The managers of corporations

“The managers of corporations have obligations to their shareholders, but they have obligations to other stakeholders as well. In particular, they have obligations to consumers and the surrounding community as well as their own employees” (From: R. C. Solomon, ‘Business Ethics’, within P. Singer (ed. ), A Companion to Ethics (Oxford: Blackwell Publishing, 1991), p. 361). To successfully discuss the above statement I will have to define the term business ethics and what role it plays in business today. I will have to distinguish between shareholders and stakeholders and how business responsibility differs from each entity.

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First of all what is meant by the term business ethics. Whenever confronted by an unfamiliar subject we must define the term that will be at the centre of the discussion. Business ethics is merely the combination of two simple words. Just the same as medical ethics means the correct code of practice within the medical profession business ethics is the correct code of practice within the business environment. We can now see that business ethics is a term that is easy to define, however that does not mean it is a term that is easily understood.

To fully understand ethics does not merely mean to be able to distinguish from what is right and what is wrong, you must be able to apply it fully to the situation at hand. To know it is wrong to steal does not mean you are ethical, because everyone with a conscience should be aware of that fact. Ethics in the business environment is more in twine with environment protection; corporate responsibility; worker participation (Chryssides 2002). Although in today’s capitalist society it is a fairly straightforward procedure (marketing) for firms to get customers they cannot take advantage of the circumstances, however simple it may seem.

Businesses must be ethical in order to escape being tied down by restriction Companies need customers and they also need legitimacy from governments. Issues about executive remuneration, the environment, and employee policies become inextricably linked in attitudes to policy making. The corporate sector must maintain and improve its public image if it wishes to escape serious regulation and restriction. (Paul Judge/3 April 03) The first sentence in the above extract is pointing out that firms in the private sector have a social responsibility.

And in order to carry out their responsibility to the public as well as their shareholders the government must legitimise their operations. This leads me to the next part of the discussion, their obligations to the shareholders and stakeholders. First of all I will look at their obligations to shareholders. Shareholders are those individuals who in return for a stake invest money into a company. They do so by buying shares into that company. Shares can be bought off the stock exchange. The shareholders motivation for doing it is that they get paid money every year.

The amount of money they get is in accordance with how many shares they have bought and how well the firm has done in terms of making profit. Therefore the manager’s obligation to the shareholders is simply to steer the firm into high profit making territory. The more profit a firm makes the higher the dividend the shareholder receives. So the managers’ relationship with the shareholders is purely a financial one. However this relationship must be closely monitored. This must be done in order to counter the “principle-agent problem”. This causes problems in the relationship between shareholders/owners and managers.

The principle-agent problem arises in a situation within which an individual or individuals (principle) who have a financial stake in a firm hire an agent (manager) to take action on their behalf. The principle gives the agent authority to use the firm’s resources in order to increase the financial worth of the firm. The owner of the firm is usually the principle. This is where the problem arises, because the owner has given the manager total jurisdiction over his resources, he wants the manager to further his interest not to have some hidden action that will further the managers own interests.

This is known as the moral hazard. The manager may be using the firm’s resources in order to gain personal goals such as job security, career development, and financial gain. In order to prevent this, the shareholders must monitor the manager’s actions. Considering the number of shareholders that can own a company this would be extremely impractical, therefore the best way to deal with this problem is to align the interests of managers with the interests of owners by building various incentives into the manager’s contracts.

The most common incentive built into the manager’s contract is the award of stock options if a target is reached. This motivates the manager as it increases his stake in the firm and therefore the better he does to increase the firms financial worth the more money he receives. This is also good for owners as it rewards managers for doing things that increase the value of the company. Therefore the growth of stock options should not be denounced but it should be welcomed as a step forward in corporate governance.