Ethical issues in finance and their impact on shareholder’s value.

Business is a part of society and the motto of every business is to make money. Business ethics is
applied ethics. It’s the application of our understanding of what is good and right
to that assortment of institutions, technologies, transactions, activities and pursuits
which we call business. There are several ways to make profit and organizations strive hard
to achieve it. Butte way selected by business to make money should be ethically right. The
role of business is to guarantee the fluidity of transactions which are essential to economic
activity by ensuring the best possible use of available capital. Based on economic and legal,
one concludes that insider trading is not an appropriate way of making money... The logical
conclusion of these steps is that it is ethically impermissible to engage in insider trading. Ethics
is concerned with human behavior that is acceptable or "right “and that is not acceptable o r
"wrong “based on conventional morality. Ethical dilemmas and ethical violations in finance
can be attributed to an inconsistency in the conceptual framework of modern financial-
economic t h e o r y a n d t h e w i d e s p r e a d u s e o f a p r i n c i p a l - a ge n t m o d e l o f
r e l a t i o n s hi p i n f i n an c i a l transactions. This paper focus on theoretical aspects
related to ethics and describes the implications of insider trading as an unethical activity.

Business Ethics :

Corporate leaders who seek larger profits and higher visibility at the expense of ethical standards
can deal major damage to stockholder equity. A major example of this unethical behavior comes
from Enron. Not only did Enron see rapid revenue growth in the late 1990s, the company won
Fortune magazine’s “America’s Most Innovative Company” award every year from 1996 to
2001. In its pursuit of more profits and more publicity, the company took higher risks and hid its
losses, resulting in one of the biggest corporate collapses in history.

Many companies toe the line between doing profitable business and being ethically responsible.
Sometimes the line gets crossed in effort to maximize profits. Companies that cross too far over
the line can face legal repercussions that can prove costly and damaging to the brand. A recent
example of this is, Recreational Data Services (RDS), a small Alaskan software company won a
$51.3 million settlement over GPS giant, Trimble Navigation. Trimble was forced to pay the
Alaskan company for lost earnings after being found guilty of stealing confidential information
and creating a carbon copy of an RDS project.

A CEO’s job is to maximize revenue streams to satisfy pushy shareholders that demand a high
ROI for their investment. However, they must also weigh the cost between pushing for profits
and being an ethical organization. (Ephermajournal.org)
Business Ethics and Legal Issues:

Some unethical practices, such as fraud, embezzlement and falsifying financial records, not only
place the stockholders at extreme risk, but also will bring the perpetrators under investigation by
law enforcement agencies. While there is a substantial overlap between ethical standards and
legal compliance, not all unethical behavior is illegal. The practice of providing a "golden
parachute" to executives of failing companies gives the parties responsible for a company's
demise a comfortable escape, while the ordinary shareholder watches the values of his shares
dwindle.

Business Ethics and Corporate Culture:

Corporations operate in ways that reflect their company culture. When managers and directors
consistently employ ethical standards in their decision-making processes, they instill confidence in their
shareholders. A 2009 survey conducted by the Ethics Resource Center found that companies with a strong
ethical culture were less likely to be engaged in activities such as falsifying financial records,
environmental violations and insider trading. Companies with a strong focus on ethics stay away from the
troublesome behaviors that endanger other firms, making them a more attractive investment and
increasing share value.

The importance of ethics in the corporate decision making process becomes clearer upon
consideration of the sheer number of stakeholders involved. Corporations, most of them offering
stock in the capital markets, constitute ninety percent of total business revenues (Block & Hirt,
2002). This means that the entire American socioeconomic system is affected by the corporate
decision making process. Stakeholders with an interest in these issues include the CEO and top
management, middle and lower managers, public shareholders, and the employees charged with
producing for the firm. Because employees are such a large segment of the corporate population,
and are directly, often adversely, affected by managers' decisions, the question of corporate
ethics is specifically a human resources (HR) issue.

Fundamentally at stake is the professional viability of ethical principles themselves. By most any
definition, ethics involves consideration of right and wrong in decision making and policy
formulation (Halbert & Ingulli, 2003). It should come as no surprise that the financial advocates
of wealth maximization uphold the principle of utilitarianism-in essence, an ethical version of
maximization, subject to numerical rather than behavioral analysis (Halbert & Ingulli, 2003;
Verschoor, 2002). At the same time, it should be clear that the financial maximization principle
itself offers no real ethical guidance in corporate governance or HR management. Ethical
dilemmas therefore surface in all sorts of business contexts, especially HR contexts. Though
many areas could be discussed, three are to be addressed here: managing diversity, workplace
safety, and the relatively recent phenomenon of whistle blowing.
Characteristics of Unethical Companies:

From my research on this subject I found many several commonalities in companies that are
unethical. Unethical companies are typically focused on short term gains. They have not
developed a sustainable business strategy that allows them to think long term. Additionally,
unethical companies are typically followers. They are lacking in innovation. This often leads
corporate misrepresentation. It can be as simple as a salesman who overstates the benefits about
his company's products, or it can be as severe as blatant false advertising. Unethical companies
are plagued with poor decision making and mismanagement.

Final Thoughts:

There is a trend that kept coming up in the research I did. Companies that are doing unethical
business are typically focused on the short term gains. Companies that have figured out ways to
be both ethical and profitable have mastered a sustainable business model. In the example I gave
from my career, my manager’s ethical perception of the situation was clouded by his desire to
not give out any more credits that would cause him to go further over his credit limit. He was
focused on a short term loss instead of doing what is right by the customer, and ensuring a
profitable long term business relationship. Given the many examples out there it is clear that
companies can be ethical, socially responsible, sustainable, and very profitable all at the same
time.