use the attached 3 articles in your discussions for the two assignments. 500 words for each assignment.Assignment1: Corporate Governance and EthicsConsider the roles of government, shareholders, the board of directors, and management in your answers to the following questions:What is the primary function and ethical responsibility of each of the above-mentioned roles in corporate governance?What is the primary function and ethical responsibility of each of the above-mentioned roles toward society?To what extent are your answers to each of these questions congruent and aligned? In other words, to what extent are your answers to these consistent and reasonable, and in what ways are these roles and ethical responsibilities tied to each other?Assignment 2: Social Shareholder EngagementFor this forum, respond to the following questions. Please reference resources with your posting.What is Social Shareholder Engagement?Which organizations use Social Shareholder Engagement?Is there a downside to practicing Social Shareholder Engagement?What organizations should integrate this practice into business operations?
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New Directions in
Corporate Governance and Finance:
Implications for Business Ethics Research
Lori Verstegen Ryan, Ann K. Buchholtz, and Robert W. Kolb
ABSTRACT: Corporate governance and finance are dynamic academic fields that offer
myriad opportunities for business ethics analysis. Within the corporate governance triad in
recent years, shareholders have increased their power over boards of directors and executives
through both regulation and movements to change corporate by-laws. The impact of board
characteristics on firm performance has proven elusive, leading to questions conceming
board processes and individual director beliefs and behaviors. At the same time, CEOs have
lost considerable power, leaving many struggling to regain their control and maintain their
compensation levels, while others adopt a stewardship approach to their posts. In the field
of finance, the recent financial debacle has led to a reexamination of financial regulation and
of the fundamental nature and purpose of the industry. All of these issues provide business
ethicists fodder for investigation and analysis.
O ACADEMIC DISCIPLINES have been more affected by the “Decade from
Hell” (Serwer, 2009) than those of corporate govemance and finance. From the
perspective of these fields, the decade began with the dot-com “bust,” then moved
through the Enron-era scandals and their ensuing legislation and listing mies, to
the drawn-out implementation of compliance with those mies, and then, ultimately,
to the most recent debacle in the govemance of the U.S. financial and automotive
industries. The compilation of these well publicized episodes resulted in a radical
shift both in the public’s awareness of these academic disciplines and in corporate
behavior. Our goal in this paper is to illuminate some of these recent events and
changes in corporate govemance and finance practices that offer research opportunities for business ethics scholars, as well as to assess long-standing issues still
in need of ethical investigation. We will address the fields of corporate govemance
and finance in tum.
Corporate govemance comprises the roles, responsibilities, and balance of power
among executives, directors, and shareholders. After abrief description of the varied
roots of the field, we assess the changing roles and responsibilities of these three
groups and conclude with a brief discussion of their dynamic balance of power.
The academic discipline of corporate govemance draws on three underlying
disciplines: law, management, and finance. The legal disciplineboth corporate
law and contract lawis central to the field. Corporate law has set the parameters
©2010 Business Ethics Quarterly 20:4 (October 2010); ISSN 1052-150X
BUSINESS ETHICS QUARTERLY
of corporate governance since the inception of the corporate form (Macey, 2008).
Contract law, on the other hand, involves the enforcement of corporate contracts
between governance constituencies, often working within the framework of a bargain
that would have been reached between shareholders and executives of a firm in a
hypothetical negotiation (dubbed “non-contractual law” by one skeptical leading
researcher [Macey, 2008: 29]).
Many law review articles in the field make careful legal arguments based on
explicit ethical premises, offering a rich resource for the business-ethics researcher
investigating corporate governance. Research ranges from insightful analyses of
more traditional legal topics, including trends in securities regulation (Gerding,
2006) and principle-based vs. rule-based corporate governance law (Anand, 2006),
to examinations of the roles of the media (Borden, 2007) and of hedge funds (Briggs,
2007; Kahan & Rock, 2007) in corporate governance.
The scholarly management literature addresses issues related to all three constituent groups, both theoretically, such as recent articles related to director interlocks
(Shropshire, 2010) and management’s treatment of institutional investors (Westphal
& Bednar, 2008), and empirically, such as studies of the relationship between firm
environmental performance and executive compensation (Berrone & Gomez-Mejia,
2009) and of the impact of CEOs’ advice networks on firm performance (McDonald, Khanna & Westphal, 2008). This literature is also fundamental to the corporate
Finally, thefinancediscipline, which will be discussed in its own right below, offers
a plethora of primarily empirical resources for the corporate governance researcher.
Topics as varied as the impact of governance mechanisms and investor activism on
firm performance (Brav, Jiang, Partnoy & Thomas, 2008; Cremers & Nair, 2005),
the ethics surrounding the subprime debacle (Jennings, 2008), investor trust in the
market (Guiso, Sapienza & Zingales, 2008), and the effectiveness of “busy” directors
(Fich & Shivdasani, 2006) are all within the purview of finance researchers.
Corporate governance scholars combine, contrast, and test arguments and findings
from these three literatures to focus on the behaviors and nuances of the corporate
As noted above, researchers from all three fields address such ethical issues as
trust, subprime ethics, principles vs. rules, and conflicts of interest, all topics of
interest to business ethics scholars. While traditional questions of the separation
of ownership and control and managerialism remain, the primary entry into these
conversations lies in the dynamism of the field: corporate governance practice is in
constant flux, offering researchers ongoing opportunities to examine and comment
on these new and competing practices. In order to facilitate business ethics scholars’
potential exploration of the field, we now discuss the recent events and research in
corporate governance, examining shareholders, directors, and executives in turn.
Through the early 2000s, institutional investors have waged a multi-stage campaign
to gain greater control over excessive CEO compensation, which many consider to
NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE
be a clear indicator of poor oversight by boards of directors. The campaign began
with the push for majority voting for directors, followed by the say-on-pay movement, and most recently by the demand for the right to nominate directors. All of
these battles offer fodder for ethical investigation.
The first initiative was to move corporate voting from a pluralist model to a majority model (Lesser, Hoffman & Bromfield, 2006), Through most of the twentieth
century, U,S, shareholders receivedand seldom returnedproxy ballots that
allowed them to vote “yes” or “withhold” for director candidates. Thus, any director who ran uncontested (which was most) and who received any number of “yes”
votes gained or retained the board seat, even if the vast majority of proxies were
Institutional investors found this system untenable, and in 2004 began campaigning with corporations to change their by-laws to allow for “majority voting” (Lesser
et al,, 2006), While it comes in several forms, majority voting generally consists
of allowing shareholders “yes” or “no” votes, and requires an aspiring director to
eam a majority of “yes” votes of the ballots cast in order to join the board. Many
corporations converted their voting systems voluntarily as they recognized this
impending sea change. Others resisted until investors filed proposals for a formal
shareholder vote, many of which passed. However, such proposals are non-binding
“advisory” votes that simply communicate to management that investors would
“prefer” an amendment to corporate by-laws. In this case, many firms whose investors recommended the by-law change complied. More than 66 percent of S&P 500
firms now have majority-voting mies for uncontested elections (CalPERS, 2009),
an impressively smooth victory for shareholders.
Business ethics researchers could examine both the historical roots and current
demise of the pluralist voting system in the United States, along with the advisability
of and ethical problems inherent in majority voting. Boards who receive these advisory votes have a choice whether or not to remove a given director, and must decide
whether fiduciary duty leads them to cooperate with investors’ stated desires or to do
what they take to be in shareholders’ long-term interests. Shareholders’ reactions to
that decisionincluding potentially filing a lawsuitalso deserve examination.
Investors next sought to add “say-on-pay” amendments to the by-laws of their
portfolio firms (Blandeburgo, 2009), which would allow them to voice non-binding
votes of support or opposition to a CEO’s compensation package. While some see
executive compensation as well within the proper purview of boards of directors,
others argue that boards have abused that discretion and have been co-opted by
management. Some firms, such as first-mover Afiac (Jones, 2007) and Microsoft
(Investment Weekly News, 2009), adopted the measure voluntarily, while others,
such as Cisco (Modine, 2009), faced shareholder proposals that yielded positive
votes. In the midst of the “say on pay” movement, the financial crisis and ensuing
bailouts led the federal govemment to become involved in executive pay limits and
now legislation on the subject. The House of Representatives passed the Wall Street
Reform and Consumer Protection Act in December 2009, which includes a provision
for shareholders to have an advisory vote on executive compensation (Bay, 2009),
BUSINESS ETHICS QUARTERLY
The Senate financial reform bill ultimately passed in May 2010, and continues to
undergo reconciliation in Congress (Dennis, 2010).
Business ethics researchers examining this subject could consider the proper role
of investors in setting CEO pay, which has long fallen under the business judgment
mle, protecting firms from investor interference in day-to-day operations. If boards
have, indeed, been co-opted and are paying CEOs unnecessarily exorbitant salaries,
shareholder involvement may be appropriate. However, the question remains whether
this involvement should be legislated and whether an existing, more macro-level
tool, such as board elections, should be used to solve the problem.
The latest shareholder empowerment action to gain ground is “proxy access,”
which would give investors the right to place competing nominees for director seats
on companies’ official proxies. While this issue has been under discussion since
the early 2000s (Pozen, 2003), it achieved a major milestone when, as of August
1, 2009, Delaware corporations were freed to adopt by-laws that allow shareholder
nomination of directors (McGregor, 2009). Proxy access that would enable onepercent owners to nominate directors was also proposed as an SEC mling as of
July 2009, with the public comment period extended into 2010 (Nathan, Brauer &
Papadima, 2010). Many shareholders believe that the ability to propose their own
slate of directors could reduce the entrenchment of management-co-opted directors. Opponents argue that investors are less capable than nominating committees at
recognizing and fulfilling boards’ personnel needs and that frequent tumover would
reduce a board’s teamwork and its focus on long-term initiatives. Proxy access
has been controversial due to investors’ implied presumption that their knowledge
of which directors are optimal for a given board tmmps current board members’
knowledge and willingness to follow their fiduciary duties. The intentions of both
sides deserve business ethics researchers’ attention.
Aside from this campaign to gain more power over boards, investors have also
focused significant effort on abolishing CEO duality in the U.S., which consists of
CEOs also serving as Chairmen of the Board of their corporations. While empirical evidence conceming the impact of CEO duality on firm performance continues
to be inconclusive (Finegold, Benson & Hecht, 2007), investors have voiced their
preference for the separation model prevalent in other corporate govemance systems.
Many U.S. corporations have responded to this demand not by separating the roles,
but by adding a new role of lead or presiding independent director to take charge
of such duties as the independent directors’ annual executive session, required of
NYSE-listed firms (Monks & Minow, 2008). The benefits of CEO duality remain
unclear, as does the rationale behind U.S. firms’ unwillingness to follow the remainder of the world’s corporate govemance systems in separating the two roles
in non-family controlled firms. Given the lack of empirical support for duality’s
impact on firm performance, investors’ presumptions about the ethical dangers of
CEO duality also deserve examination.
These efforts by traditional institutional investors have been augmented over the
last decade by those of a new activist partner, the hedge fund and private equity
industries. These funds are significantly less regulated than traditional institutional
investors, and hedge funds, in particular, are able to engage in a variety of risky
NEW DIRECTIONS IN CORPORATE GOVERNANCE AND FINANCE
investment strategies that gamer exorbitant pay for managing partners (Schneider
& Ryan, forthcoming). Their activism has resulted in radical change in corporate
board rooms in recent years, and has eamed on average a 4-7 percent abnormal
retum on investment for the twenty days surrounding the filing of their 13(d) announcement of intent to intervene (Brav et al., 2008). The high level of risk and lack
of transparency surrounding these funds have led to a public outcry for increased
regulation that concluded in heightened SEC restrictions in recent years, only to be
overtumed by the federal courts due to the funds’ special characteristics (Schneider
& Ryan, forthcoming).
Donaldson (2008) initiated the business-ethics analysis of hedge funds by examining the ethics of increased regulation. Despite regulation advocates’ complaints of
unfair tax benefits, investor “duping,” and “alleged social harm,” Donaldson opposes
greater regulation, concluding that it would reduce fund managers’ entrepreneurial
motivation and be nearly impossible to enforce. Other scholars agree, arguing that
hedge fund and private equity activism are a last bastion of corporate governance
monitoring and control (Macey, 2008). While free-rider problems and heavy regulation hamstring individual and institutional investors, private equity and hedge fund
investors are free to take major positions in underperforming firms and work with
management to improve their corporate govemance and strategic practices.
Private equity firms that engage in highly leveraged buyouts have also come under
recent scmtiny in the business ethics literature. Concemed that these firms focus
excessively on shareholder welfare at the expense of other constituencies, Nielsen
(2008) offers both ways to stop these buyouts and other mechanisms for hampering
them. Clearly, the issues of risk, transparency, faimess, and regulation associated
with hedge funds and private equity firms offer rich and timely opportunities for
further ethical analysis.
Most recently, an even newer form of shareholder has entered the scene in the U.S.
The relationship between govemment and business has shifted, as the federal govemment has become a major shareholder in some firms and has intensified regulatory
pressure on others. This new relationship creates a plethora of potential conflicts
of interest for federal officials, as they simultaneously serve as regulator, pension
guarantor, tax beneficiary, customer, owner, and lender (King, Neil, McCracken &
Spector, 2009). Businesses’ side of the equation also presents an opportunity for
ethical analysis, as General Motors, for example, used millions in TARP monies to
fund both its sixty-day money-back guarantees and its federal lobbying efforts for
concessions in non-TARP arenas (Camey, 2009). Of course, access to such a deep well
of funds is not available to Ford as an independent competitor (Anonymous, 2009).
Many TARP firms have also mshed to repay the loans, perhaps primarily driven by
the govemment’s caps on executive pay, which severely limit the pool of candidates
qualified and willing to lead the troubled companies out of distress (Rothacker, 2009).
Both the govemment’s interventions and the companies’ attitudes toward TARP
expenditures and repayment offer fmitful topics for ethical investigation.
Shareholder power has escalated rapidly over the last two decades with the consolidation of equity holdings into the hands of institutional investors, and 2000s laws
and regulations have raised shareholder control to unprecedented heights. This level
BUSINESS ETHICS QUARTERLY
of power in relation to executives and boards of directors, and investors’ proper use
of it, offers a wide variety of avenues for business ethics researchers.
Boards of Directors
For years, corporate govemance research has been dominated by concems with board
stmcture, composition, and vigilance (Finkelstein, Hambrick & Cannella, 2009).
As a result, corporate govemance scholars have tended to focus on such variables
as CEO duality, percentage of outsiders on the board, percentage of stock ownership by directors and CEOs, and board size. These “usual suspects” (Finkelstein &
Mooney, 2003: 101) have not been shown to improve firm performance (Dalton,
Daily, Certo & Roengpitya, 2003; Dalton, Daily, Ellstrand & Johnson, 1998), yet
they appear on “best practices” checklists, and many boards have enacted these
recommended reforms in response to pressure from institutional investors and public
opinion. In 2000, with the stmctural reforms mostly in place. Business Week suggested that, “the govemance battle has largely been won at big companies” (Byme,
2000: 142). One year later the Enron and WorldCom debacles unfolded, followed
by a wave of restatements that demonstrated that boards were not running as tight
a ship as their performance on traditional govemance indicators suggested. Not
only had the govemance items on those checklists never received robust empirical
support (Finegold et al., 2007), but they then also failed to achieve desired results
in practice (Finkelstein & Mooney, 2003). These occurrences brought home the
point that research into boards of directors needs new theoretical perspectives and
new ways of examining what boards actually do.
This failure of stmctural board research underscores an opportunity for business
ethics scholars to add new value to corporate govemance discussions by diving
more deeply into board processes (Ravasi & Zattoni, 2006). Board stmcture and
composition variables have been widely exploited in corporate govemance studies, because these data can be obtained relatively easily from publicly available
corporate proxies. For corporate govemance research to expand in new directions,
however, it will be important for govemance scholars to adopt new approaches
both conceptually and methodologically (Daily, Dalton & Cannella, 2003; Forbes
& Milliken, 1999). This opportunity presents a challenge for scholarship on boards
of directors, because boards are understandably resistant to being observed as they
go about their work, concemed that confidential information may be leaked and
that being observed might affect board processes (Leblanc & Schwartz, 2007).
Surmounting that obstacle will require innovative and even bold research designs,
while deriving necessary insights from such studies will require a broader range of
theoretical perspectives (Daily et al., 2003; Huse & Zattoni, 2008; van Ees, Gabrielsson & Huse, 2009). Researchers should also look beyond the Fortune 500 firms
that have populated the majority of corporate govemance samples. The boards of
smaller firms (Huse & Zattoni, 2008), younger firms (Pollock, Chen, Jackson &
Hambrick, 2010), family firms (Le Breton-Miller & Miller, 2009), and private fir …
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