Corporate Social Responsibility (Fach) / Chapter 6: Shareholders and Business Ethics (Lektion)

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• Corporate Goveranance - Shareholders as. Stakeholders Locus of Control owner no longer controls his founded company Control in hand of directors, the board or another committee Shareholders have at best indirect and impersonal control over their property Fragemented ownership many shareholders and each could hardly consider themselves to be the owner Divided functions and interests different interests of shareholder and managers shareholder has no real task
• Shareholders rights right to sell the stock right to vote in the general meeting right to certain information  right to sue the managers for (alleged) misconduct certain residual rights in case of the corporation`s liquidation (no profit/dividend included)  → limited rights
• Duties of Managers Duty to act for the benefit of the company (short and long term survival) Duty of care and skill (achieve the most professional/effective way of running the company) Duty of diligence (expected level of active engagement in companies affairs)
• Corporate Governance describes the process by which shareholders seek to ensure that their corporation is run according to their intentions includes processes of goal definition, supervision, control and sanctioning Main actors: Shareholders and Management (narrow sense) Broader sense: includes all actors who contribute to the achievement of stakeholder goals inside and outside of the corporation
• Agency Theory/relations Conflict between shareholders and managers managers want high salaries and might pursue power principal has only a limited knowledge and insight informational aysmmetry Agency costs costs of structuring, monitoring, and bonding a set of contracts among agents with conflicting interests Bonding performance dependent executive pay stock options, managerial ownership (managers do not pay for stocks, means no loss if stock prices are going down, but got "unlimited" gain) contingency fees Monitoring board monitoring (CEO-Board, CEO can influence the board which may lead to information asymmetry) block holding (shareholder monitoring) shareholder activism market for corporate control (takeovers), managers want to avoid small share prices which are an incentive for takeovers leverage ( extend to which the firm uses loans) legal protection
• Major approaches to corporate governance Anglo-American Model market capitalism (high) stock market as the central element of the governance system dispersed ownership structure (zerstreut) and frequent change Goals of ownership: shareholder value and short term profits; strong control of executives (key stakeholder: shareholder) Role of Banks: marginal role and short term financing Growing percentage of performance related elements (stock options, shares) Continental European Model Network Capitalism, (low market concentration)  small number of large inverstors concentrated ownership structure, rare change Goals of ownership: sales, market share, headcount, long-term ownership Role of Banks: Crucial role as creditor, owner and major representation Salary based compensation Key stakeholders: Owners and employees
• Ethical Issues in corporate Governance - Executive accountability and control Executive accountability and control Executive directors and non-executive directors Anglo-American Model: Single tier board Continental Eurpoa: Two tier board Upper Tier: supervisory Board (includes stakeholders, oversees the lower tier) Non-executive directors should be largely drawn from outside no personal financial interests other than the interests of shareholder appointed for a limited time  should be competent to judge the business of the company sufficient rescources to get information  independent appointments
• Ethical Issues in corporate Governance - Executive remuneration pay executives in shares, stocks that affect their wealth Issue of designing appropiate performance-related pay (with shares to align shareholders and managers interest) Globalization leads to rises in pay  limited influence of the board and often fails to reflect shareholder value
• Ethical Issues in corporate Governance - Ethical Aspects of mergers and aquisitions executive prestige vs. share price interests of shareholders Executives have two options (hostile take-over) Golden parachutes: large sum of money that executives receive if they agree to the merger (recommending the merger to the executive board) Greenmail: Inform the potential hostile party and ask to buy back the shares for the company at a higher price than the market price (ethical problem), primarily used beacuse the CEO does not want to lose his position
• Ethical Issues in corporate Governance - Role of financial markets and insider trading Speculative "faith stocks" not solidly calculated profit expectations overblown speculations Insider Trading in the long run it can undermine inverstors trust in the market Fairness: unfair advantage of one party Missappropriation of property: Property of the firm and not of inders Harm to inverstors and the market: threatening of confidence in the market and making the market more riskier Undermining of fiduciary relationship: Insider trading is fuelled by self-interest on the part of insiders
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• Ethical Issues in corporate Governance - Role of accountants provide a true and fair view of the company`s financial situation Main problematic aspects of the auditers job: Auditors make a judgement whether the accounts of the corporation provide a realisitc picture of the real situation Auditing firm gets a very close insight into the corporation. They use this to develop an extra source of income by providing management consultancy and other business services Long term relationships can threaten independence Size of the accounting firm may lead to the lose of sense of responsibility for the task Increasing competition between auditing firms may lead to cuts of costs and less diligence
• Ethical Issues in corporate Governance - Reforming Governance shortcomings of the present system of governance in many countries Implementation of corporate governance codes to prescribe the best practice standards for corporations  Codes of corporate governance are: size and structure of the board independence of supervisory or non-executive directors frequency of board meetings rights and influences of employees in corp. governance disclosure of executive remuneration (Bezahlung) general meeting participation role of other supervising and auditing bodies
• Shareholders and Globalization shareholders become directly involved abroad by buying shares of companies in other countries shareholders might be involved indirectly by buying shares in a domestic (or international) company that operates globally by selling goods abd services worldwide (shareholders become indirect players by investing in MNCs and direct players in international capital markets)
• Shareholders and globalization - Global financial markets definition are the total of all physical and virtual places where financial titles in the broadest sense are traded worldwide technological advances political developments Ethical Issues: Governance and control (lost of control of national governments) Speculation (encourage of speculation, damages of governments) Unfair competition with developing countries (speculative moves with these countries, withdraw of money when boom ends) Space for illegal transactions (not regulated by national governments)
• Shareholders and Globalization - Tobin Tax Tax for transactions in foreign currency to harm speculations Main Problems: Global enforcement: Has to be enforced on a global level. Lack of political goverance structures. Speculations take place only in a few countries Benefit: Difficult to differentiate between speculative and non-speculative transactions, Tax would increase the costs for foreign capital
• Shareholders and Globalization - Combating global terrorism and money laundering Deregulated social spaces are an invitation to all sorts of illegal financial activities prevent money Laundering (IMF) know your customer prevent criminals from getting control of key positions in banks identifying and reporting unusual transactions training and other iniatives of raise gerneral awareness
• Shareholders as Citizens of the Corporation - Shareholder democracy describes a community of people that own the company and are therefore able to incluence it in some way Scope of activity what does the company need to report to the shareholders? Adequate information shareholders have to be provided with adequate information on issues of ethical performance social accounting Mechanism for change Shareholder activism and ehtical investment
• Shareholding for sustainability Dow Jones Sustainability Group Index rate of corporations according their performance towards the broader goal of sustainability leading index in this respect Environmental sustainability Economic sustainability Social sustainability Kritik: data on which company is accepted to the index comes from the company itself focuses mainly on management processes rather than on its products or actual sustainability of the company
• Capitalism Private ownership of assets (in general) Property rights regulate relationships between people in respect to certain combination of rights private ownership of the means of production private rather than state owned enterprise system the ownership of firms by the financiers of that firm providers of equity
• Ownership property rights: codified in laws that enable and contrain ownership combinition of rights reduces transaction costs residual rights of control right to use an asset in any way that is not mandated/forbidden by law or sold away contractually residual return rights the right to the returns to an asset after: having paid all contractual obligations and payment of other obligations under the law (taxes ...)
• Publicly listed firm (PLF) Delegated management: ownership changes, shareholders change -> need for specialized management Limited liability: limited risk for amount of investment, important to attract shareholders (reduces risk through risk differentiating, all about risk bearing) Investor Ownership Legal personality (Ability to sign contracts and own assets) Transferable shares: Transfer shares if risk gets higher
• Governance Challenge of PLFs Principal Agent Problem - How to protext shareholders against value-destroying managers?
• Private Ownership leads to Optimal alignment of incentives Solves the tragedy of the commons Efficient allocation of assets Complexity reduction in transactions
• The social responsibility of PLFs: The classical economic view Purpose of the firm: Maximizing shareholder valueMost vulnerable stakeholder: The shareholderCorporate governance task: Aligning manager’s interest with those of the shareholder Two basic governance ‘remedies: Bonding Contingency fees Performance dependent executive pay Stock options, managerial ownership Monitoring Board monitoring Block holding Shareholder activism Market for corporate control (takeovers) Leverage Legal protection Problems: Imperfect information & knowledge Also non-shareholding stakeholders bear risk
• The social responsibility of PLFs: The stakeholder view Purpose of the firm: Maximizing value for all stakeholdersMost vulnerable stakeholder: All stakeholders, not just the shareholderCorporate governance task: Attending the needs and interests of all stakeholders in decision-making. Problem/Critics “Multiple objectives is no objective”. Stakeholder theory contains no conceptual specification of how to make trade-offs among stakeholder interests.

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