Ethical business practices are standards of behavior related to moral judgments that apply to individuals working in trade-related positions (Gitman, 2012). Shareholders and stakeholders are two different groups of investors who have a vested interest in a company’s success. Shareholders are investors who are not employed by the company but who have bought shares (stock) in a company in the hope that their investment will grow. Stakeholders are customers, employees, owners, creditors, suppliers who actually perform the company’s work or have a direct economic impact on the company’s success (Gitman, 2012).
Ethics plays a huge role in the success or failure of a business. For example, if a company intentionally reports profits or losses in its financial statements to give its shareholders a more positive view than the actual financial data, shareholders lose confidence in the company and sell their shares. Also, when stakeholders are treated unfavorably or not paid on time, revenue and inability to secure credit also affect the company’s bottom line. Some argue that executives only have a duty to please their shareholders because this group provides much of the money needed to operate (Gitman, 2012). However, if stakeholders are dissatisfied with the operation, an important cog is missing and ultimately leads to the failure of the company.
An example of misrepresentation to investors is the bank failures and housing market crash of 2008. Mortgage securities are actual mortgages sold by mortgage brokers and offered for investment in securities by financial institutions (Brigham & Ehrhardt, 2011). Mortgage securities contributed to the Great Depression by being presented as having less risk than the mortgage contained in the security actually was. (Brigham & Ehrhardt, 2011). Investors bought these securities expecting a healthy return on their investment, but instead bought mortgages that carried a risk of default. These mortgages were risky because mortgage borrowers could not afford the loan due to variable interest rates or because the mortgage lenders used fraudulent lending practices that misrepresented the customer. As demand for housing began to fall due to high levels of mortgage defaults and unemployment, house prices plummeted and the rate of short sales and foreclosures forced several banks to close. Lending slowed dramatically, affecting US companies, individuals and other countries around the world.
Executives have a primary responsibility to their shareholders and stakeholders to ensure maximum profit and growth within a company. It is the duty of a company’s officers, managers and officers to maintain a high ethical standard so that both shareholders and stakeholders have confidence in the company and want to remain investors and committed to its goals. Both of these groups have a strong impact on a company’s stock’s earnings per share, and both are important to a company’s growth and maximum profits.
Brigham E, Ehrhardt M (2011). Financial Management: Theory and Practice
(13th ed.) Ohio: Cengage Learning. ISBN-13: 978-1-133-66500-7
Gitman, Lawrence J. & Zutter, Chad J. (2012). Principles of Financial Management. 13.
edition. apprentice hall.
Thanks to Michele Mackin | #Business #ethics #moral #responsibility