Ethics in Corporate

Finance
Ethics is about how to act in pursuit of a given set of
objectives in a manner that seeks to attain the best
outcome for the collective good while causing the least
harm to all stakeholders.
Corporate finance involves decisions on wealth
maximization by evaluating risks and returns trade-offs in
the interest of the shareholders. Opportunities thus exist for
decisions to be made in the narrow interest of the decision
maker or that of the shareholder without regard to the
harm caused other stakeholders.
Governance and
Corporate
Control Around
the World
 Governance and Corporate Control Around the World

Relationships among various participants in determining the

direction and performance of a corporation.
Effective management of relationships among
• Shareholders
• Managers
• Board of Directors
• Employees
• Customers
• Creditors
• Supplier
• Community
 Ownership, Control and Governance
 Ownership and Control in Japan

Traditionally the most notable feature of Japanese corporate

finance has been the keiretsu. A keiretsu is a network of companies,
usually organized around a major bank. Japan is said to have a main
bank system, with long-standing relationships between banks and
firms. There are also long-standing business relationships between a
keiretsu’s companies.
For example, as of March 2009, Sumitomo
Corporation held about 10% of Sumitomo Metal
Industries, which in turn held about 2% of the shares of
Sumitomo Corporation.
 Think of the keiretsu as a system of corporate governance, where
power is divided among the main bank, the group’s largest companies,
and the group as a whole. This confers certain financial advantages.
 First, firms have access to additional “internal "financing— internal to

the group, that is. Thus a company with a capital budget exceeding
operating cash flows can turn to the main bank or other keiretsu
companies for financing. This avoids the cost or possible bad-news
signal of a public sale of securities.
 Second, when a keiretsu firm falls into financial distress, with

insufficient cash to pay its bills or fund necessary capital investments, a

workout can usually be arranged. New management can be brought in
from elsewhere in the group, and financing can be obtained, again
"internally.”
 Ownership and Control in Germany

Traditionally banks in Germany played a significant role in

corporate governance. This involved providing loans, owning large
amounts of equity directly, and the proxy voting of shares held on
behalf of customers. Over time this role has changed significantly.
The relationship between the largest German bank, Deutsche Bank,
and one of the largest German companies, Daimler AG, provides a
good illustration.
 Ownership and Control in Other Countries
 La Porta, Lopez-de-Silanes, and Shleifer surveyed corporate ownership in 27
developed economies. 16 They found relatively few firms with actively traded
shares and dispersed ownership. The German pattern of significant
ownership by banks and other financial institutions is also uncommon.
Instead, firms are typically controlled by wealthy families or the state. The
ultimate controlling shareholders typically have secure voting control even
when they do not have the majority stake in earnings, dividends, or asset
values.
 Family control does not usually mean a direct majority stake in the public firm.
Control is usually exercised by cross-shareholdings, pyramids, and dual-class
shares. We have already seen an example of cross-holdings with Sumitomo.
 Corporate Code of Conduct and the Success of the
Globalization
 Act with honesty and integrity, avoiding real and clear conflicts of interest in personal and
professional relationships.
 To provide information which is full, fair, accurate, complete, objective, relevant, timely
and understandable, including in and for reports and documents that the company files
with, or submit to, or submits to, the other public communications made by the company.
 Act in accordance with all the applicable laws, rules and regulations of governments, and
other appropriate private and public regulatory agencies.
 Act in good faith, responsibly, with due care, competence and carefulness, without
misrepresenting material facts or allowing my independent judgement to be
subordinated.
 Respect the confidentiality of information acquired in the course of business except when
authorized or otherwise legally obligated to disclose the information. It should not be used
for personal advantage.
 To promote ethical behaviour among our associates.
 Adhere to and promote this Code of Ethics.
 Foreign investment and the activities of TNCs have grown even more
rapidly than global trade in this period. But the changing nature of global
corporations means that these figures underestimate the true extent of their
international activities. A significant factor here has been the growth of global
.commodity. or .value. chains in many industries. While trade has always been a
significant feature, what is new is the ability to control production over large
distances without exercising ownership. A variety of consumer goods, including
garments, footwear and vegetables, are characterized by value chains in which
control of the chain resides with brand name producers such as Levi Strauss
and Nike, or large retailers such as WalMart and Tesco.
 A key feature of the development of such buyer-driven value
chains is that the buyer ensures that the producers meet delivery dates,
quality standards, design specifications and so on. In other words, the
buyer controls many of the aspects of production carried out by the
producer. It is then but a short step to argue that the buyer should also
take responsibility for the conditions under which subcontractors
operate, in terms of their relations with labour and their impact on the
environment. It is often these types of industries that saw explicit codes
of conduct introduced.
Thank you!!