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Ethics in Relation to Business Activities

Ethics are socially acceptable principles and standards established to guide the undertakings, activities, and decision-making processes in business. Over the years, organizations have increasingly embraced and embedded moral ideals and values throughout their operations. These ethical codes articulate the expected conduct and behavioral parameters to be followed and adhered to by the members of a given entity. In this regard, business ethics encompasses the defined set of principles, norms, values, and standards which are adopted as the guiding philosophy for all transactions, decisions, and actions undertaken by an organization (Grigoropoulos, 2019). Therefore, these principles help enterprises to develop a robust organizational culture which enhances the company’s ability to choose and do what is socially acceptable.

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Business ethics are a constituent of the wider moral code which governs society. They require organizations to observe and practice higher ideals beyond those demanded by the regulatory authorities and government agencies, such as adhering to the prescribed laws and paying their fair share of taxes (Daku, 2018). For instance, despite the company’s objectives of increasing profitability, it should not obtain a competitive advantage by venturing into countries with lax employment laws where they can exploit child labor or offer low minimum wages. In this regard, business ethics creates and entrenches an organizational culture which promotes and reinforces positive behavior across all the processes and activities undertaken by an entity.

Reason for High Ethical Standards

Organizations establish an ethical culture to encourage and promote integrity among their workers and obtain trust from key stakeholders, including consumers and investors. Over the years, the adoption and subsequent application of high standards and value in the practice and conduct of business processes have intensified considerably to reinforce their competitive advantage, enhance reputation, and stimulate firm growth. According to de Gelder et al. (2019), in an increasingly competitive business environment, entities have recognized the indispensability of ethical conduct in enterprise success as more customers become analytical in their buying decisions. This implies that organizations are moving beyond complying with the minimum requirements of regulatory policies as a competitive strategy for anchoring corporate brand loyalty and selling their products at a marginally high price (Lee and Jin, 2019). Thus, observing high ethical standards improves a firm’s competitiveness and bottom lines.

Additionally, robust ethical cultures help corporates to build a good reputation, which enhances their ability to attract investors and a talented workforce. Andrade, Hamza and Xara-Brasil (2017) assert that observing socially acceptable conduct positively impacts an entity’s ability to attract stakeholders and draw talent to the firm. Indeed, people are highly likely to support and infuse resources in organizations which demonstrate commitment to ethical practices. This view is corroborated by Lee, Kim, and Kwon (2017) who posit that investors and potential employees view ethical conduct as an indicator of a socially responsible, transparent, and honest institution. Therefore, high ethical standards elevate the public image of a business entity, enabling it to attract talent and investors.

Balanced Scorecard

The balanced scorecard (BSC) is strategic management, planning, and performance evaluation tool. It encompasses four perspectives, including the internal process, learning and growth, customer, and financials, which are the primary internal business functions. BSCs are used by managers to monitor the execution of predefined activities by the staff, track the outcomes resulting from those undertakings, and obtain feedback (Quesado, Guzman and Rodrigues, 2018). Since management should not exclusively focus on the financial aspects of an organization, BSC provides an effective platform through which the non-financial information is integrated and streamlined for a more comprehensive view.

The financial component of BSC utilizes monetary metrics such as inventory turnover, revenue growth, and sales volumes to evaluate performance. The internal business perspective focuses on the inside operations of a business and analyses them to ensure they meet the defined strategic objectives. For instance, an organization can use transaction efficiency, employee productivity, machine downtime, and the number of defective outputs to determine the effectiveness of internal processes. The customer component of BSC measures how well a business is performing regarding its clients and users of its products. In this regard, corporates may utilize variables such as the number of repeat customers, repeat clients, referrals, market share, and successful conversions from inquiries. The learning and growth perspective evaluates how the management and subordinates continually collaborate to enhance and develop organizational capacity to reach strategic objectives, surmount new challenges, and survive. This dimension of BSC can be measured by assessing the hours of employee training per year, the number of new innovative products, and the scope of process improvements over the last year.

Divisional Performance

Divisional performance is a process or operational effectiveness evaluation model in which an organization computes and reports productivity for each of its business segments independently. It involves the measurement and assessment of the output of a business’ sub-units or departments as opposed to the centralized approach. Divisional performance metrics are highly effective in ensuring that the specific organizational strategies are successfully implemented by monitoring the activities of the various sub-units in satisfying and accomplishing the division’s predetermined objectives or desires. Notably, this performance evaluation strategy can be based on financial or non-financial metrics. The former encompasses approaches such as return on investment, residual income, and the economic value added. The non-financial models include the balance scorecard and the performance prism.

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Return on Investment

Return on investment (ROI) of a division is the expression of profit as a percentage in direct connection to the sub-units funding and resource allocation instead of focusing on the departmental profits. It is computed by subtracting the operating expenditures from the constituent’s profits then dividing the obtained figure by the operating costs. A negative percentage illustrates that the division is losing money, while a positive number indicates profit. Divisional ROI supports companywide goal congruence, comparative analysis, and the creation of an overall impression of a firm. Although this approach provides valuable insights, its applicability is impeded by its exclusive focus on short-term profitability, which may not be long enough for projects requiring prolonged durations.

Residual Income

The residual income approach overcomes the dysfunctions of return on investments and safeguards against possible under-investment. It encompasses the calculated discretionary amount of money that is left after all financial obligations have been addressed (Hand et al., 2017). For instance, managers may abandon a project with a relatively reduced rate of return and opt to pursue another venture yielding high profits. This implies that residual income is significantly better and more flexible than ROI since varying percentages of the cost of capital can be applied to investments with different risk levels, regarding the divisions of a business. Therefore, residual income enables the computation of diverse risk-adjusted capital costs, an aspect which cannot be incorporated by ROI.

Shareholder Model of Corporate Governance

The shareholder theory of corporate governance is the conventional Anglo-American system which asserts that the exclusive obligation of an organization is to maximize the profits or wealth of the business owners. Under this model, the management of a corporation works on behalf of the investors to deliver maximum returns in form of high dividends and increased share prices (Bottenberg, Tuschke, and Flickinger, 2016). This corporate governance model is anchored on Milton Friedman’s postulation which advances the philosophy that modern corporations have no social obligations to society but only to shareholders with a direct stake in the business. Notably, this corporate governance approach enhances the centrality of managerial accountability and communication to the owners of the business.

The shareholder theory of corporate governance is pegged on the premise that the management of an organization is hired as agents of shareholders to steer the business for their benefit. In this regard, they are morally and legally obligated to exclusively serve and advance the interests of their employers. This contrasts distinctly from the stakeholder’s theory which focuses on addressing the expectations and needs of the wider society. Notably, the shareholder model has been identified as the primary cause of corporate scandals, such as Enron and WorldCom due to the disproportionate pressure exerted by business owners on the management to deliver supernormal profits.

Overtrading

Overtrading refers to a scenario in which companies or businesses expand their operations too aggressively to the point that the expansion generates adverse outcomes and implications. This implies that a corporation underestimates the resources required to fulfill a particular venture, leading to the allocation of insufficient provisions to support the additional needs. As a result, these businesses slide into a negative cycle, resulting in an increase in interest expenses, which adversely affects the firm’s net profits. This leads to constrained working capital, the subsequent growth in borrowings, and the eventual liquidity challenges. According to Seeku (2018), overtrading is characterized by diminishing cash flows, small profit margins, excessive borrowing, low levels of capacity utilization, and poor inventory turnover ratio. Additionally, overtraded organizations may have many unpaid vendors and disproportionately high debt servicing costs.

Although traders are driven by the desire to scale up their operations, the temptation to increase the trading frequency without a comprehensive consideration of the firm’s capabilities triggers overtrading. In this regard, it is imperative for organizations to ascertain their operational limits and how much risk they can comfortably take. Ultimately, overtrading becomes counterproductive to the investment decisions, leading to a consistent rise in commission costs without observable positive outcomes.

Sources of Short-Term Finances

Short-term finances refer to the monetary support or facilities obtained by an enterprise and repayable within a period of one year or less. In business, this assistance is also known as working capital financing and is ordinarily required to aid processes during periods of uneven cash flows and due to the seasonal patterns of operations. In this regard, the proceeds obtained from these agreements are usually channeled towards supporting minor business needs, such as restocking and boosting working capital as opposed to funding long-term endeavors. Bank overdrafts rank among the most prominent short-term sources of finances for the business. Under this facility, a financial organization allows an organization to overdraw its accounts to a predefined limit following a prior agreement. The lending institution charges interest on the overdrawn amount and convenience, usually at an agreed rate. This facility is popular among businesses due to the ease of acquisition and rapid provision.

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Accounts receivable financing, also known as invoice financing, is another popular avenue through which businesses obtain short-term monetary aid. It entails the pledging of the outstanding debtors or unpaid invoices as collateral against which a lending institution advances finances for a fee after evaluating the quality and value of the debtors. According to Kozarevic and Hodzic (2016), this option is advantageous since it allows the business to retain full ownership of the firm and eliminates the need to commit critical assets as collateral. Notably, this source of short-term funding allows businesses to obtain instant monetary assistance for urgent purposes without exerting pressure on debtors. Trade credit is also another common source of short-term business loans through which organizations obtain commodities without making immediate payments. This implies that an organization is allowed to acquire supplies and pay at a later date, thereby enabling such entities to finance short-term growth and free up cash flows.

External Stakeholders of a Business and How Their Requirements Influence Corporate Objectives

External stakeholders are individuals or organizations with no direct association with an organization but are somehow affected by the activities and operations of the business, such as customers and the government. These two wield significant potential and power to influence the objectives of a corporation. Regulatory and taxation policies formulated and enacted by a government directly impact the operations of an entity. For instance, the prohibition of the manufacture or the production of specific goods and the imposition of taxes of subsidies would determine whether a company would continue operating in a given industry or quit. Similarly, the customers’ contexts influence businesses by compelling them to adopt or embrace a particular philosophy. For instance, consumers may coerce corporations to operate ethically by remaining loyal to brands with a positive public image. Consequently, businesses would respond appropriately to such behaviors and start engaging in corporate social responsibility. In this regard, the consumers and government, as external stakeholders, can potentially influence the corporate objectives of a firm.

Reference List

Andrade, J., Hamza, K. and Xara-Brasil, D. (2017) ‘Business ethics: international analysis of codes of ethics and conduct’, Revista Brasileira de Marketing, 16(1), pp.1–15.

Bottenberg, K., Tuschke, A. and Flickinger, M. (2016) ‘Corporate governance between shareholder and stakeholder orientation’, Journal of Management Inquiry, 26(2), pp. 165–180.

Daku, M. (2018) ‘Ethics beyond ethics: the need for virtuous researchers’, BMC Medical Ethics, 19 (42), pp. 22–28.

De Gelder, E. et al. (2019) ‘Market competition and ethical standards: the case of fair trade mainstreaming’, Review of Social Economy, pp.1–31.

Grigoropoulos, J. E. (2019) ‘The role of ethics in 21st century organization’, International Journal of Progressive Education, 15(2), pp. 167–175.

Hand, J. et al. (2017) ‘The use of residual income valuation methods by U.S. sell-side equity analysts’, Journal of Financial Reporting, 2(1), pp. 1–29.

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Kozarevic, E. and Hodzic, M. (2016) ‘Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina’, Economic Review – Journal of Economics and Business, 14(2), pp. 18–32. Web.

Lee, J., Kim, S. and Kwon, I. (2017) ‘Corporate social responsibility as a strategic means to attract foreign investment: evidence from Korea’, Sustainability, 9(11), 2121.

Lee, J. and Jin, C. (2019) ‘The role of ethical marketing issues in consumer-brand relationship’, Sustainability, 11(23), pp. 1–21.

Quesado, P., Guzman, B. A. and Rodrigues, L. L. (2018) ‘Advantages and contributions in the balanced scorecard implementation’, Intangible Capital, 14(1), pp. 186–201.

Seeku, J. (2018) ‘Why banks fail? The case of the Gambia Commercial and Development Bank’, Issues in Business Management and Economics, 5(6), pp. 99–110.

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