Relationship between ethics and share price

Ethics and finance

relationship between ethics and share price

10 PART 1 Introduction to Managerial Finance Relationship to Accounting Ethics and Share Price An effective ethics program is believed to. A number of the world's largest banks have suffered through major scandals over the past decade. They have paid huge fines and faced other. Ethical behavior and the link to corporate governance: Corporate governance Ethics, stock price maximization, and social welfare: This idea in turn led to the.

To whom is your duty? Your prior employer - the private equity firm? The investors of the fund you are managing? What the individual did…. He approached the compliance department. The compliance department, after conversing with their lawyers, placed Biomed on the firm's restricted list.

relationship between ethics and share price

Take a look at these. You are meeting with a potential client in a foreign land and they have presented you with an expensive gift in accordance with the local custom. Would you refuse the gift thereby offending their sensibilities and risk losing the business? Would you accept the gift and risk the perception that it influenced your decision and behaviour?

You are pulled over for drunken driving on your way home from the company Christmas party. Do you disclose this to your supervisor or wait to see what happens to you in court first?

Your mentor was just fired and he asks you to copy his files to help in his job search. You want to help your mentor, but the files belong to the company. Would you help him or refuse? Ethical dilemmas are grey areas that rarely have a clear right or wrong course of action. Professionals often face ethical dilemmas that have no satisfactory responses. They have to think about the consequences to their clients, to the organization, to themselves, and also perception of others — be it colleagues or the public.

Sometimes, the best option is not perfect but the lesser of the two evils. Regardless of which course of action you decide to take, it does not mean that you are a bad or unethical person.

It just demonstrates the fact that people perceive and react to the same situation or set of circumstances in different ways. Does that justify unethical behaviour?

relationship between ethics and share price

McMillan never tires of pointing to the difference between unethical people and unethical behaviour. An example he often resorts to is the Martha Stewart case. She acted on information provided by her broker to sell her stake in biotech company ImClone without stopping to think about whether it was material and nonpublic.

Later, when she realized that she may have traded on inside information, she attempted to cover it up by lying to federal officials. Though her actions were unethical and she paid for them dearly 5 months prison, 5 months home confinement, 2 years probationhe believes that inherently she is not a bad person. He contrasts her behaviour to a criminal mind like Bernie Madoff who knowingly and ruthlessly stole from his clients. He cites such people as unethical.

relationship between ethics and share price

At the Morningstar conference, he told the audience that under the right conditions, good people can be induced, seduced and initiated to act unethically. Companies exist primarily to make money for their owners and shareholders.

Generating a profit is the main goal. Short-term profit tends to be more important than long-term success. Without confidence in management, stakeholders tend to limit investments, negatively affecting growth.

According to EIRIS, studies show that ethics-related news influences a company's share price for better or worse, revealing effects of between 0.

relationship between ethics and share price

Validating Return on Investment Whether a company has outside investors, relies on venture-capital funding or reinvests its own profits, keeping accurate records is essential to long-term success. Announcing large returns that are the result of fraudulent accounting can lead to issues that ultimately hurt a company's performance. As environmental sustainability has gained attention, government has had to step in and curb corporate negative spillover effects, effects that were not supposed to occur under the banner of stockholder wealth maximization.

The corporate profit versus eco-friendly production story is still unfolding, but it is safe to say that corporations left to their own devices would probably make decisions that run counter to the environmental impact those decisions would render. Ethics would be out of the window. As a result government intervention has stepped in to regulate corporate behavior that is deemed socially detrimental. Simply put, if government forces corporations to internalize their social costs, then these costs must reduce the "bottom line" for the stockholder.

To the extent that firms can pass on these costs to consumers in the form of higher prices, consumers ultimately pay these production-produced social costs. The place of private property rights in ethical behavior: A property right might be thought of as a right, enforced by law, to act based upon private property ownership.

The place of legal property rights presents a broader view of the ethics debate and is centered on society as a whole rather than on individual stockholders or stakeholders. At the root of much of the "environment versus corporate profit" debate is the private ownership or control of the Earth's natural resources e.

Production usually carries with it unintended by-product consequences i. Profits require control of natural resources. This control can be obtained via the law under the moniker of private property rights. In this scope of viewing production, ownership gives control to the owners to use the resources in the most profitable manner. If the by-products of control could be relegated to the immediate producers all would be fine. Unfortunately this is not the case.

Most types of production carry negative spillover costs i. By definition and "externality" is a negative impact of production that affects others not involved in the production process. If you live downstream from a dairy farm you know what I mean! Producers argue that private property ownership gives them the right to produce. However, it does not give them the right to spoil the world of third-parties. A solution is to internalize the negative spillover effects of production by forcing producers to pay the "social costs" of production.

Doing so raises the costs of production. If these costs are passed on the public in the form of higher prices production can supposedly carry on and all is well.

This sounds very similar to the above discussion, Financial decisions: Wrong; unfortunately it's not that simple. It is extremely difficult or impossible to internalize all production spillovers.

Thus, negative externalities result in final prices that are too low, production that is too high, and an existence that is polluted.

How Do Ethics Affect the Financial Results of a Company?

Pure and simple, this is an ethical issue even though it's not related to accounting mis-management or lavish company parties that do not benefit the stockholder. What maximizes stockholder wealth is long-term cash flow and the very financial management decisions that maximize cash flow are the ones that try to avoid politically or otherwise internalizing negative spillover costs.

Society bears the cost. Hence the apparent contradiction often seen in the finance literature and the statement: You make the call. As long a there are negative spillovers to production, private property can never be private—it's all public.

How Do Ethics Affect the Financial Results of a Company? |

In fact if you want to be downright ludicrous about the argument, in today's pressed-for-space world there can be no private property—what I do in my back yard will drift over and affect you in your back yard. Now if you want to lean over the back fence and "drift" me a cold beer I will shut up! While government controls can try to limit this contradiction, to do so runs into tremendous political and economic pressure.

Government usually fails to do the job adequately. Then you are down to a "jobs or the environment" mentality. To argue for jobs is "American"; to argue for the environment is "un-American. Related to the topic of ethics and business decision-making is the agency relationship in finance. In spirit this relationship is discussing the same basic philosophy that connects standards of conduct to corporate behavior.

It is not new to finance; rather it has been adopted by the finance literature from other areas of human interaction primarily politics. As we will see, an "agency perspective" of business ethics lends a bit more focus to the standards of conduct discussed above.

A principal hires or elects an agent. Implicit in the contract is the understanding that the agent will act in the best interest of the principal. As long as this is the case the agency relationship is not being violated. Being the owner of the company the stockholder is the principal; the financial manager hired by the principal assumes the role of an agent.

Separation of ownership and control: In corporate American there is a natural separation between the owners of the firm and those that control the firm on a day-to-day basis. In most large companies the firm's managers generally own only a small percentage of the company's stock.

The stockholders own the firm; the managers control the firm. This separation of ownership and control stems from a natural division of labor which benefits both groups.

relationship between ethics and share price

Managers know how to run the company while stockholders supply the financial capital and collect their return on investment. While stockholders can vote on major company issues, many do not or do not know the specifics to make informed decisions. If managers operate such that major decisions maximize stockholder wealth separation of ownership and control causes no ethical problems. However, this is often not the case particularly when stockholders are indifferent about the everyday affairs of the business.

Separation of ownership and control, while it has obvious benefits, allows the agency problem to occur since it presents a potential conflict of interest. That is the over-riding objective of stock price maximization that can be placed behind any number of conflicting managerial goals. Other forms of conflicts would be managers acting too conservatively about investment spending, increasing their job security by hand-picking the members of the Board of Directors, or adding assets simply to reflect personal hubris rather than to add to stockholder wealth.

Separation of ownership and control and altered incentives: The above list of agency violations represents overt management actions which lead to violations of the agency relationship. However the cause of agency violations can be more subtle and more indirect.