Ethical business practices are conduct standards related to moral judgments applicable to people engaged in commerce related positions (Gitman, 2012). Shareholders and stakeholders are two different groups of investors that have a vested interest in the success of a company. Shareholders are investors who are not employed by the company, but have purchased shares (stock) in a company with hopes of their investment growing. Stakeholders are customers, employees, owners, creditors, vendors, who actually do the work of the company, or have direct economic impact on the company’s success (Gitman, 2012).
Ethics plays a large role in the success or failure of a company. For instance, if a company purposely records profits or losses in its financial statements in order to show a more favorable image to its shareholders rather than the actual financial data, shareholders will lose confidence in the company and sell their shares. Also, if stakeholders are treated unfavorably or not paid on time, turnover and inability to secure credit will also affect the company’s bottom line. Some argue that executives have only the duty of pleasing its shareholders, because that group provides much of the cash that is needed for operations (Gitman, 2012). However, if stakeholders are displeased with operations, an important cog in the wheel is missing and will ultimately cause the company to fail.
An example of misrepresentation to investors is the banking failures and housing market crash of 2008. Mortgage securities are actual mortgages that are sold by mortgage brokers, packaged as securities, offered by financial institutions for investment (Brigham & Ehrhardt, 2011). Mortgage securities contributed to the global economic crisis by being presented as a lower risk than the mortgage contained in the security actually were. (Brigham & Ehrhardt, 2011). Investors purchased these securities expecting a healthy return on their investment, but instead were buying mortgages that were in risk of default. These mortgages were risky because of mortgagees not being able to afford the loan due to variable interest rates, or by fraudulent lending practices engaged in by the mortgage banks that misrepresented information to the customer. Also, when demand for housing began to drop due to the large number of mortgage defaults and unemployment, home prices plummeted and the number of short sales and foreclosures forced several bank closures. Lending slowed dramatically and this affected U.S. businesses, individuals, and other countries around the globe.
Executives have a primary responsibility to both its shareholders and stakeholders in order to ensure maximum profit and growth within a company. It is the duty of executives, managers, and officers of a company to hold a high standard of ethics so that both shareholders and stakeholders have confidence in the company and want to remain investors and committed to its goals. Both of these groups have heavy influence on the earnings per share of a company’s stock, and both are important in growth and maximum profit of a company.
Brigham, E., Ehrhardt, M. (2011). Financial Management: Theory and Practice
(13th ed.) Ohio: Cengage Learning. ISBN-13: 978-1-133-66500-7
Gitman, Lawrence J. & Zutter, Chad J. (2012). Principles of Managerial Finance. 13th
Edition. Prentice Hall.