FNCE201 Corporate Finance- Value Maximization is Ethical

In recent times, ethics become more important and essential aspect of the business, due to unethical behavior of the company affects its reputation, image, wealth and brand value in the market. For example, if an organization behaves unethically through present misstatements and misleading information of their performance that affects on the trust of the people and decline the brand value, goodwill and wealth of the business. Ethical behavior of the organization is related to develop the reputation, image and wealth in the market that enhance performance of the business (Ayuso, Rodríguez, García-Castro and Ariño, 2014). Moreover, through applied code of ethics organization able to retain talented people and improve their performance in the market. In addition to this, ethics provides a lot of competitive scope to the business firms and also offer significant ways to deal with a number of business challenges and issues effectively. For case, ethics could help a company in enhancing its reputation, image and value in the public or in the front of key stakeholders. So, it is essential and valuable for the companies to use various ethical standards, rules and method in order to fulfill key goals and objectives effectively.

In recent times, most of the organizations applied the code of conduct to follow ethics in the workplace that bound or encourage the management to take business decision while consider the interest of all stakeholders to maintain trust of people and engage them with business. Organization followed the business ethics to maintain their reputation or image in the market and engage the people with the business to maintain their performance. Unethical business practice is given the wrong message in the people, so they cannot support organization and cannot prefer to purchase of products or services that decline performance, reputation, value and wealth of the brand (Bridoux and Stoelhorst, 2014). Ethics is used by today’s organizations to enhance their image, reputation and brand value in the market for maximizing the wealth and value of stakeholders.

Ethics is also related to corporate governance and corporate social responsibility.  Corporate management is focused on ethical decision making through consider the interest of all stakeholders, parties and people while taking business decision to fulfill their obligation for the society, people, planet and environment. Organization applied corporate governance and corporate social responsibilities strategies to ensure that their operations, functions and business activities have not violate laws, ethics and human right as well as prevent the interest of all stakeholders (Deng, Kang and Low, 2013). In addition to this, ethics is also provides various methods, standards, rules, norms, and regulations to deal with the several business issues in an effective and proper manner. On the other hand, it is also important to know that, ethics promote and encourage people of a company to conduct their practices and activities in a more dynamic and ethical manner. Simply, by using ethical rules and standards, business firms are able to fulfill corporate goals and improve organizational efficiency in an effective and proper manner. Organization is responsible for society and environment, due to they perform their function or business activities in the society; therefore it is corporate social responsibility of the business to reduce carbon emission, reduce waste, use renewable or natural source of energy, and reduce use of natural resources to ensure sustainability of the people, and planet. Employees or management have fulfilled their social and ethical obligations through considered the interest of all stakeholders while perform their job or take any action. In addition, organizations have fulfill their social and ethical obligations through do not harm the people, society, environment and planet with their operations, functions and business activities (Vranceanu, 2014).

In 2002, Global Crossing Limited Accounting Scandal is the example of value maximization may conflict with ethics. Improper audit financial statements and lacking of internal control was the reason of failure of Global Crossing Limited. In the US history, Global Crossing bankruptcy was the fourth largest and it did not follow several accounting standards and violated numerous accounting laws. In 2001, Global Crossing was rapidly expand its telecommunication services all over the world with represent the financial misstatement to present high value and wealth of the company that is unethical aspect of the business. Moreover, Global Crossing founder Gary Winnick sold $123.5 million worth of shares of the company before the company's eventual bankruptcy that is example of insider trading that is also unethical aspects of the business (Sulub, 2014). Moreover, it is also analyzed that, shortly before filing for bankruptcy, Global Crossing is also agreed to forgive two-thirds of a $15 million loan to John Legere, current chief executive that is also related to unethical business activity. This example is indicated the unethical aspects of the business utilized by Global Crossing to maximize value and wealth for providing benefits of owner, but bankruptcy effect on investors, chief executive, markets, and employees.

Agency Theory: The agency theory evaluates the duties and conflicts that happen between parties those have an agency relationship. Agency theory is the major conflict identify related to value maximization and the case study. Agency relationship happens while one party has not performed a task that affects agency relationship. According to the agency theory, management can be seen as the agents of shareholders, managers as the agents of management, employees as the agents of managers, shareholders as the agents of creditors, store manager as the agents of distributor or warehouse manager, etc.( Hannafey and Vitulano, 2013). Along with this, it is also accessed and analyzed that, the Agency theory is used to explain the actions of owner, vice president, chief executive, employees, auditor and other interest group in the bankruptcy of Global Crossing debate.

On the basis of the agency theory, Global Crossing owner or founder Gary Winnick is the agents of shareholders. In this case, Winnick is also responsible for this issues or bankruptcy situation of the company’s due to it has not taken action and permitted to present the financial misstatements. Winnick has not fulfilled their obligations and duties for the shareholders and has not considered the interest of shareholder and consider self interest as earned from sold the company share before the company's eventual bankruptcy that is unethical behaviour of his (Huy, 2015). In addition, the financial reporting misstatements to maintain the wealth and value of the Global Crossing are the type of unethical value maximization due to Winnick taken personal benefits through sold shares before bankruptcy.

In addition, according to the agency theory, vice presidents, financial manager, accountant, auditor are the agents of owner; therefore they also involved in the financial reporting misstatements to provide benefits of few stakeholders rather than considered interest of all stakeholders. This situation indicated the value maximization through financial reporting misstatements is the unethical aspects of the business (Bridoux and Stoelhorst, 2014).

Stakeholder theory: Firm operates with multiple stakeholders such as suppliers, owners or management, business partners, shareholders or investors, employees, customers, distributors, government, competitors, etc. Value maximization achieved through balancing multiple interests of the all stakeholders is ethical; while value maximization conflicts in consider interest of few stakeholders is unethical aspect of the business. In the past times, the company has earned the largest possible profit for its owners and shareholders without consider other stakeholders interest and business ethics (Harrison and van der Laan Smith, 2015). In the recent times, the stakeholder theory is explained that profit earning and value or wealth maximization is the main aim of business, but it is necessary for firm to consider the business ethics and prevent the interest of all stakeholders. In addition to this, it is found that, Stakeholder theory is bounded the companies to protect the interest of shareholders or people without losing profit as ensure that business activities or function cannot harm or effect the interest of any stakeholder.

On the basis of the shareholder theory, in the case of Global Crossing, owner, vice president, accountant, finance manager and auditor have not considered the interest of the all stakeholders. The main conflicts of Global Crossing is not balancing multiple interest of all stakeholders and considered the interest of some stakeholders such as owner to maximize value through prepared and presented misstatement that is unethical way of value maximization. Fraud in accounting through not followed the accounting laws or standards as well as not considered mutual interest of stakeholders by owner, vice president, accountant, finance manager and auditor of Global Crossing is example of unethical business practice applied (Pouryousefi and Frooman, 2017).

In October 2001, Enron Corporation eventually led to the bankruptcy due to the biggest audit failure. Enron CEO, Jeffrey Skilling had hiding the financial losses of the trading business and other operations in the financial statements of the company through presented misstatements to maintain current market value and wealth. It is also example of value maximization through presented misstatement that is unethical due to CEO has not considered interest of all stakeholders (Hosseini and Mahesh, 2016). Another example of WorldCom has disclosed a further $3.3bn in accounting errors that lead to filing for bankruptcy protection in 2002. Apart from this, it is also important to know that, it is the largest accounting fraud or scandal in American history related to financial misstatements reporting. Enron, WorldCom and Global Crossing case indicated these companies have not followed stakeholder theory as it have not considered all stakeholders’ interests and only consider owner or partners’ interest while taking business decision (Dodo, 2017).

Sarbones–Oxlay Act (2002): Large public corporations such as Global Crossing, Enron, and WorldCom, were involved in the accounting and auditing scandals during the 2000-2002; therefore the US Congress passed the Sarbanes-Oxley Act of 2002 to ensure accuracy of financial statements and information. The SOX Act has charged criminal penalties of firms and management or responsible person those have violated GAAP (Generally Accepted Accounting Principles) by provide misstatements those mislead investors and stakeholders regarding with the company financial position. This act features proposed objective is to maintain public, shareholders and investor confidence in the fairness of financial reporting and corporate ethics in the capital markets (Kohn, Kohn and Colapinto, 2004). On the other hand, it is also analyzed that, the Federal government is needed to establish this act to prevent or protect the interest of stakeholders and prevent the money of investors or shareholders. The (SOX) is protecting and rewarding whistleblowers that contributed to maintain ethical business environment as it forced top management and executives to be transparent and considered the interest of all stakeholders while taking business decision and execute strategy.

Dodd-frank Act (GFC): In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act are passed by the Obama administration as a massive piece of financial reform legislation. Moreover, the global financial crisis (GFC) indicates the US financial system was unregulated and under regulated, so that Dodd-frank Act passed to reform of the financial system or market (Ciro, 2016). This act features proposed objective is to promote financial stability and provide adequate protection to customers, investors and shareholders in financial markets. In addition to this, this act is also assists the company to maintain business accountability, creditability, and marketability in an effective and more significant manner. With the help of this business firms are able to attain their key and core goals and objective in more dynamic and effective manner.  

Evaluate effectiveness of laws: The GFC (2007-08) is created the questions on the effectiveness of the SOX in terms of citing by corporations. The financial crisis indicated the SOX failures to prevent the investors, shareholders and customers in the capital or financial markets. In 2011, PCAOB Chairman, James Doty submitted that PCAOB inspectors had examined around 2,800 largest audit firms engage and it has disclosed and analysed many cases involving that they found out to be audit failures. This indicates the less effectiveness of the SOX requirements that required new act introduction (Verschoor, 2012). Now, the Dodd-Frank is the most effective then SOX to maintain business ethics in the corporate world. In the same way, this helps the business firms to work in a more ethical and effective environment and gain competitive advantages over others.

Conclusion

On the basis of the above discussion, it can be concluded that SOX law is not effective to reduce scandals related to accounting and auditing fraud that needed requirement of new law. The Dodd-Frank is played major role in reform of financial system that decrease the corporate financial and auditing scandals and more effectively prevent the investors, shareholders and customers. Moreover, after five years later of the Dodd-Frank act, the US financial market is more stable. In addition to this, it can also be concluded that, business firms must adopt various standards, legal rules, ethical guidelines, and business codes of conduct in order to fulfill long term goals in an effective and proper manner, Finally, it can also be concluded that, different acts or laws must be used to enhance the level of market share, profit and revenue in more specific manner.

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