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  • Category:
    Business
  • Document type:
    Assignment
  • Level:
    Masters
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9GOVERNANCE

GOVERNANCE

Student No

Corporate Governance

Introduction

The business world is fast changing. More people are becoming increasingly aware of how businesses are supposed to function in the society and their overall effect on their wellbeing. Thus, most consumers tend to be associated with companies that do less harm to the environment or follow the law while pursuing their goals. Companies that fail to live up to the public expectations suffer great reputational damage that could threaten their existence. It is important that businesses adhere to ethical practices governing their industries.

Summary of Article

The newspaper article is about the arrest of Samsung heir Lee Jae-Yong over political corruption scandal. Prosecutors accuse Lee of paying US$ 40 million in bribes to a friend of impeached President Park to be granted policy favors. The scandal surrounding Lee has had a negative image for the company and it is affecting its business. Its main holdings firm, Samsung C&T dropped two percent and another key unit Samsung Life Insurance, fell 1.4 percent. Lee who is being held at a detention center had earlier avoided arrest after the court ruled there was insufficient evidence («Samsung boss’ arrest stuns South Korea», 2017). However, the prosecutors released fresh evidence that led to his arrest. The detention of Lee, which is also the first for a Samsung head, is expected to affect the company’s operations, which also forms a significant part of the South Korean economy. It includes Samsung Electronics, which is the leading smartphone manufacturer in the world.

The latest developments have had adverse effects of Samsung’s image. It comes at a moment when the company is undergoing an intricate restructuring and it could be forced from carrying out its overseas mergers and acquisitions. It could be a double tragedy when Lee is punished since its Galaxy Note 7 could face sanctions («Samsung boss’ arrest stuns South Korea», 2017). The prosecutors are investing whether the Samsung paid Choi Soon Shil to be granted the government go ahead for the controversial merger of its two units. The move is regarded as a strategy towards making sure a smooth power transfer to Lee, Many investors opposed the merger of Samsung C&T and Cheil Industries saying that it would undervalue the former unit’s shares.

Corporate governance issues raised by Samsung

Corporate governance is defined as a system of rules and practices by which an organization is directed and controlled. It encompasses striking a balance of an organization’s many stakeholders such as financiers, community, suppliers, management, shareholders, and the government (Du Plessis, Hargovan, Bagaric, & Harris, 2010, p 10). Corporate governance helps provide a framework for achieving an organization’s objectives. The authors say that stakeholders form a crucial part of any company’s existence and long-term prosperity.

Bad corporate governance such as the case facing Samsung Chief Lee can cast aspersions on the company’s integrity, reliability, and commitment to shareholders. Particularly, the tolerance or the support of illegal activities can lead to scandals just like the one facing Mr. Lee. Most shareholders demand that apart from just making profits, a company should exhibit good corporate citizenship through ethical behavior, sound corporate governance practices, and environmental awareness.

The most serious issue facing Lee is corruption charges. Besides the requirement that businesses carry out its activities in an economically, efficient, and effective way, there is a growing demand that they are ethical as well. Most organizations have a framework that guides the connection between its objectives and other stakeholders within and out of the organization (Fernando 2010). Moreover, in corporate ties, it is expected that companies serve observe the highest level of ethical when serving its stakeholders. A corporation is supposed to account for its ethical performance and report it to the relevant stakeholders. By engaging in corrupt practices, Lee clearly failed to observe what is required of him as the head of Samsung. Ethical behavior should be manifested through by unselfish actions that are good for both the organization and the stakeholders as well.

The other issue raised is failing to look into stakeholders concerns. As earlier stated, many investors opposed the merger of Samsung C&T and Cheil Industries saying that it would undervalue the former unit’s shares. However, the company proceeded to merge the two units in order to make the Samsung easier to govern for the Lee. Arguably, this is in total disregard to what a leader of a company is supposed to do which is to protect shareholders. According to the stewardship theory, a manager is responsible for protecting and maximizing shareholders wealth through firm performance (Friedman, & Miles, 2006, p. 10). The main function of a company executive is making profits for shareholders. Most executives derive satisfaction when their companies are doing well. The theory states that the company’s goal should come first over individual aspirations.

There are numerous theories that are associated with corporate governance. They include business ethics theory, virtue ethics theory, discourse ethics theory, feminist ethics theory, and postmodern ethics theory. Business ethics examines business functions, decisions, and situations where right and wrong are addressed. Most importantly, it hopes to address instances where big companies can use their influence and power wrongly. (Crane and Matten (2016) says that businesses play an important role in the society than ever before thus the greater concern of stakeholders. The theory helps identify advantages and disadvantages tied to ethical concerns within a firm. Indeed, it was ethically wrong for Lee to bribe Choi Soon Shil to secure state approval for the controversial merger of two Samsung units. Before making decisions, company heads should be guided by norms, values, and beliefs fixed in the social process that would help them make the right decisions

Virtue ethics theory emphasizes on moral excellence, good character, and chastity. A company’s manager who chooses, to be honest not only does his organization good but also himself. Virtues can be defined as a set of characters that enables an individual to live a better life (Akrivou, & Sison 2016). Such persons look beyond making themselves happy at the expense of others. In the Lee case, it can be assumed that he lacks the required values since he made sure that the two Samsung units were merged with the support of the government even when some shareholders opposed the move. Had he listened to the concerns raised by the shareholders, he would not have found himself in the predicament that he if facing now.

Kant’s deontological theory on ethics explains that there are objective ethical standards of behavior that each person is required to follow. The author expounds that our moral behavior in certain areas cannot be grounded on an individual’s practical experiences or natural needs, but based on what the society expects (Crane and Matten 2016). It should be hinged on the standard of good behavior, which is achieved via unbiased critical thinking. The hallmark of moral behavior is obeying objective standards of behavior. Lee’s actions clearly contravened all these requirements.

Adding on that John Stuart Mill’s utilitarian theory centers on quality of behaviors as expounded by the deontological theory. The uniqueness of utilitarian theory is that it focuses on the practical outcomes of an action to establish if that action was good or bad (Beattie 2017). An action is regarded as right if it makes the majority of those affected by that particular action a happy. Clearly, its shareholders and the public are not happy with the recent accusations leveled against Lee.

Companies that engage in unethical conducts suffer irreparable damage. Foremost, the authorities may sanction the affected businesses for failure to adhere to the set regulations (Jennings, 2014, p. 162). Secondly, they may cause their stock market value to stumble, which would result to massive losses by shareholders. During the 2016 Samsung annual meeting, its shareholders raised concerns over the company’s deteriorating performance and governance problems (Jung, 2016). Vocal shareholders occasionally interrupted the proceedings to raise concern about issues that include the company’s slow growth, lack of new growth drivers, and poor oversight by its directors. The latest case surrounding Lee could any make things bad for Samsung.

Samsung may be fined a lot of money, which may affect its balance sheet. For example, the Volkswagen car company is expected to lose more than the US $4.8 billion that it gained from falsifying emission results tests (Armour, 2016). The car manufacturer would be forced to fork out more to cover for the mess including legal costs, contingent liabilities, and cleanup costs. The worst part is that executives may lose their jobs and face potential personal liability for criminal or negligent misconduct.

There are ethical practices that every organization must follow. Fernando (2010) say that companies should

  1. Act with honesty and integrity by avoiding conflict of interest in personal and professional relationship

  2. Provide information that is timely, relevant, and complete to regulators

  3. Comply with regulations

  4. Act in good faith always

  5. Share skills and knowledge that is relevant to stakeholders needs

Importance of the Issues to Business and the General Public

The role of corporate governance is to run companies ethically in a way that all employees, competitors, customers, creditors, and governments are treated in a fair manner. Moreover, the society tends to demand more responsibility from businesses. Moral behavior should be a foundation of everybody. Businesses that generally conduct their activities in accordance with have the interest of the society at heart. That way, they do not engage in practices that can be a threat to the society such as releasing harmful products to the environment, bribing to engage in unfair practices among others (Mika, 2012, p. 41). As earlier stated, some of the biggest companies have a crucial role in the economy of a country and should it be affected in any way, hundreds of thousands of lives would follow similar suits. Jobs would be lost and the cost of inflation would go up.

In addition, big corporations can use their power and influence to benefit their owners at the expense of the public. If not checked, they could end up engaging in corrupt activities that definitely would infringe on the rights of the victims (Crane and Matten 2016). The multinationals could also end up influencing every arm of the government from parliament, judiciary, and even the presidency, which could affect either directly or indirectly. It is, therefore, important that businesses follow due process always for the benefit of the society.

The case facing Lee should offer lessons to other businesses and executives. First, managers should be aware that any involvement in unethical deals though they have short-term gains, they would end up paying more when caught by authorities (Jennings, 2014, p. 162). It is also important that they become aware that although they might be making such decisions to help their companies if caught, they could be held accountable for their actions, which could taint their often impressive careers.

Equally, businesses can suffer other grave consequences of failing to uphold ethical standards. Apart from suffering irreparable damages, they could also end up losing their customers to rivals firms. It takes years to build trust with shareholders but the same can come tumbling down a short duration of time when a company decides to engage in unfair practices. Moreover, companies should understand that besides generating revenue, they should put the interests of shareholders and the community first.

Conclusion

In general, failure to observe ethics could spell doom for Samsung. Since it is in a very competitive industry, the company should do anything in its power to prevent a repeat of corruption charges against its executives. The recent case involving Samsung heir has not only affected the company’s image but also affected its performance on the stock market. It continues to receive maximum coverage from the international media. Another important issue is that companies should always seek the opinion of shareholders before making changes in their structures. Notably, Samsung shareholders had opposed the merging of two units at the company but their pleas were ignored. Had Lee listened to their concerns, he would not be facing the predicament that he is facing now.

Reference List

Akrivou, K., & Sison, A. (2016). The Challenges of Capitalism for Virtue Ethics and the Common Good. Chelteham: Edward Elgar Publishing.

Armour, J. (2016). Volkswagen’s Emissions Scandal: Lessons for Corporate Governance? (Part 1). Oxford Law Faculty. Retrieved 6 April 2017, from https://www.law.ox.ac.uk/business-law-blog/blog/2016/05/volkswagen%E2%80%99s-emissions-scandal-lessons-corporate-governance-part-1

Abdullah, H., & Valentine, B. (2009). Fundamental and Ethics Theories of Corporate Governance (pp. 1-9). University Putra Malaysia. Retrieved from https://pdfs.semanticscholar.org/886d/c63d287375c54f5143225243a5edecddbf59.pdf

Beattie, F. (2016). An Examination of the Utilitarian Theory of Morals. Iowa: BioLife.

Crane, A., & Matten, D. (2016). Business ethics. Oxford: Oxford University Press.

Du Plessis, J., Hargovan, A., Bagaric, M., & Harris, J. (2010). Principles of contemporary corporate governance. Cambridge: Cambridge University Press.

Fernando, A. (2010). Business Ethics And Corporate Governance . Indianapolis: Pearson Education India.

Jennings, M. (2014). Business ethics. Boston: Cengage Learning.

Jung, S. (2016). Tempers fray at Samsung Electronics AGM. Ft.com. Retrieved 6 April 2017, from https://www.ft.com/content/ed6cc15e-e757-11e5-ac45-5c039e797d1c

Mika, A. (2012). The importance of codes of ethics. Hamburg: Bachelor + Master Pub. (41)

Samsung boss’ arrest stuns South Korea. (2017). NewsComAu. Retrieved 6 April 2017, from http://www.news.com.au/world/asia/samsung-defacto-head-lee-jaeyong-arrested-on-charges-related-to-a-political-corruption-scandal/news-story/0147dee07a9261a0be40188c0189f2ac

Appendix

Samsung boss’ arrest stuns South Korea. (2017). NewsComAu. Retrieved 6 April 2017, from http://www.news.com.au/world/asia/samsung-defacto-head-lee-jaeyong-arrested-on-charges-related-to-a-political-corruption-scandal/news-story/0147dee07a9261a0be40188c0189f2ac