Business ethics is a key component in corporate governance in determining the success or failure of a business entity. They refer to the written and unwritten codes of principles and values that govern the actions and behavior of individuals in an organization (Svensson and Wood, 2011). It involves distinguishing right and wrong regarding the company policies. Ethical and unethical behavior directly affects not only the organization but also the community and society at large. Therefore, it should be implemented from the very start of a business and throughout its operations. Leaders in an organization usually set the tone for ethics for the rest of the employees. When the management is leading ethically, the rest of the employees follow suit and vice versa. An organization founded on ethics reap benefits such as profitability in the short and long term, boosts the reputation of the firm to the surrounding community, other businesses, as well as investors (Crane and Matten, 2016). Unethical business practices result in poor performance, poor company credibility which can result in significant financial harm and legal problems in cases where the unethical behavior translates to breaking the law. Kingfisher Airlines is one ideal example in which ethical practices played a part in the downfall of the company.
Kingfisher Airlines (KFA) was an airline based in India. The company was launched in May 2005 but had its license for both domestic and international flights canceled by February 2013. During its period of operation, the company suffered losses and acquired huge loans that turned difficult to pay, causing its bank accounts to be frozen and its reputation muddied, eventually collapsing (Kanthe, 2013). Taking a closer look at the underlying reasons for failure, unethical practices played a huge role. One, Vijay Mallya, who was the chairman and managing director of the airline, exercised control of the company, following his intense desire to shine in the industry. He made decisions that affected the profitability of the firm such as offering first class services and in-flight entertainment for domestic flights. Second, according to Criminal Bureau of Investigations (CBI) and banks, Mallya laundered a significant amount of money from the loans he was taking for the company, transferring the money to other of his companies. Third, there came a time when the company could not pay its employees their salaries which is unethical. These, together with the failure of the company to repay its debts corrupted the credibility and affected the success of the firm, leading to its collapse.
Various theories of corporate governance have been developed to enhance the main objective of corporate governance which is maximizing the value for shareholders by ensuring good social and environmental performances. The fundamental theories of corporate governance are rooted in Agency Theory (Abdullah andValentine, 2009). Others include moral hazard theory, stewardship theory, stakeholders theory, transaction cost theory, resource dependency theory, political theory, ethics theory, the theory of information asymmetry, and theory of efficient markets. Agency theory focuses on the relationship between owners/shareholders of a company (principals) and its directors (agents). In this relationship, the principals mandate the agents to perform services on their behalf. Under this theory, there arises a conflict of interest since the principal expects the agent to make decisions in their (principals) interest, yet the agent cannot adopt decisions that only pursue the interest of the principal. In the case of Kingfisher Airlines, some of the decisions that Mallya made were in conflict with the interest of the shareholders of the airline. For instance, he took some of the money meant to boost the operations of KFA and transferred it to other of his companies. Agency theory points to the need of harmonizing the interests of shareholders with that of the directors.
Following the conflict of interest expressed in agency theory, managers are prone to moral hazard and opportunistic behavior guided by their interests. The theory of moral hazard depicts to the opportunistic behavior of managers. Moral hazard is determined by two issues: the conflict of interest of the principal and agent, and the hidden actions and opportunistic behavior of the managers resulting from asymmetric information held between these counterparties. The transfer of money belonging to KFA by Mallya to his other companies can be viewed as an opportunistic behavior to boost his other businesses at the expense of KFA. The results of moral hazard are decreasing performance and even business failure as witnessed with KFA. Stewardship theory outlines the roles of managers as administrators in maintaining and developing the organizations values. Steward theory considers the board director structure as an important factor and, therefore, must be comprised of company intern members since they know best the problems of the company and as such can act accordingly (Siebels and zu KnyphausenAufsess, 2012). Kingfisher Airlines adhered to this theory by having Mallya as the chairman and managing director since he knew best the vision he had for the company.
Stakeholders theory is a development of agency theory. The theory explores on the corporate responsibility of the various stakeholders in an organization. It is based on maximizing the interests of all stakeholders (Freeman, Harrison, Wicks, Parmar, and De Colle, 2010). Through it, economic success and competitive advantage are achieved. For instance, Kingfisher Airlines offered its customers with outstanding services that attracted many of them to the airline. The main issue addressed in transaction cost theory is to explain the transactions conducted regarding efficiency of governance structures. Ronald Coase says that contracting by market involves costs. By creating an organization with the responsibility for resource allocation, some expenditure can be avoided. Political theory points to the political influence in the governance structure of organizations. Government influence is evident in the KFA case especially when the firm is sued for defaulting loans. Laws and regulations by the government ensure that businesses operate under certain frameworks for the good of all stakeholders. Resource dependency theory emphasizes that organization activities are open systems and the decisions on resource allocation are based on the environment and the social relations in which they operate. This explains the decisions made by the management of KFA like in-flight entertainment. They were based on the environment the company was operating in which needed these services. These are the main theories of corporate governance. Ethics theory, the theory of information asymmetry, and theory of efficient markets are developments of the theories discussed. To achieve effectiveness, there is need to adopt a combination of these theories rather than applying an individual theory.
Corporate governance refers to the rules, practices, and processes by which companies are operated and managed. The primary goal of corporate governance is to facilitate effective, entrepreneurial and prudent management capable of delivering the long-term success of an organization (Achim and Borlea, 2013). This role is assumed by the board of directors who are appointed by the shareholders of the company. All the strategies and policies that guide the running of organizations are passed by the board of directors. This is to say that, a strong board of directors is likely to produce excellent corporate governance, and thus success for the organization, while weak corporate governance would be a result of a weak board of directors and is likely to slow down performance or lead to the failure of the business. There are certain areas of weaknesses that can be identified in corporate governance that could hinder the achievement of organizations goals. These areas include separation of ownership and management, insider trading, misrepresentation of information, and in monitoring costs.
In the area of separation of ownership and management, managers go wrong by striving to achieve goals outside those of the organization, creating an agency problem harmful to the company in the long-run. The impact of this action is felt by stakeholders and investors who are interested in the company. There arises a conflict of interest for the board of directors entrusted with the companys assets when they attempt to acquire personal benefits from the companys success, rather than striving towards maximizing shareholder wealth. Insider trading happens when company officials with confidential information about the company could use it for their benefits by selling shares to another individual who does not have this information. This could also be conducted by other shareholders not directly linked to the company, such as government agents, an external auditor, or a relative to a corporate officer. Misrepresentation of information can be done by corporate officials, especially on financial information. This could be done for reasons like avoiding paying heavy taxes or to affect the value of the company shares in the market. This could be done by trading properties between the parent company and its subsidiaries to increase or decrease a number of revenues or assets. Misleading information is a failure in corporate governance since it can lead to companies getting away with corrupt deals. Finally, monitoring costs can be tricky for managers. With laws being put in place to regulate misuse of power through corporate governance, compliance becomes costly. This area, therefore, requires a high sense of keenness from the board of directors to save the company from unnecessary costs. These areas of weakness in corporate governance can be huge drawbacks to the performance of the organization.
Several recommendations to these weaknesses in corporate governance can aid in minimizing such instances and bettering the governance of firms. One, in the separation of ownership and management, the interests of the corporate officials should be harmonized with those of the company to ensure that both benefit. Through this, no official will feel the need to extend his personal interests at the expense of the shareholders gains. This action will also aid in minimizing cases of insider trading which are as a result of dissatisfaction. The compliancy of regulations and policies set by the law should be followed, and if so, the problem of misrepresentation of information will be done with, subsequently easing the process of monitoring costs brought about by compliance requirements. Boards of directors should act with integrity while managing resources entrusted to them by the owners of the organizations they represent. If these actions are taken, failure in corporate governance will cease to be a reason that causes organizations to fall.
Abdullah, H., & Valentine, B. (2009). Fundamental and ethics theories of corporate governance. Middle Eastern Finance and Economics, 4(4), 88-96.
Achim, M. V., & Borlea, N. S. (2013). Corporate governance and business performances. Modern approaches in the new economy, LAP LAMBERT Academic Publishing, Germany.
Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S. (2010). Stakeholder theory: The state of the art. Cambridge University Press.
Kanthe, R. U. (2013). Challenges of Indian aviation industry in chaotic phase. Innov...
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