Investigating the Ethical Concerns Associated with Corporate Finance and How to Manage them
Background of the Study
Investors all over the world are becoming more interested in ethical finance. Research reveals that the growth of ethical or Socially Responsible Investment (SRI) continues to outperform that of traditional investment techniques (Chelawat & Trivedi, 2013). For instance, at the beginning of 2010, SRI assets surpassed $3 trillion, an increment of roughly 34% in five years, compared to barely 3% for traditionally managed assets. Also, SRI assets increased by 13% during the recession, compared to 1% for traditional, professionally managed assets (Chelawat & Trivedi, 2013). The author further adds that a growing number of investment consultants and analysts acknowledge the significance of ethics and integrate them into investment decision-making. Marantika et al. (2020) further reveal financial decisions impact company value in corporate finance, and they are influenced by corporate manager decisions about the uptake, distribution, and allocation of financial resources, all while remaining under the control of corporate governance. Thus, corporate finance has become more important in terms of business valuation, which has a positive impact on the generation of value. Notably, corporate finance refers to the financial decisions made by corporate executives to improve the effectiveness of the company’s financial management (Marantika et al., 2020).
Research reveals that the underdeveloped nature of banking systems and financial markets of many nations (mainly in frontier and emerging markets) has led to alternative investment financing options, such as microfinance firms (Sahut et al., 2018). To serve this niche, some of the major international banks have partnered with providers of local microcredit to demonstrate their commitment to social development and make a profit. Banks are progressively rethinking their actions and requirements to finance projects and businesses in developing nations. In times of economic crises, investment funds tied to social commitment goals demonstrate more consistency in their benefits than funds whose main goal is profit, as Gangi and Trotta (2015) point out. According to Sahut et al. (2018), this implies that the economic and moral values associated with ethics provide balance and solidity to corporate finance during profit-seeking in the markets. Despite this fact, to the best of my knowledge, researchers have focused very little effort on investigating the ethical concerns in corporate finance. This study aims to fill this research gap by investigating the ethical concerns in corporate finance and defining ways to manage them so that corporate finance can continue enjoying the benefits of ethics in the financial industry.
Statement of the Problem
According to the literature review, ethical finance and socially responsible investing research have been focused on a few areas. While certain significant topics, such as the financial performance of ethical funds and indices, have gotten sufficient attention from scholars, many others require more investigation (Chelawat & Trivedi, 2013). One of these areas is ethical issues associated with corporate finance. Sahut et al. (2018) reveal that an in-depth investigation of the topic of ethical finance and governance is particularly pertinent owing to the increasing number and severity of corporate fraud episodes. The WorldCom, Lehman Brothers, and Enron scandals have served to undermine investors’ and public confidence. On a different note, Melé et al. (2017) urge that we must retain the future before it is too late by reversing the financialization procedure and ensuring that finance sector operates in the interest of human dignity. To achieve this, this study aims to uncover the ethical concerns associated with corporate finance.
Research Aims and Objectives
Following the recent financial crises and its ramifications, it has become more important than ever to consider the relationship between finance and accounting, means of integrating ethics and efficacy, and how to empower and to motivate finance practitioners to commit to fairness, to justice, and increased understanding, as well as to enhance their integrity (Melé et al., 2017). The primary goal of this study is to uncover ethical concerns prevalent in corporate finance and define how they can be managed. The following specific objectives will guide the study to achieve this goal.
To determine how ethics affect corporate financial performance.
To determine ethical concerns in corporate finance.
To define ways of managing ethical concerns associated with corporate finance.
The following research questions have been formulated from the research aims and objectives to guide the study.
What are the effects of ethics on corporate financial performance?
What are the ethical concerns in corporate finance?
How can ethical concerns associated with corporate finance be managed?
This section covers the literature review related to the topic under study. The goal of this section is to provide the reader as well as the researcher with a comprehensive understanding of the research topic. The section covers the concept of corporate finance and ethics. It further discusses ethics in finance.
Corporate finance is an important aspect of any company in today’s economic world. It is the department in charge of how firms and organizations manage their funding sources, accounting, capital structuring, and investment decisions. Corporate finance encompasses a wide variety of activities, ranging from capital investment decisions to investment banking. For instance, it is concerned with increasing shareholders’ value through financial planning, dividend distribution, and other tactics (Ethics in Corporate Finance, 2022). They are also in charge of taxation and capital investments. Furthermore, the department regulates managers’ behavior to improve the worth of the firm to shareholders without being motivated by self-interest. It also provides analyses and methods for allocating financial resources.
Ethics and Corporate Ethics
Ethics refers to a person’s collection of moral principles. The role of ethics is to determine what is wrong and what is right. It’s also known as a code of conduct, which most individuals do not want to break. Ethics exist to assist us and provide advice for our actions that have an impact on others (Ethics in Corporate Finance, 2022). Morals, standards, and values are all important aspects of ethics. People will act unethically if they quit following their own morals, which might result in adverse effects such as job loss, jail time, large fines, or reputational damage. Eisses (2017) defines corporate ethics as the sense of ethical content in an organization’s procedures and practices by its members.
If a behavior does not conform to a high standard or if it is morally wrong, it is termed unethical. A perfect example of unethical behavior in a business is insider trading. Businesses must ensure that their employees embrace honesty, fairness, and respect to avoid this. Even if governments and regulators use legislative reform to prevent misconduct, it is still not enough to ensure that a company is totally ethical. This is the main reason why businesses must build an ethical framework and a culture of integrity. Firms require a well-developed set of ethical guidelines to assist in analyzing decisions and their potential conduct from an ethical perspective. Since ethical issues in corporate finance have been largely ignored by scholars, it is important to uncover the unethical issues in this sector. These issues can serve as a guide for developing a set of ethical guidelines to assist in analyzing decisions and potential conduct of financial institutions from an ethical perspective.
Ethics in Finance
Research reveals that accounting and finance are technical tools with a close connection to ethics (Melé et al., 2017). The South African divestment movement is an excellent example of how ethics ties in with corporate finance. When South Africam(SA) was under the segregationist apartheid system in the mid-1980s, American university students attacked American companies doing business in SA in an attempt to overthrow it. Divestment campaign’s participants lobbied their own institutions to divest from those corporations. The plan was to destabilize South Africa’s finances to the point that it would be forced to change, and the strategy was a success. Over 200 American companies had divested from SA by 1990, taking approximately $1 billion worth of investment from the nation’s economy. Those businesses had clearly received the message from the student-led university divestment and chose to conduct business elsewhere. The corporations’ activities represented an ethical use of financial capital, even though their motivation was purely financial. There are now publicly available lists of companies that exemplify SRI. Companies with strong environmental policies, social responsibility, and governance are more likely to be included on the list (Ethics in Corporate Finance, 2022).
While explaining the relationship between corporate finance and ethics, Melé et al. (2017) urge that accounting and finance cannot work without, and trust cannot be achieved without ethics. Ethics in finance is also built on a culture of integrity. Notably, ethics covers actions, anticipated repercussions, and people participating in any human activity, with or without their virtues (Melé et al., 2017). In the field of finance, the definition of ethics relates to the proper use of money, whether it is one’s own or someone else’s money. Christen (2022) further urge that dealing with a company’s financial resources entails a lot of risks and decision-making, which presents many opportunities for unethical practices. Government and regulator regulatory improvements are insufficient to ensure that a corporation is entirely ethical; therefore, firms require a created set of standards to analyze actions and evaluate prospective conduct from an ethical standpoint (Christen, 2022). In order to establish such a set of standards in corporate finance, it is vital to understand the most prevalent unethical practices in this sector. This study will uncover the ethical issues associated with corporate finance.
Investors, customers, and the general public have been known to reject and boycott businesses that violate ethical standards. However, businesses that adhere to ethical standards reap substantial financial rewards. Therefore, individuals involved in corporate finance in the contemporary world must have a strong basis in ethics (Ethics in Corporate Finance, 2022). Ethics in finance is associated with various benefits, including assisting in avoiding legal issues, maintaining a good reputation with customers and high consumer confidence, minimizing financial risks, and allowing an organization to enjoy a positive corporate culture and a motivated and dedicated ethical workforce. Ethics also allow financial institutions to understand their social license to operate and promote social responsibility (The Importance of Ethics in Finance, 2022).
This section includes an outline of the research methods employed in this study. Various concepts are covered, including research design, search method, and data gathering and analysis procedures.
In this research, I employed a literature-based approach. Newman and Gough (2020) reveal that literature analysis is used to construct arguments based on what a researcher already knows and does not know about a subject. To determine how ethics affect corporate financial performance, the ethical concerns in corporate finance, and determine ways of managing ethical concerns associated with corporate finance, I used a meta-analysis and full systematic literature review. A systematic literature review is a research strategy for identifying and critically evaluating relevant research and gathering and analyzing data from previous studies (Snyder, 2019). On the other hand, a meta-analysis entails merging results from several researchers to compare and emphasize links, patterns, and conflicts that emerge in the context of various studies on the same topic (Snyder, 2019).
Search Strategy and Selection Criteria
I used recognized databases such as EbscoHost, Google Scholar, ProQuest, Sage publications, and Science Direct to select the most relevant publications for review. Several search phrases were used to find relevant data sources. “Effects of ethics on corporate financial performance,” “corporate finance and ethics,” “managing ethical issues in corporate finance,” and “ethical issues and corporate finance” are among them. I also refined the search results using Boolean operators such as NOT, AND, OR, and truncation and wildcard techniques. Also, I used an ancestry search to locate potential sources. This entailed keeping track of all relevant footnotes and cited references and incorporating them in the review. To discover relevant and reliable sources of data, I devised a set of exclusion and inclusion criteria.
Based on the inclusion criterion, I only reviewed articles on corporate finance and ethics. I reviewed studies published in the last ten years to ensure that only the most up-to-date material was included in the report. Also, I only included publications written in English to ensure that the data sources were understood. In my analysis, I only included peer-reviewed and scholarly journal papers. Furthermore, I only considered papers that were published in full text and had free access. This was done to ensure that full information regarding the study under consideration was readily available. All studies that did not match the criterion for inclusion were excluded.
After preliminary screening, I retrieved all of the studies that were deemed relevant and trustworthy for this research. I prepared a data extraction sheet, which included publication information as well as study parameters such as sample size, location, design, and results. The risk of bias for the papers selected for review was established by focusing on methodological issues such as the research design’s adequacy.
Data Analysis Procedure
I performed a thematic and content analysis of the secondary data to address the three research questions. I started data analysis by performing thematic analysis to amass evidence from the different sources and generate themes. I then performed content analysis to critically analyze the generated themes. The findings are resented in the next section.
The goal of this research was three-fold. First, the study aimed to determine the ethical concerns in corporate finance. Secondly, this study sought to determine how ethics affect corporate financial performance. Lastly, the study sought to uncover practical ways of managing ethical concerns associated with corporate finance. This section presents the study findings. The research questions guided the presentation of findings.
RQ1: What are the effects of ethics on corporate financial performance?
One of the effects of ethics on corporate financial performance is the validation of return on investments. Usually, corporate finance relies on venture capital funding and the reinvestments of own capital, which requires ethical conduct. As such, ethics helps keep accurate records of the long-term success of corporate finance. By keeping the records, the corporate finance can announce the returns, which are the products of the fraudulent accounting that may lead to issues that rises to ultimate hurt on the performance (Kim & Li, 2021). Therefore, ethical practices help corporate finance avoid negative financial results and legal challenges upon discovering unethical conduct. As a result, the company can prove the consistency of the return on investments by focusing on the effective operation by limiting the distractions of the negative public perception and bad press that may hurt the business.
Ethics also assists in improving the employee’s morale. In the corporate finance department, employees prefer working where they get treated with dignity, fairness, and respect. When corporate finance uses a high standard of business conduct, employees will work with the perception of moral and ethical treatment (Landi & Sciarelli, 2018). In return, the employees accord the customers utmost respect while delivering the services. As such, the customer’s loyalty gets generated, leading to the achievement of more market share, thereby creating business success.
Ethics also assist in minimizing financial risks. The ethics in corporate finance minimizes the financial risk since the financial managers and operator works with integrity and moral uprightness as defined by the ethical values. Also, ethics enables the controllers to develop accounting procedures principled in a particular dimension characterized by the internal control for credibility (Landi & Sciarelli, 2018). Therefore, the financial controller behaves ethically in both the professional ad private life leading to the minimization of financial risks like thefts and miscalculations. Furthermore, through ethical conduct, the worker understands the social license that operates and promotes social responsibility in the management of finance documentation.
RQ2: What are the ethical concerns in corporate finance?
One of the most common ethical issues in finance is insider trading. Insider trading entails the purchase or sale of stocks and securities based on information that has been shared but is not publicly available (Ethics in Corporate Finance, 2022). An insider is typically someone in a business management position of a corporate entity or an individual with whom they share information for their personal gain. Insider trading in corporate finance is motivated by the opportunity of making a large profit using information not yet made public. Such information provides the trader with a significant competitive advantage over other traders in the same security.
Another ethical concern in corporate finance is fraud. Melé et al. (2017) claim that frauds have been reported in corporate finance, with the most commonly reported causes being ineffective corporate governance and control mechanisms, inefficient boards, accounting irregularities, distorted incentive schemes, auditor failures, dysfunctional behavior of managers, and a lack of a sound ethical tone at the top.
Another ethical issue in corporate finance is a lack of professionalism. In corporate finance, it is expected that professionalism complies with all applicable regulations without misinterpretation and misconduct (Bagry, 2022). All dealings/transactions should be conducted with transparency and integrity. Financial managers must also operate in the best interests of their clients and employers when conflicts of interest arise. Another aspect of your job is to protect your own and your employer’s reputation. Some argue that the risk of embarrassment and reputational damage is enough to deter financial executives from acting unethically. According to industry experts, more regulation is required since financial ethics cannot overcome temptation (Bagry, 2022).
Other ethical issues in corporate finance include cheating clients about their trading profits, misuse of customers’ funds for personal gain, corruption and larceny, unauthorized translations, and mispricing customer trades.
RQ3: How can ethical concerns associated with corporate finance be managed?
One way to manage the ethical concerns associated with corporate finance is by adhering to the ethics codified in corporate finance. A significant number of American Companies and financial markets have adopted ethical codes, which are usually issued by regulatory authorities such as the Securities and Exchange Commission (SEC), which is one of the leading securities industry regulators. This agency is in charge of enforcing federal laws and regulations that govern the ethical behavior of organizations and individuals in the securities sector. Furthermore, a number of firms have established their own ethics departments to self-regulate their financial behavior.
Another way of managing ethical concerns is through the promotion of good management. Melé et al. (2017) urge that most unethical decisions and financial scandals have taken place due to pressure to achieve immediate results. According to the author, such decisions could be avoided with effective management.
Another way of managing ethical issues in corporate finance is by promoting professionalism. Lail et al. (2015) urge that even though reforms should be the first step in restoring financial reporting systems, virtuous professionalism is required to restore corporate finance.
Another way to manage ethical issues in corporate finance is by imposing legal liability on professionals. According to Alzola (2016), among the causes of increasing corporate scandals and recent financial crises is the inability of professional gatekeepers to detect and disrupt corporate misbehavior. Alzola (2016) further urges that the solution to this problem is imposing legal liability on professionals.
CONLUSION AND RECOMMENDATIONConclusion
The first goal of this study was to determine the effects of ethics on corporate financial performance. Findings revealed that ethical practices help corporate finance avoid negative financial results and legal challenges upon discovering unethical conduct. As a result, the company can prove the consistency of the return on investments by focusing on the effective operation by limiting the distractions of the negative public perception and bad press that may hurt the business. Also, findings revealed that ethics assists in improving the employee’s morale and assist in minimizing financial risks.
Another goal of the study was to identify the ethical concerns in corporate finance. Among the identified ethical issues is insider trading. This is the purchase or sale of stocks and securities based on information that has been shared but is not publicly available. Fraud is another ethical issue in corporate finance. Other ethical issues identified include lack of professionalism, cheating clients about their trading profits, misuse of customers’ funds for personal gain, corruption and larceny, unauthorized translations, and mispricing customer trades.
Lastly, this study sought to uncover practical ways of managing ethical issues in corporate finance. One way to manage the ethical concerns associated with corporate finance is by adhering to the ethics codified in corporate finance. Other ways of managing ethical concerns are through the promotion of good management and imposing legal liability on professionals.
Limitations of the Study
There were a few drawbacks to this study. To begin with, the study was restricted to the use of secondary data, preventing the researcher from obtaining primary data to supplement the findings from the secondary data. Besides, the fact that the researcher was responsible for data extraction, processing, and interpretation, increased the risk of researcher’s bias. However, to deal with this limitation, the researcher cited all the materials from which data were extracted.
Corporate finance should adhere to the ethics codified in corporate finance, practice good management, promote professionalism, and impose legal liability on professionals. Since this study has focused on ethical issues in corporate finance and how to manage them, future scholars should explore guidelines to assist corporate finance in analyzing decisions and their potential conduct from an ethical perspective.
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