How Business Ethics Affect Stockholder Equity

Page content

Benefits of Ethical Behavior

Business ethics is a subject taught in most management programs throughout the United States. Complex business relationships often test the moral character of employees and managers because it is impossible to monitor everyone at the same time all the time. With many stakeholders, a corporation has a multitude of responsibilities to act responsibly and reduce the erosion of stakeholder confidence. Stockholders, the owners of a company, can financially benefit from the ethical behavior of the managers hired to run the corporation.

The set-of-contracts model of a corporation demonstrates that there are many stakeholders affected by a corporation’s decisions. At the center of the model, the corporation has significant ability to adversely affect stakeholders such as stockholders, managers, creditors, the community, and even the government. To adhere to high standards of ethical behavior, each stakeholder must be affected positively by the corporation in an honest way.

Ethics refers to standards of judgment and behavior that treat others fairly. It is more than just following rules. It is about people making judgments about right and wrong, a highly subjective appraisal. There seems to be a general belief that large corporations are only looking out for themselves. The principle of self-interested behavior would seem to bolster this sentiment. However, there are long-term consequences that make ethical behavior a profitable undertaking in large companies.

Ethical behavior gives clear advantages to a corporation. First, ethical behavior allows firms to avoid fines and penalties associated with unethical behavior. Second, it attracts high-quality employees to the firm. Whenever a company is found to have acted unethically, current and prospective employees may feel that the behaviors of the company reflect on them making association with the firm undesirable. Ethical behavior also builds public trust for the firm making potential customers comfortable doing business with the firm. Finally, investors seek companies who are unlikely to be caught in a scandal where millions of dollars may be lost to lawsuits and other expenses in making the error in judgment right again.

It may be argued that ethical behavior is a necessary component to profitability. The set-of-contracts model works best in the real world when all stakeholders have confidence in the firm as an entity treating all involved fairly. Unethical behavior often increases profitability in the short term but the sacrifice to future profitability is usually not worth the risk. It represents an opportunity cost of realizing future cash flows for the sake of immediate payouts.