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Shareholder and Stakeholder Theory Paper

Shareholder and Stakeholder Theory Paper

Twelfth Edition

Business Ethics

O.C. Ferrell John Fraedrich Linda Ferrell.

Reflection Paper #1
Due: Monday, February 17th, 2020 by 5:00PM MST.
We are constantly bombarded with instances of ethical and unethical business behavior in the news. The purpose of these reflection papers is to connect our readings with contemporary events. Please provide detailed answers to all of the following questions. Keep in mind that this assignment constitutes 15% of your final grade. Your responses should be in size 12 Times New Roman font, double spaced, 1” margins, and should be approximately 4-5 pages long. Write in complete sentences. Improperly formatted papers will face a grade penalty. Your responses must provide textual support by appeal to quotes from our book. When using quotes, you must also explain what they mean in your own words. Write as if you are addressing someone who has not read the text. Aim to have responses that would clearly explain the topics to an intelligent, yet naïve, friend who has never encountered any of these writings. Submit as a .docx or .pdf through the assignments section of our Blackboard page.Shareholder and Stakeholder Theory Paper

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1) Explain the difference between shareholder and stakeholder theory as discussed in our book.

  1. What is shareholder theory in the context of business ethics? What exactly is corporate governance in general? What, more specifically, is the shareholder model of corporate governance? Who exactly are a business’s shareholders? What are the ultimate goals of the shareholder model?
  2. What is stakeholder theory in the context of business ethics? What is the stakeholder model of corporate governance? Who exactly are a business’s stakeholders? What are the different types of stakeholders?

2) Appealing to the specific types of ethical issues and dilemmas discussed in Chapter 3 of our textbook (between pp. 61-80), provide one example of unethical conduct in the contemporary businesses world, and answer the following.

  1. Choose an example of one unethical event in the business world. Tell me the title of your article, its date of publication, and the source (e.g., Business Insider, The New York Times, CNN, Fox News, Al Jazeera, Forbes, etc.). Stories must be no older than one year.
  2. Summarize the main points of the article. Be clear and don’t assume I know what it is about.
  3. What precisely is the unethical issue in this story? Briefly explain how this issue fits into the news story as a whole. What is it that makes this unethical?
  4. For the type of ethical dilemma in your story, explain in detail all of the components of the issue in general by appeal to that section in our book (for example, if your article is about a conflict of interest, you should provide a summary of the whole framework and all distinctions related to such conflicts in the textbook chapter).Shareholder and Stakeholder Theory Paper
  5. For this story, in what ways is the business in question appealing to shareholders and stakeholders? Who exactly has been harmed through the unethical act?
  6. How might this example of unethical conduct have been avoided? Are there additional stakeholders that should have been further taken into consideration?

The Difference between Shareholder and Stakeholder Theory

Shareholder theory in the context of business ethics is the influential role that a business is expected to live up in society. It asserts that business entities are obliged to conduct their business in the best interest of shareholders. Therefore, business entities have the responsibility of utilizing the resources and capabilities of a business to increase the profits margins attributed to the shareholders and thus increase their wealth (Ferrell, Fraedrich & Ferrell, 201, 33). Corporate governance, in general, refers to the system of practices, laws, regulations, rules, procedures, and processes which guide and directs the business activities and operations of an entity. It refers to the running of the business and the ultimate goals that form the basis of the governance (Ferrell, Fraedrich & Ferrell, 201, 34).

Corporate governances thus outline the hierarchy, power structure, responsibilities, and accountability of all members and staff of the organization. Through corporate governance, business entities formulate and implement decisions in the best interests of shareholders. The shareholder model of corporate governance is the formal system of oversight, accountability, and control of a business entity with shareholders at the center of all decisions (Ferrell, Fraedrich & Ferrell, 2017, 34). Oversight entails seeing the compliance with certain standards operating procedures, accountability entails taking blame, liability of individual actions and being answerable to third parties Control means exercising authority of the decisions, behavior, and actions of a group of people or an organization.Shareholder and Stakeholder Theory Paper

These three domains of the formal system of governance fit in the shareholder model of corporate governance by focusing on maximizing the wealth of the shareholders. Shareholder theory deals with corporate governance by giving priority to the interests of shareholders in every action and decision (Ferrell, Fraedrich & Ferrell, 2017, 36). A business’s shareholders are the people who have vested interest in the company limited by their contribution to the capital, which is apportioned in terms of shares. They are the members who agree to share the company’s shares to raise the capital required for investment. Due to their vested interest in the business, the ultimate goals of the shareholder model is wealth maximization.

Stakeholder theory in the context of business ethics is the business ethics and organizational management concept that recognizes the multiple constituencies of a business. It asserts that a business is obliged to create value for its diverse stakeholders in equal measure (Ferrell, Fraedrich & Ferrell, 2017, 36). The general notion of corporate governance is that organization should serve the interest of the investors. However, that is not the case with the stakeholder model of corporate governance which emphasizes on impact of the activities of a business to all its stakeholders. According to this model, corporate managers are obliged to incorporate the interests of stakeholders in the governance process.

A business’s stakeholders include employees, customers, suppliers, government agencies, local communities, competitors, and creditors.  The different types of stakeholders include the primary stakeholders who are in direct contact with the business and the secondary stakeholders who indirectly depend on the business (Ferrell, Fraedrich & Ferrell, 2017, 37). Primary stakeholders include customers, investors, employees, local communities, government agencies, and suppliers who are in direct contact and interaction with the corporation. Secondary stakeholders include competitors, mass media, trade associations, and special interest groups who are only interacting with the corporation indirectly because the activities of the corporation affect what they corporation does.Shareholder and Stakeholder Theory Paper

An example of Unethical Conduct in the Contemporary Businesses World

One example of unethical conduct in the contemporary business world is a fraud. Fraud takes many forms ranging from financial fraud to fraudulent manipulation of records, statements, and data to give a false impression of the true state of affairs within a business. Business entities engaged in fraud with a view of pleasing the shareholders and portraying a contrary image and perception in the mind of the stakeholders (Schafer, 2020). Fraud is an ethical issue because it looks towards achieving the ultimate goals of shareholders while bypassing the interest of the stakeholders.

One such unethical event in the business world is the ethical issue at Wells Fargo regarding the creation of fake premium accounts for its customers against their consent of knowledge. The ethical issues occurred after executives of the company mandate a companywide quota for cross-selling of customers’ accounts. This ethical issue was reported by the Star Tribune news media under the title “Three years on, the Wells Fargo scandal is still breathtaking” by Lee Schafer on 25th January 2020 (Schafer, 2020).

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The ethical issues were well known to several insiders, including the friends and families of the senior executives of the bank. The fake accounts were brought to the limelight by the regulatory filings, audit and review by the entity’s board, and court documents. The ethical issues began when the senior executives set quotas and goals for the company’s employees on the number of accounts they ought to open (Schafer, 2020). Since the employees could not meet the target quotas, they embarked on creating fake customer accounts.

The creation of fake accounts without the knowledge of the customers is itself an unethical issue captured in this story. This issue fits into the news story as a whole because it highlights how customers were promised premium accounts concealed as free accounts. According to the Office of the comptroller of the currency, hundreds of thousands of staff at the bank in the credit card division had engaged in the fraud for 14 years, rendering it a systemic illegal activity within the institution (Schafer, 2020). This was unethical because it involved the loss of trust, integrity, and honesty on personal incentives. As a result of the unethical activity, the affected customers were thus exposed to large fees associated with the premium accounts, leading to over-drafted accounts with negative credit lines.Shareholder and Stakeholder Theory Paper

The components of the ethical issue, in general, can be explained form the ethical framework of Virtue Ethics, which posits that business decisions should be made based on the moral virtue and characters of the business. The executives of Wells Fargo were supposed to have asked themselves how the fake accounts would affect the public perception about the company before ordering employees to engage in such acts (Ferrell, Fraedrich & Ferrell, 2017, 39). Among the virtues that are highlighted in this case are honesty, integrity, and trustworthiness. This ethical framework creates a long-lasting relationship between the company and its shareholders and stakeholders. It also maintains transparent relationships when addressing business challenges, thus directly affecting the profitability, longevity concerns, and growth of the company. The notion of fraud is that it is an act that violates the principle of transparency and credibility. The version of fraud are inconsistencies and discrepancies in the opening of accounts by the company.

Wells Fargo case represents fraud in that it involved the attempt to appeal to shareholders by increasing the number of premium account holders to increase the revenue and profitability, thus realizing its ultimate goal of profit maximization. On the other hand, the customers and staff were harmed in different ways. The ethical issue led to damage to the morale and reputation of the company’s staff because nobody could trust them with their fake accounts (Ferrell, Fraedrich & Ferrell, 2017, 42). Customers had to incur unnecessary costs attributed to the premium accounts, forcing them to distance themselves from the ethical issues that took place in the company. Even regulatory agencies started questioning the general financial position of the company after the ethical scandal.Shareholder and Stakeholder Theory Paper

The customers and the employees were the most harmed by the unethical issues. The customers lost huge amounts of money while the company was left with little but to repair its damaged reputation through a positive response to the scandal. Today, Wells Fargo has failed on their part to instill ethical codes of conduct that regulate their operation and activities (Ferrell, Fraedrich & Ferrell, 2017, 44). This ethical issue was systemic and widespread across the whole organization. However, the company choose to discipline individual employees rather than implementing radical changes from the top organ of the organization (Wells Fargo, n.d). The failure by Wells Fargo to remain ethical is attributed to non-compliance with its ethical codes of practice.

This example of unethical conduct could have been avoided by modifying the structure of employee compensation and removing the incentives that were tied to the employee benefits. Additional measures include putting less emphasis on sales goals and eliminated the sales quotas from its operations. The fraudulent activities could also be curbed through an ethical workshop warning employees to desist from creating fake accounts without the consent of customers (Ferrell, Fraedrich & Ferrell, 2017, 47). The additional stakeholders that should have been further taken into consideration are the employees and the customers who were directly faced by these sales quotas.

 

References

Ferrell O.C., Fraedrich J., & Ferrell L. (2017). Business Ethics: Ethical Decision Making and Cases Twelfth Edition. Cengage Learning. Boston U.S

Schafer L (2020). Three years on, the Wells Fargo scandal is still breathtaking. Available at http://www.startribune.com/schafer-three-years-on-the-wells-fargo-scandal-is-still-breathtaking/567272972/?refresh=true

Shareholder and Stakeholder Theory Paper

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