ETHICS AND CORPORATE GOVERNANCE (STUDY OBJECTIVE 8)
Creating a corporate governance system is a matter of doing what is right. However, maintaining positive corporate governance during tough times is an extremely challenging task. Corporate leaders may be faced with situations where their corporate governance principles and their ethical values are tested “when the going gets tough.”
Arguably, the most challenging ethical issue within corporate governance is the potential conflict of interest for managers in their role as financial stewards of the corporation. It may become difficult for managers to always act in the best interest of the shareholders, especially in times when shareholder interests and management interests are not aligned. Managers are often placed in a very difficult position, because their jobs include lofty goals that are tied to the company's earnings. Thus, managers may be inclined to act in ways that protect their jobs or the jobs of their employees. Actions taken in the personal interest of management often come at the expense of the shareholders.
In recent years, a troubling number of accounting executives have abandoned or ignored their fiduciary responsibility to the corporate shareholders. In most cases, these executives did not set out to do wrong, but they let their personal interests take priority over their corporate duties. Unfortunately, this is often how fraud unfolds: A high-ranking corporate official, with help from those working for him, may become somewhat desperate in his attempts to make his goal. His intentions are not dishonest at first, but eventually he shifts his focus and his actions become fraudulent. He thinks there will be a way out of the deception in the near future, but that break never comes. Instead, the fraud grows. Some subordinates may become reluctant to continue with the crime, but none has the courage to blow the whistle. Eventually, they will be discovered, the company's stock price will drop, and the shareholders will lose a lot of money. Ultimately, the perpetrators will be looking for new jobs, and some may go to jail because of their involvement.7
Participating in earnings management is a very risky activity for managers. Although the motivation is for the company to realize sustained or improved earnings, the reality is that greater harm than good will result if the means of achieving the positive outcome is not honest.
The corporate governance structure plays a significant role in maintaining an environment of honesty. Corporate governance includes the function of internal controls and compliance, which is responsible for minimizing opportunities for collusion and management circumvention of controls. In reality, however, the success of the system depends on the integrity of the company's leaders. What matters most is the personal moral character and technical competence of the people who make up the financial systems. If top managers are intent upon doing wrong, it would be nearly impossible to develop a set of checks and balances that could completely prevent them from doing so.
Another example where corporate governance may be challenged in times of hardship pertains to management's role regarding oversight of the company's workforce. In times of trouble, changes may be needed in the workforce, and management may be placed in the painstaking position of firing and reorganizing personnel. An ethical approach to this difficult task is important to develop.
THE REAL WORLD
Motorola Solutions, Inc., a worldwide electronics conglomerate, has a longstanding reputation of being a great place to work. In addition to its economic success, it is well known for its model social and environmental performance. The company's corporate citizenship programs support philanthropy, diversity, wellness, and community outreach. The company prides itself on being a great corporate citizen.
Motorola's favorable reputation of strong ethics was threatened, however, as the company has been forced to downsize several times during the past two decades in order to maintain its competitive edge (like many high-tech companies). In carrying out this difficult task of reducing its workforce, management made sure that affected people were treated with respect, protecting employee benefits for as long as possible during the transition periods. It offered placement counseling and provided extended medical coverage and severance packages. Motorola's management team claims that times of hardship prove how important corporate governance is to a corporation.8
The Motorola case exemplifies a company upholding its commitment to corporate governance during difficult financial times. Motorola's approach focused on preserving the morale and welfare of its human resources. It is sometimes challenging to balance personnel issues with stewardship obligations. Some managers may be inclined to make swift, drastic cuts in order to protect shareholder resources. However, a compassionate approach is likely to be more effective than a quick fix in terms of protecting the company's reputation.
Another concept that is extremely significant to corporate governance and ethical conduct is independence. With the changes imposed by the Sarbanes–Oxley Act, it is more important than ever for a corporation's audit committee to maintain independence when it performs its duties. The audit committee is responsible for financial oversight, which requires it to challenge financial decisions and presentations of related information. Even though the board of directors demands ethical conduct from the company, the audit committee cannot be too trusting of the company's management. Members of the audit committee cannot let their connection to the company overshadow their objectivity with regard to financial matters. They must thoroughly understand the company's underlying transactions, especially any areas involving judgment and estimates, as well as nonroutine transactions that may have bypassed the normal system of internal controls.
Although there are many legal aspects of corporate governance that mandate an ethical business environment, there is no substitute for the integrity and ethics of a company's leaders.