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Ethics is one of the principles that govern the operation of corporations. It is therefore important for corporations to observe it in order to remain relevant to the market, make profits, and expand their capacity. Corporate governance is entitled to direct all the operations of a corporation. It is the manner in which top management directs the corporation and so the stake holders are able to judge whether the company is operating in ethical manner or not.
This paper will cover ethical problem that is as a result of poor corporate governance, dilemmas between stakeholders, law that applies to it and how strategies have been laid to solve the problem.
The most common problem on corporate governance that I will discuss on this paper is evasion of tax and other problems that arise in the course of governing a company such as failure to corporate social responsibilities for example environmental pollutions and unfair remuneration of workers, cultural diversity and poor quality goods.
These problems occur because of lack of ethical responsibility of top management when governing a corporation.
Ethics on corporate governance
When an entrepreneur develops a business idea, his main objective is that the business will be able to succeed through making a lot of profits. To ensure that a business idea succeeds and it is able to generate a lot of profits, entrepreneurs recruit the best management who will be able to steer his idea forward in line with ethical practises of the business industry (Arjoon, 2005).
If the idea succeeds, the business expands and grows to large corporations that can run in a wide geographical location and even in the international market.
At this level, management become complex and the company adapts different levels of management which direct the operations of the company and control everything that is undertaken in the company. At this point, the company must have a governing body that manage the overall company practises. This is where the corporate governance is important so that the company is able to distribute all its responsibilities to different stakeholders such as managers, board of governors, suppliers, customers, creditors, auditor and share holders (Arjoon, 2005).
In order to be able to control and direct all the stakeholders, ethics must be highly upheld in corporate governance. This will ensure that any decision making process involves all the stakeholders for ethical practises and that ethics are considered when delegating duties to each stakeholders to avoid conflicts and other mismanagement problems that may affect the company performance. Failure to ethical corporate governance perhaps is one of the greatest sources of many unexpected losses to corporations.
Ethics also ensures that a business is able to follow e right way to do businesses without exploiting other businesses or populations in is environments. In today’s competitive markets and business environment, a reputation of a business plays an important role as its marketing strategy through appealing stakeholders such as customers and creditors, which are integral part of business success. The stakeholders expect that business operations are steered in accordance to the best corporate governance whereby the top management bear the total responsibility. Therefore, corporate governance is the integral part of business success and so ethical values should be part of it.
Not only should be the decision making process and policy formulation that should involve ethics in corporate governance, but also the way the top management behaves and carry themselves when executing their duties. In every business, the conduct of employees and its reputation are highly influenced by the leadership of the company. If the leaders show high professionalism such as integrity and transparency in work place the employees also try to copy them, which contribute to improved performance of the business and maintain its good reputation in the market (Arjoon, 2005).
Today, most corporations are failing in their management due to failure to consider ethics when making major decisions, directing or controlling their activities. These failures are blamed on poor corporate governance that does not follow moral values of the company and stakeholders. For example, a number of corporations have been said to evade taxes, mistreat their workers by paying them unfair remunerations, producing inferior or substandard quality goods in the market and exploiting communities and other small companies in order to make profits. These practises are considered unethical traits of incompetent corporate governing and have led many corporations to trouble resulting to under performance or even prosecution.
Many corporations carry out underground businesses with the aim to avoid part of their legal responsibility to pay taxes and other licences fees that are part of legal requirements. Although this is an ethical responsibility for any profit making company, it is becoming a major problem in business industry.
According to Fátima, & Abreu, (2013) tax evasion is violation of moral values and norms (ethics) for financial and administrative behaviours that govern operations of a business. This has led to the he global business regulatory bodies such as world trade organizations and other corporate bodies to come up policies and rules that govern the operations of business so as to ensure that all the operating business operates in an ethical manner that is acceptable by all stakeholders.
For this reasons policies have been developed, which acknowledge the responsibility of any business or corporate body to pay taxes and meet all other legal requirement of the state in which it operates all its businesses. For example, United States have developed laws such as foreign account tax compliance act, which ensures all financial organizations are able to pay their respective taxes. Therefore it is the responsibility of any management or corporate governing body to ensure that it meets the requirements of the government where it operates its business as part of the right way (ethical) to carry its business. By this way, business corporate governance it said to be observing ethical practises.
Most governments have lost billions of money through tax evasion. For example United States exempt corporations with subsidiary branches in foreign countries from tax. This has led to many corporations exploiting the opportunity in an illegal and unethical manner. Countries register their corporations as subsidiary branches in order to evade tax.
Google and Apple have been the recent companies that have been discovered to have evaded a lot of taxes for United States. For example Apple is said to have avoided tax on $ 74 billion that it earned as profits between years 2009 and 2012 and Starbucks was accused for evading taxes in United Kingdom (UK) for three years in December 2012 (Evans, 2014).
Although it is ethical for companies to pay taxes to their own government and foreign states where they operate, US 2004 law on corporation tax has encourage many companies to take part of unethical corporate governance (Mider, 2014). In addition, US have laws that allow it to penalize companies and corporate managements who avoid tax havens but this has not worked out. Therefore, it can be concluded that poor and unethical corporate governance has led to evasion of taxes for many corporations and small businesses across the world despite laws and policies that mandate them inn paying their taxes in honesty (Otusanya, Lauwo, & Ajibolade, 2013).
The issue on tax payment on many corporations have been one of the main ethical dilemmas with most companies putting pressure on their chief executive officers (CEOs) not pay taxes while workers and general public demonstrate and condemn corporations that evade their taxes. For example public and workers demonstrated against Starbucks coffee Company in 2012 for evasion of taxes for three years in UK. Most of these dilemmas are cited on the ambiguous US laws on corporations operating in foreign countries.
Most of the dilemmas have been taken to courts and legislation bodies for solutions. For example, Apple CEOs were taken stood before US senate to answer against evasion of $ 74 billion profits taxes (Evans, 2014). Other solutions have been obtained through agitation of public through mass demonstrations and condemnation of the corporations. This has seen some of the companies start paying taxes. Other dilemmas are being solved by perfection of tax payment laws so as to fill the loopholes that the corporations are taking advantage of in order to avoid their legal rights to pay taxes. US senate and other political leaders are coming up with legislations that ban corporations from avoiding tax.
It has been a great problem for many corporations to carry out their operations in line with the communities living around the corporations through corporate social responsibilities (Nakano, 2007). For example, United Nations have published business reference guide for business on the rights of indigenous people in the environment that a business is established.
Many corporations are the largest source of pollution and exploitation of resources in places where they operate without benefiting the communities living there. Therefore, global regulatory bodies require every business to participate in corporate social responsibilities. A good corporate governance ensures that it participate in projects that improve the lives of the communities living in its environments (Arjoon, 2005). It is the mandate of management to see that the communities are able to benefit with the employments opportunities, social responsibilities such as funding their projects, and protecting their environment.
A company or a business that tend to avoid these responsibilities is said to be operating in unethical way and may be summoned by the international business regulatory bodies for exploiting the communities. Therefore it is ethical for every business to work in close consultations with the communities that form part of its stakeholders. On the other hand, a company that denies the communities employment opportunities does not participate on its social projects and play a major role in pollution of its environment is said to be operating in an unethical manner. This may provoke the regulatory bodies or even the government resulting in confiscation of its properties and cancelling of its licence. This is a blame on corporate governance as it is the top management that is held responsible for unethical operations.
It is also the responsibility of top management to ensure that all employees, customers and other stakeholders are accorded equal respect. This will ensure that the corporation is able to carry all its responsibilities in consultation with all stakeholders, which is the ethical requirement of every business that is in operations and be able to offer competitive remunerations that meet the international labour laws (Pollack, 2011). However, most corporations exploit their worker paying them substandard wages in order to maximize their profits. This is against labour laws of many countries and industrial organizations. Therefore, it is unethical for company to pay substandard wages as that is not the right way or requirement in business industry.
Most multinational corporations have suffered big losses through poor corporate governance that does not consider its ethical responsibility in protecting the environment and communities living in their vicinity of operations. A recent example is Yaiguaje versus Chevron environmental dispute where the Ecuadorian plaintiff was awarded $ 9.5 billion. This was a big loss to the multinational corporation.
Various states and international business organizations have also put up punitive measures that have seen many corporations incur a lot of losses but in the long run controlled from their unethical governance. In addition, European commission and European councils have enacted laws and policies that require companies affiliated to the commissions to give annual reports of their social responsibilities to the communities. This was aimed to reduce the number of companies that are exploiting communities and taking part in environmental pollution that is causing world a lot of money. This also defines what is right way for corporations to govern their operations. Therefore, corporate social responsibility has become an ethical requirement of every company or business in operation. Other legal requirements for companies include international criminal law, corporate governance, and labour standards (Tully, 2012).
In addition, it has been a challenge for many corporations to work in a multi-cultural society. Most business environment comprise of diverse people. A company is mandated to cope up with these challenges by providing a favourable environment that harmonises all employees and customers to share same goal and mission of the company to help in propelling growth of the company.
Some of the corporations have been accused of employing people on the basis of races and ethnic groups. This has led to dilemmas between corporations and communities, who are part of the company as they form part of the market. However, international labour organizations and world trade organization and various governments have enacted laws to ensure balanced employment and equal treatments of communities. For example, United States and other countries in America have enacted laws that advocate for multiculturalism. For example, Canadian Multicultural Act of 1988 allows equal rights for all citizens despite their ethnic or racial background. This has led to many companies in the country to be able to address multicultural issues and thus effectively working in a diverse environment.
There has been dilemma between corporate, management and stakeholders such as employees, customers, and communities, which has led to unceasing conflicts and demonstrations agitating for corporations to carry out their operations in ethical manner that respect the rights of the people living within their environments. For example, Shell a royal Dutch petroleum operating in Niger Delta has been accused of polluting the environment and displacing the communities living there by drilling oil reserves. This has affected agriculture in the location, causing problem to more than 27 million people living in the region (Global Exchange, 2014). This has led to demonstrations and continued litigations although with no much success.
Coca Cola Company has also received objection in India for its increased drainage of water to communities around the company affecting their agricultural farming that has resulted in many deaths of farmers due to poor crop harvest. This has led to communities through their councils of elders rejecting the company’s plan to expand its boundaries (India Resource Centre, 2013).
Political leaders have played major roles in solving these conflicts through enacting laws that confine corporations to protecting environmental and the communities. Other organizations such as international labour organizations (ILO) have enacted laws and policies that protect employees and define how they should be remunerated. This has led to decreased conflicts and dilemma between communities and employees.
Increased cometition and cost of production have led to many businesses producing substandard goods that are low in quality without the knowledge of consumers. This has been a means of lowering production cost at the expense of consumers’ rights. This has led to formation of international standard organizations, which measure and accredit companies that produce quality goods. In addition, global consumers’ rights movements have also being formed to agitate for quality goods.
However, many companies still produce inferior and goods of poor quality. This is unethical and blame is laid on the top managements of the companies as it the one that is responsible and part of corporate governance as they are aware of the set policies and requirements for quality products and thus it is unethical to release low quality goods to the market.
Therefore, it is ethical for companies to produce high quality goods (Fernando, 2009). This has led to increased dilemma between management and customers who have gone to the extent of mass actions advocating for quality products sand some of the corporations being banned from markets where they supply low quality goods. For example Russia banned Ukraine Roshen Corporation from its market arguing of unsatisfying packages and labels that could not meet Russian standards in July 2003 (Roshen, 2014). Russia also argued that the ingredients that Roshen was using was not meeting the standards for confectionary companies thus its (Roshen) products posed a threat to its (Russia) citizen.
Corporate governance involves directing and controlling all operations of a corporation. Therefore, all unethical issues are as a result of incompetent corporate governance. Most ethical problems associated by poor corporate governance include evasion of taxes, not meeting their corporate social responsibilities such as environmental protection and unfair wages to employees and production of poor quality goods to maximise their profits. The problems have led to a dilemma between the corporations and stakeholders resulting in mass actions and cases that have caused corporations a lot of money. Political leaders through legal forums such as senate have enacted laws that have directed corporation thus bringing solutions to these dilemmas.
Arjoon, S. (2005). Corporate governance: An ethical perspective. Journal Of Business Ethics, 61 (4), pp. 343–352.
Evans, P. (2014, January 31). Corporate tax evasion ‘crackdown’ more bark than bite. CBS.
Fátima, D., & Abreu R. (2013). Tax evasion. Encyclopedia of Corporate Social Responsibility. pp. 2497-2503
Fernando, A. C. (2009). Business ethics: an Indian perspective. Prentice Hall.
Global Exchange (2014). Global exchange top ten corporate criminals list | Global Exchange. [online] Retrieved from: http://www.globalexchange.org/corporateHRviolators#Shell [Accessed: 9 Apr 2014].
India Resource Centre (2013). Village Councils Reject Coca-Cola Plans, Opposition Grows. Indian Resource Centre [online] Retrieved from: http://www.indiaresource.org/news/2013/1008.html [Accessed: 9 Apr 2014].
Mider Z., R. (2014, January 7). Companies fleeing taxes pay CEOs extra as law backfires. Business week
Nakano, C. (2007). The significance and limitations of corporate governance from the perspective of business ethics: towards the creation of an ethical organizational culture. Asian Business & Management, 6 (2), pp. 163–178.
Otusanya, O. J., Lauwo, S., & Ajibolade, S. O. (2013). An investigation of corporate executive fraud by CEOs in the Nigerian banking sector. African Journal of Accounting, Auditing and Finance, 2(1), 65-89.
Pollack, D. (2011). International legal note: salaries of CEOs of international NGOs: Ensuring fair compensation while avoiding populist rage. International Social Work, 54 (4), pp. 599-604.
Roshen (2014). ROSHEN Confectionery Corporation statement about the situation at its enterprises in Russia :: Confectionery Corporation Roshen.
Tully, S. (2012). International corporate legal responsibility. Alphen aan den Rijn: Kluwer Law International.
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