Business ethics are the standards of conduct or moral judgment that apply to persons engaged in commerce. Violations of these standards in finance involve a variety of actions: “creative accounting,” earnings management, misleading financial forecasts, insider trading, fraud, excessive executive compensation, options backdating, bribery, and kickbacks.
The financial press has reported many such violations in recent years, involving such well-known companies as Apple and Bank of America. As a result, the financial community is developing and enforcing ethical standards.
The goal of these ethical standards is to motivate business and market participants to adhere to both the letter and the spirit of laws and regulations concerned with business and professional practice. Most business leaders believe businesses actually strengthen their competitive positions by maintaining high ethical standards.
Considering Ethics
Robert A. Cooke, a noted ethicist, suggests that the following questions be used to assess the ethical viability of a proposed action.1
1. Is the action arbitrary or capricious? Does it unfairly single out an individual or group?
2. Does the action violate the moral or legal rights of any individual or group?
3. Does the action conform to accepted moral standards?
4. Are there alternative courses of action that are less likely to cause actual or potential harm?
Clearly, considering such questions before taking an action can help to ensure its ethical viability.
Today, many firms are addressing the issue of ethics by establishing corporate ethics policies. The Focus on Ethics box provides an example of ethics policies at Google. A major impetus toward the development of ethics policies has been the Sarbanes-Oxley Act of 2002.
Frequently, employees are required to sign a formal pledge to uphold the firm’s ethics policies. Such policies typically apply to employee actions in dealing with all corporate stakeholders, including the public.
Ethics and Share Price
An effective ethics program can enhance corporate value by producing a number of positive benefits. It can reduce potential litigation and judgment costs, maintain a positive corporate image, build shareholder confidence, and gain the loyalty, commitment, and respect of the firm’s stakeholders.
Such actions, by maintaining and enhancing cash flow and reducing perceived risk, can positively
affect the firm’s share price. Ethical behavior is therefore viewed as necessary for achieving the firm’s goal of owner wealth maximization.
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