion of tax individ-corporations
  • Proportion direct -indirect


Monetary policy

  • Government policy on money supply,monetary system,interest rates,availability of credit.
  • Interest rate increase:
  1. Spending falls
  2. Investment falls(opportunity costs increases and reduces NPV of investm)
  3. Attracts foreign funds
  4. Exchange rate rises
  5. Inflation rate falls-deflationary impact


Corporate political activity(CPA)

  • Involvement in political process to gain favour-lobbying /donating on political campaigns

2 types:

Buffering:warning the government on the impact of pending legislation,influence the content

Bridging:Ensuring company is aware and compliant with proposed new legislation.

Situations when dealing with government necessary

  1. Multinational companies-terms of invest
  2. MC lobby government to provide conditions in the economy that benefit them-min wages
  3. New industries may seek protection (import restrictions)
  4. Developing industries -support/tax breaks to compete in the global market


Institutions involved in Global trade and growth:

  1. World trade organisation-free flow of trade,trade agreements ,disputes,policies.
  2. G8-no official powers ,economics,trade,politics,global warming,aids,poverty
  3. IMF(international monetary fund)-goal rebuild national economies,exchange rate stability ,major role in workd affairs (former communisyt nations to market economies),international liquidity.
  4. World Bank:help nations to reconstruct their economies after world war 2,after attention to developing world ,5 main bodies:
  • IBRD-loans 
  • IDA-poorest countries -interest free loans
  • IFC-private sector in developing countries
  • Miga(multilateral inv guarantee aency)-guarantees against losses
  • ICSID-conciliation and arbitration of inv disputes

5.EBRD(european bank for reconstruction and dvt-world s only transition bank

6.Central bank-bank acts on behalf of the government


Functions of central banks:

  1. Monetary stability(setting interest rates to meet inflation targets)
  2. Stability of the financial system-regulate banking system
  3. Lemder of last resonrt -banking system is out of money
  4. Banker to commercial banks-net balances with other banks settled through clearing accounts at central bank-funds  act as liquid reserve controlled by fractional reserve ration
  5. Banker at the central government and holds the public deposits
  6. Centrak note -issuing authority in the country
  7. Manages the national debt
  8. Holds the countries foreign currency reserves
  9. Advisor to the government on the monetary policy


Regulation -def and effectiveness:

  • Any form of state interference with the operation of free market


  • Efficient when:
  1. Total cost of reg is less than the benefit it provides to the society
  2. The function of the business is not impeded
  3. The end -product /service being controlled is safe and it works as it should


Regulation and competition policy:

Involves regulating:

  • demand,supply
  • profit ,price
  • quantity,quality
  • entry ,exit 
  • information ,technology
  • any aspect of consumption.production


  • In UK much regulation around competition-delegation  to individ/orgs
  • Government plays part in regulating externalities
  • Action of business people controlled(cease trade of insolvent companies,insider dealing ,money laundering



Competition act 1988 and industry regulators:

  • Anti-competitive arrangements illegal
  • Office of fair trading -controls and imposes fines up to 10% of revenue

Industry regulators:

Aim :promote competition by imposing price caps,performance standards,removing barriers for new companies to enter

OFCOM -UK telecommunications



Other regulatory bodies/types:

  • Competition Commision(CC)  -In the UK ,role :promote competition-eg investigate proposed mergers when assets exceed a certain value.
  • Restrictive Practices court-agreenents contary to public interest
  • EU competition  policy:ensure fair and free competition in EU.The commission of EU has authority to prohibit price fixing and other uncompetitive arrangenments,prevent subsidies that will distort competition across the wider market
  • Self regulation


Cost of regulation:

  1. Enforcement costs-reg agencies set up,cost of regulated org to conform
  2. Regulatuore capture-regulator dominated and controlled by regulated companies
  3. Unintended consecquences of regulation-business move away from regulated activities


Adv,dis of deregulation(liberalisation):


  • Increased incentive to find internal cost saving and efficiency
  • Improved allocative efficiency-prices closed to marginal output/socially otimal output level


  • Loss of economies of scale(more competitors)
  • Lower quality of quantity of service
  • Need to protect competition


Knowledge gap or agency problem-corporate governance def:

  • Owner- managed companies:directors and shareholders same people,same info  and are in position to direct comp policy
  • Bigger companies :no access to day to day company mgt

Corporate gov:system by which companies and entities are directed and controlled.


Stakeholders   def and types-stakeholder theory:

  • Stakeholders:persons or groups that have a legitimate interest in business conduct(business strategy) and whose concerns should be adressed as a matter of principle.
  • stakeholder theory:shareholders not the sole focus of orgs attention
  • 3 constituencies of stakeholders:
  1. internal-empl,mgt
  2. external-community,gov,trade unions,pressure groups
  3. connected-customers,suppliers,financiers
  • Also primary(formal contractual relationship) and secondary stakeholders.




Stakeholder conflict:

  • Mostly interested in the success of the business
  • Incompatible interests between different groups of stakeholders
  • Example of conflicting interests
  1. shareholders-profit vs customers-quality
  2. employees pay rise-mgt max profit
  3. community (min environm impact vs shareholders cheaper way of disposing waste.

Mendelow 's matrix (pg 50)

Vertical:power/infl  Horiz: level of interest

  • Key players :High both.Any strategy should be acceptable to them (major customer).Participate in decision-making.
  • High power/low interest:Treated with care.While often passive they might change to key players so they should be kept satisfied.
  • Low power,high interest:no ability to influence strategy but may influence more powerful stakeholders by lobbying.Should kept informed(community reps,charities)
  • Low both.Minimal effort(contractors empl)


Corporate governance-reasons,facts

  • Scandals:polly peck,Bcii,Maxwell communications,Enron,Parmalat
  1. Domination by a single individual-single exec with other board members acting as a rubber stamp.Presence of non exec directors on board-important safeguard against domination
  2. Lack of involvement of board.
  3. Lack of adequate control function-inffective internal audit,lack of technical knowledge (compliance positions),rapid turnover staff in accounting makes control difficult
  4. Lack of supervision-segregation of duties
  5. Lack of independent scrutiny -Barlow clowes case -audit failed to identify illegal activity
  6. Lack of contact with shareholders
  7. Emphasis on short term profitability
  8. Misleading accounts and info


Uk corporate governace code-key principles 

  1. Leadership-(role of NED attend board and board comittee meetings and constructively challenge and help develop proposals on strategy).
  2. Effectiveness-board should have experience,skills,knowledge,independence ,elected through nomination comittee 
  3. Accountability-audit comittee (non exec directors) to monitor integrityof accounting policies and financial statements,review of internal controls,ext auditors independence
  4. Remuneration: remuneration comittee by NED to determine pay ,same number as audit comittee.
  5. Relation with shareholders:annual general meeting,dialogue satisfactory



Ethics in orgs:

Ethical approach towards:

  • stakeholders
  • Environmental issues
  • Disadvantages
  • Dealings with unethical companies or countries

Pressure comes from :

  • Gov
  • UK and European Legislation
  • Treaty obligations
  • Consumers
  • Employees
  • Pressure groups


Advantages of CSR strategies:

  1. High quality employees
  2. Reduce packaging costs,env taxes
  3. Improves image
  4. Differentiation from competitors
  5. New markets for goods/serv attracts new likeminded customers
  6. Positive impact on profitability


Carol and Buchholtz's layers of CSR:

  1. Economic responsibilities-properly functioning economic units
  2. Legal responsibilities-more emphasis in Europe and Anglo-american economies
  3. Ethical responsibilities-act in a fair and just way
  4. Philanthropic responsibilities-desired rather than required (charitable donations)



Corporate citizenship-views on how it should extend:

  1. Limited view:voluntary philanthropy,loc communities and employees-limited focus projects
  2. Equivalent view:Partly voluntary and partly imposed,wide range of stakeholders,focused on legal requirements and ethical fulfillment
  3. Extended view:promotion of social ,civil and political rights



CSR stances Johnson,Scholes,Whittington:

  1. Laissez faire -short term interest of shareholders-meet only min obligations
  2. Enlightened self interest(long term shareholder interest)-social action makes good business sense/corporate image enhanced by undertaking such responsibilities (promo exp)/less less pressure for legal obligation
  3. Multiple stakeholder obligations-legitimacy of the expectations of stakeholders other than shareholders for sustainability
  4. Shaper of society-financial considerations secondary importance


Against corporate social responsibilty- M Friedman

  1. Only people have responsibilities-not businesses
  2. General aim make as much money as possiblewhile conforming to the laws,ethics
  3. Manager with social responsibilities-translated to acting in a way that is of no interest of his employer.
  4. Manager spending money for social reasons not right-gov s responsibility/wasting stakeholders money

Maximisation of wealth should be best way society can benefit from business activities:

  • increase tax
  • trickle down effect on other disadvantaged members
  • Many company shares-pension funds (not the wealthy anyway)