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Corporate Governance and Ethics: Evaluation of Real World Ethical Problems

Introduction

The proper functioning of an organization requires control and monitoring. Corporate governance comprises one of the ways of controlling and enhancing the monitoring of organizational operations (Caldwell & Karri 2005). At the heart of corporate governance is the need to mitigate or implement mechanisms of controlling and preventing conflicts of interest among stakeholders. The mitigation of conflicts of interest is mostly accomplished through the enactment of various customs, laws, processes, policies, and institutions that have enormous repercussions in afflicting the manner in which organizations are controlled.

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Although policies and other control structures that are established in corporate governance may help in the regulation of the conduct and decisions made by employees, organizational culture may act as an important regulator for employee decision-making processes within an organization after defining what is ethically permissible. This claim is perhaps a correct inference upon considering the ‘Plant World’ case study that forms the basis of this paper. The owner of the organization deploys human management strategic initiatives effectively to instill a strong culture of loyalty, which helps to drive ethical decision-making processes among its employees. Utilitarianism theory finds application in the organization’s managerial approaches without stipulation and definition of rules and regulations that guide ethical conduct. This paper deploys the utilitarianism theory to analyze and evaluate Plant World’s approaches in making ethical decisions as presented in the case study.

Utilitarian Theory

Bentham established the utilitarian theory in the 18th century. However, it was later refined by Stuart mill. The theory calls individuals to look beyond their self-centric interests to enhance total good for all people who may be influenced by their actions. In the context of organizational ethics, it highlights the importance of evaluating the repercussions of individual action so that ethical action is the one, which does not harm any party that is subjected to its consequences. Ketz (2006) asserts that utilitarian theory appreciates that tradeoffs exist in decision-making processes. For instance, in the case of Plant World, when challenges were encountered so that Ong could not pay employees promptly, they (employees) had the option to quit looking for employment in other organizations. However, they had to trade off this decision with non-monetary benefits such as work flexibility. In this sense, utilitarian theory balances various social harms while accruing benefits to arrive at a decision that can optimize benefits while lowering the harms that are likely to be encountered by all organizational stakeholders (Ketz 2006).

The concern of utilitarian theory in lowering harms on organizational stakeholders corresponds to the concepts of corporate governance. It addresses issues that relate to finance, regulations, and ownership systems to ensure optimal benefit to all stakeholders. As Denis and McConnell (2003, p. 7) reckon, ‘Corporate governance is of immense significance in the current economic climate…the current malaise in the financial system owes much to governance and regulatory failures’. The challenges that lead to the failure of organizations due to accounting malpractices such as fraud and other forms of organized crimes to extort organizations’ funds, which corporate government seeks to mitigate, arise due to lack of consideration of ethical consequences of actions from a utilitarian dimension.

From a utilitarian perspective, the definition of stakeholder fails to limit parties to take into consideration specific geographical regions while making decisions. For instance, any decision made by an organization may affect people across the world (Brenkert 2010; Caldwell, Hayes & Long 2010). Such people may not be directly involved in the operations of the organization. They can also not, or even, have awareness of the existence of an organization. The need to incorporate international dimensions when applying utilitarian theory in analyzing ethical decisions proves incredibly challenging. For this reason, in the next discussion, its application is only limited to Plant World s’ organizational level.

Case Study Analysis and Evaluation

Organisational Culture, Framework, and Objectives

The smooth operation of an organization requires people to subscribe to common norms, values, beliefs, ways of thinking, and approaches to doing work. These aspects define organizational culture, which needs to be aligned with business operations for any company (Hedlund 2004). Plant World has its culture built around making employees feel accommodated and considered as the most important sources of success. The objective encompasses managing human resources as if all employees are members of one family with its leader being Ong, the company owner. Therefore, although there are better organizations, which pay better salaries and wages, employees cannot contemplate leaving. This claim suggests high job satisfaction levels. Plant World’s culture hinders bureaucratic and hierarchical job structures. Lack of job titles evidences this fact. For instance, the employees refer to the boss as ‘Myta’.

Plant World’s framework of operation revolves around ensuring a good world-life fit. The leader is incredibly concerned with other activities of her employees while out of work. The objective is to ensure that while this creates a sense of belonging to ‘one family’, giving offs to employees enables the organization to minimize voluntary turnover due to burnout and organizational financial challenges. Employees are concerned that even if they opt to look for a job elsewhere, there might be no other boss who can give offs when they feel tired. The operation framework of the company is also highly dependent on effective communication, especially during a crisis. Hiles (2011) supports this type of communication by reckoning that crisis gives rise to uncertainties, which may create misconceptions about the status of an organization among employees. The leader at Plant World depicts high abilities to deploy communication in clearing such misconceptions through timely employees as an essential framework for enhancing continuity of the business of the company during any financial crisis.

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Communication at Plant World provides the foundation for enabling people to arrive at the most appropriate decisions by deploying the utilitarian theoretical concept of decision-making. Indeed, even after getting an option not to report to work due to financial hardships, all employees considered the possible alternatives. The most ethical alternative was reporting to work the following week as they waited for the financial position of the company to improve.

Theoretical and Philosophical Ideas and Tasks

Using utilitarian theoretical approaches, the unanimous decision that is made by employees at an individual level to continue working for Plant World poses questions on their motivations to work. Should they make such a decision to advance the interests of an individual, Ong, who engages in uncalculated risks? One theoretical and philosophical idea drawn from Act Utilitarian suggests that people need to select an action from a set of possible actions that result in overall good for the largest number of people (Ketz 2006). Based on this school of thought, should Ong have only considered engaging in tasks that would deliver optimal value to everyone by rejecting to engage in any business contract on credit? Employees had the right for receiving their dues every month. Ong should have considered how to fulfill this right in case of occurrence of risks. The philosophical theory of rights upholds the idea that employees possess an inherent worth (Ketz 2006). Ong needed to respect this right. Was it necessary to pay employees as an action that would result in sinking the organization in the name of compliance with philosophical ideas of rights?

A ‘yes’ response to the above questions suggests that making a decision that delivers optimal good to a larger group of people can translate to harming the minority and/or the organization owner. Therefore, the most ethical action is perhaps the one that leads to a greater good for all organizational stakeholders in the long term. After a month, the organization will recover and pay any outstanding dues while remaining in operation. However, according to Kant’s philosophical ideas, specifically the idea of the Categorical Imperative, people have a collective duty to treat one another equally. In this sense, ethical and morally justified action is the one, which is propelled by perspectives of obligation to engage in an act simply not to foster the realization of individualized interests (Ketz 2006). At Plant World, employees were not bothered by the fact that Ong could not pay them. Rather, they were interested in her dreams and difficulties. In the light of Kant’s theoretical ideas and philosophy on ethics, it sounds imperative to infer that employees opted to report to work to save Ong’s company from collapsing. However, although the decision involved making personal sacrifices, it was appropriate. Employees felt they had an obligation to do so.

Specific Issues for Consideration by an Accounting Team

Problems at Plant World emanated from the failure to consider risk management in decision-making processes. This claim suggests that the accounting team needs to consider and evaluate the threshold to which the company can tolerate credit risks. Hence, despite the need to ensure that Plant World delivers the utmost good to all stakeholders including customers, as it may be suggested by the utilitarian theory, ensuring credit risk resilience remains an important task for the accounting team to put into consideration when making business decisions. This requirement calls for the incorporation of concepts of corporate governance.

One of the risks that the accounting teams need to consider is the inability of the organization to attain stakeholders’ anticipations. Failure to mitigate risks such as uncalculated credit risks that hinder the achievement of employee expectations may amount to corporate governance failures at Plant World. However, borrowing from the case of the failure of Marconi in 2001, the challenges experienced by Plant World should not be interpreted as a failure of corporate governance. Marconi’s failure exemplified how organizational breakdown can occur due to misguided strategies (Arcot & Bruno 2006). Thus, evaluation of business decisions that may expose Plant World to financial risks needs to be considered by the accounting team. Such risks should be maintained under controllable levels to avoid shifting organizational risks to employees.

The above claim highlights the importance of considering risk forecasting. The effectiveness of considering this aspect in reducing the reoccurrence of the challenge of offering services on credit as experienced by Plant World depends on the foreseeable likely risks. Ong may perhaps not have foreseen the likelihood for her clients running bankrupt to act in a way that could substantially mitigate such risks from occurring. This challenge adds a responsibility to the accounting teams to consider conducting evaluations of clients’ creditworthiness before offering services on credit to ensure increased good for the majority of organizational stakeholders.

Current Trends and Objectives in Literature

Learning from the experience of the 2008-2009 global financial crisis that arose from credit risks, the current trend in many organizations involves the institutionalization of corporate governance issues and risk management practices to minimize the susceptibility of organizations to financial risks. Morality and ethical business principles are also finding wide recognition in helping curb organized financial crimes (Caldwell, Hayes & Long 2010). Corporations are deploying the failure of accounting systems as witnessed in the wake of the global financial crisis as a benchmark to learn from the mistakes in an attempt to deploy the appropriate mechanisms to avoid similar failures. For this purpose, corporate governance receives a major acceptance in organizations’ risk management practices.

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The increasing attention on corporate governance principles rests on the need to enhance organizational performance. This goal can be achieved by aiding organizational leaders to execute their chores in the best interest of various stakeholders. Financial Reporting Council (2008, p. 23) reveals, ‘Good governance should facilitate efficient, effective, and entrepreneurial management that can deliver shareholder value over the longer term’. This claim implies that cooperation, through the managers, has an immense role to control the likelihood of occurrence of situations that may pose risks to the interest of stakeholders. This aspect constitutes the main concern for accessing the creditworthiness of future clients at Plant World to ensure mitigation of risks that are likely to impair the interests of its organizational stakeholders.

Mitigating organizational risks requires organizations’ decision-makers to uphold the culture of corporate accountability. Indeed, the current literature on organizational management emphasizes the need for decision-makers to accept accountability for decisions that expose stakeholder interests to risks. Accountability entails making organizations transparent and responsible for their dealing in the effort to enhance their trustworthiness (Ahrens & Chapman 2007). For this to happen, a number of issues require attention. One of such issues is the development of the capacity to deal with the emerging issues that may impede the efforts of an organization to attain its dream of accountability. For instance, the advent of globalization presents many challenges to corporations that wish to become accountable in many nations. Kearns (2003, p. 76) supports this claim by further adding, ‘Globalisation plays the role of shaping the current trends in the global economic markets and the increasing interactions among nations and people from different parts of the world’. The emergence of new interactions that are driven by the advent of globalization introduces challenges to organizations in the manner that they handle the emerging new roles to expand their functionality. The more expensive it is for an institution or any system that requires checks, the harder it becomes to handle all the individual facets, which may provide loopholes for acts of fraud.

Current trends in enhancing organizational accountability emphasize the importance of organizations to consider looking for new approaches to enhancing transparency. Traditionally, the main approach for enhancing accountability was through exercising control and close monitoring of persons who were mandated to execute certain affairs that were of stakeholders’ interest such as management of organizational finances (Ahrens & Chapman 2007). This process involved the establishment of bureaucratic discretion for checking the conduct of organizational leaders against a set of rules and regulations. Emerging literature such as the work of Malmi and Brown (2008) and Malmi and Granlund (2009) emphasizes the need for alteration of such approach so that organizations consider implementing strategies for enhancing accountability based on the need to comply with the principles of business ethics rather than direct control.

Risk management comprises an important trend in literature on the mechanisms of mitigating organizational risks. In accounting practices, risk management rests on the role of accountability to reduce incidences of accounting malpractices. This situation has seen many organizations in different nations establish rules to regulate corporate accounting practices to promote accountability to stakeholders (Caldwell & Karri 2005). For instance, before the enactment of the 2010 corporate code, the UK corporate accountability check was predominately pegged on requiring corporations to prepare annual reports to explain the approaches deployed by organizations to generate and maintain the value in the long-term and the models deployed in enhancing the achievement of organizational objectives (Clarke 2007).

The 2010 accountability and business reporting code require directors to explain their responsibilities in terms of preparation of accounts together with annual reports. This check provides the basis for determining the roles played by people who engage in organizational accounting in making decisions that may make corporations susceptible to financial risks. This claim indicates the emerging ways of looking for mechanisms of ensuring that people do not violate accounting ethical codes of conduct such as non-engagement in fraud or decisions that put the interests of organizational stakeholders at risk.

Proposal based on Strategic Framework

The organizational culture that is adopted by Plant World focuses on the effective management of employees. It constitutes a major source of competitive advantage for the organization both presently and in the future. In the continued deployment of employees to achieve the objectives of the company, it is important for the management to consider giving employees a stake of ownership. This proposal may help Plant World to retain employees even when it may encounter financial challenges again. Apart from being concerned with Ong’s problems and her dreams, workers may also incorporate their own dreams while making decisions to protect the organization from collapsing.

The current trend in many organizations involves the utilization of people to yield organizational success (Wright & Gardner 2005). While Plant World has already proven its ability to create employee loyalty successfully, it also needs to focus on the techniques of inducing more workforce motivation. To implement this proposal, the company needs to establish a human resource department to enhance its capacity to deal with the risks or organizational conflicts if they emerge in the future as the organization continues to grow. At present, such conflicts do not exist. However, in case they arise, the culture of ‘one family’ may be fractured. Effective organizational communication encompasses one of the major strengths of Plant World. It made it possible to overcome the crisis. Even when the company enlarges, perhaps into the global market, the strategy of leadership through communication should remain a major strength.

Recommendation for improvement of Organisational Culture

Apart from principally focusing on employing workers as a source of competitive advantage, and hence organizational performance, it is important for Plant World to consider other strategies of putting the organization’s operation under check. The principal focus on such systems should be in areas of accounting. While the organization has a strong culture that is capable of gluing all employees amid their differences together in a manner that eliminates conflicts of interest, Plant World has no capacity to mitigate risks.

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Despite the fact that financial challenges that the organization encountered did not arise from engagement in any fraudulent activity, it is wise for Plant World to institutionalize corporate governance to provide mechanisms of evaluating business decisions in terms of their capacity to result in financial credit risks. For this reason, the adoption of accounting management practices is also recommended. This strategy can help build an organizational culture of taking caution and creation of awareness of susceptibility to risks. Such a culture will ensure that the decisions made by both management and employees of the organization consider perspectives of financial risks. Such risks may result in total organizational failure as evidenced by Ong’s decision to offer landscaping services on credit without considering the implications of the decision in case the contracting party fails to honor the contract either out of negligence or due to circumstances that it cannot avoid such as becoming bankrupt.

The rationale for the Business Decision

The rationale for implementing the perspectives of corporate governance at Plant World is developed in the section on ‘Current Trends and Objectives in Literature’. Hence, duplication of the material here is unwarranted. Management accounting can aid in creating a culture of risk awareness and preparedness. While applying the utilitarian theory to influence the selection of the best decision at the organization, it will emerge that the best decision is the one, which minimizes stakeholders’ financial risks. Management accounting has three pillars, namely strategic management, risk management, and performance management.

The pillar of strategic management permits the roles of accounting management professionals to include them as strategic partners of an organization (Sebastian 2000). Being a strategic partner implies that accounting personnel at Plant World will evaluate the financial position of the organizations that their company engages in business with to minimize financial risks. This strategy helps in building a stronger culture of ‘one family’ by ensuring that employees believe that Plant World values and protects their right of receiving salaries and wages promptly.

Through the pillar of risks management, management accounting can enhance the capacity of Plant World to locate, measure, and report risks to ensure the long-term operation of the company. Risk management focuses on the development of business decisions, which make it possible to manage cutely the performance of the firm (Sharman 2003). Through its concepts that are ingrained in management accounting practices, Plant World could have foreseen the likelihood of risks on investing all its resources through one client. Developing the culture of using the practices of management accounting and corporate governance as the standard for gauging the capacity of a decision to deliver the optimal gain, and hence its appropriateness may help to mitigate decisions such as the ones, which led to near bankrupting of Plant World.

Key Business issues that need Monitoring and Their Rationale

Any time when an employee does not report to work upon requesting a sick day off or even a day off without necessarily being sick reduces the productivity of an organization (Wright & Gardner 2005). This claim suggests that even though giving employees day-offs to recover from exhaustion that is associated with work may help reduce burnout, and hence turnover, Plant World needs to monitor the costs associated with employee absenteeism. Monitoring these costs calls for the organization to measure the effects of employees’ offs on its output levels. This situation can be measured by determining the time required to complete a given task when operating at full workforce level and/or when some employees have taken some offs. The rationale for these business issues rests on the platform that even though it sounds imperative to give employees time to relax, monitoring absenteeism costs at Plant World is crucial as HRM costs affect the profitability of organizations directly. Such costs include turnover, compensation, training, development, and absenteeism expenses (Hom & Kinicki 2007). While most of these costs are well mitigated by Plant World, offs may account for a significant reduction in the productivity of the organization.

Plant World also needs to regulate and monitor its engagement in offering services on credit without evaluating its financial position and the ability of the client to pay. Although Plant World has an obligation to deliver services to clients in different payments in an effort to deliver optimal good to all organizations’ stakeholders, sufficient liquid cash flow is important to deliver optimal good to employees. Establishing this balance may help strike a balance between the utilitarian theory in enhancing decision-making at the company and human rights theory as applied in the determination of ethical and moral actions (Ketz 2006). The rationale for this business issue is that Plant World should only engage in calculated risks. Any risk that may threaten to make it become bankrupt is unacceptable under strategic management, corporate governance, and business ethics theoretical concepts even if it presents high gains. Such a risk subjects all stakeholders to higher probabilities of incurring loss of their investments.

References

Ahrens, T & Chapman 2007, ‘Management accounting as practice’, Accounting, Organisations and Society, vol. 32 no. 2, pp. 1-27.

Arcot, S & Bruno, V 2006, In Letter but not in spirit: an Analysis of Corporate Governance in the UK, Routledge, London.

Brenkert, G 2010, ‘The Limits and Prospects of Business Ethics’, Business Ethics Quarterly, vol. 20 no. 4, pp. 703-709.

Caldwell, C & Karri, R 2005, ‘Organisational Governance and Ethical Systems: A Covenantal Approach to Building Trust’, Journal of Business Ethics, vol. 58 no. 1, pp. 249-259.

Caldwell, C, Hayes, A & Long, D 2010. ‘Leadership, Trustworthiness, and Ethical Stewardship’, Journal of Business Ethics, vol. 96 no. 4, pp. 497-512.

Clarke, T 2007, International Corporate Governance, Routledge, London and New York, NY.

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Hedlund, G 2004, ‘The hypermodern MNC—a hierarchy’, Human resource management, vol. 25, no. 1, pp. 9-35.

Hiles, A 2011, The Definitive Handbook of Business Continuity Management, John Wiley & Sons Inc., New York, NY.

Hom, P & Kinicki, A 2007, ‘Toward a greater Understanding of How Dissatisfaction Drives Employee Turnover’, Academy of Management Journal, vol. 44 no. 5, pp. 975-987.

Kearns, P 2003, Accountability in a Seamless Economy, Sage Publications, London.

Ketz, E 2006, Accounting Ethics: Theories of Accounting Ethics and Their Dissemination, Tyalor & Francis US, New York, NY.

Malmi, T & Brown, A 2008, ‘Management control systems as a package—Opportunities, challenges and research directions’, Management Accounting Research, vol. 19 no. 4, pp. 287-300.

Malmi, T & Granlund, M 2009, ‘In search of management accounting theory’, European Accounting Review, vol. 18 no. 3, pp. 597-620.

Sebastian, N 2000, Taking Control of Costs, Prentice Hall, London.

Sharman, P 2003, ‘Bring On German Cost Accounting’, Strategic Finance, vol. 3 no. 2, pp. 2–9.

Wright, P & Gardner, T 2005, ‘The relationship between HR practices and firm performance: Examining causal order’, Personnel Psychology, vol. 8 no. 5, pp. 409-447.

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