Corporate Ethics; Dynegy Case
Ethical practices and behavior play a crucial role in any organization. The ability to distinguish the right act from the wrong activities enables individuals in a firm to improve themselves both personally and professionally. Companies today invest the huge amount of resources on developing corporate ethics; this measure increases their ability to achieve the set organizational goals. Corporate ethics entail the effort to create a healthy relationship with the company’s stakeholders to enhance efficiency. An analysis on the Dynegy Inc case of 2012 reveals the importance of upholding effective corporate ethics. The company faced losses once the stakeholders sued the corporate team due to their lack of ethical standards. The management team’s failure to observe corporate ethics led to a massive decline in the Dynegy’s stock in the capital market.
The modern technology has encouraged the development of global business operations and relations. Firms seek to maintain their relevance in the global market through establishment of business ethics and social responsibility. The shareholders and potential customers influence the decision-making process in a company. The management team should seek to protect the stakeholders’ interests to increase the lifespan of the business. Corporate governance provides a comprehensive system that manages and controls companies’ operations. Failure to observe the code of ethics can lead to mismanagement of the firm’s resources, which results to bankruptcy or closure.
Effective corporate governance tactics enables the management team of the firm to create value. This is acquired through creativity, innovation, exploration, and development. The structures provide accountability and transparency through the control systems; this makes it easy for the stakeholders to detect and eradicate the emerging risks in the business entity (Bomann-Larsen, and Wiggen, 2004, p.24). The emerging trends in the global market have led to the radical changes in corporate governance mechanisms. The management team should formulate relevant guidelines that enhance corporate ethics in the business environment. Failure to include employees, consumers, shareholders, and other stakeholders in the formulation and implementation process may hinder mutual acceptability of the corporate guidelines. Successful businesses do not only seek to maximize profitability margins, but aim at improving the public image. Social corporate responsibility is one of the major ways used in fostering good corporate ethics in business entities. Corporate governance should include ethics and moral guidelines to improve the working conditions and relations in the workplace.
Dynegy Inc, a wholesale energy firm encountered accounting fraud issues since 2002. The company did not satisfy its shareholders’ interests due to poor governance strategies. Lack of appropriate corporate structure led to the mismanagement of the firm’s resources, which almost resulted to bankruptcy. Dynergy Inc, initially known as the Natural Gas Clearinghouse was headed by a management board, which did not follow the relevant business ethics in its operations. The management team did not observe the basic guidelines, for instance the integration of skills, knowledge, and experience in the company’s activities. The unethical practices in the organization had a negative impact on potential investors’ attitude, which derailed the productivity of the company. The firm’s main subsidiary, the Dynergy Holdings declared bankruptcy in 2011. This indicates that the company’s management team is ineffective in regulating the performance process. Bankruptcy has had a negative impact on the stakeholders, for instance, the shareholders attain losses from the firm.
Establishing the responsibilities and targets of the management team helps to formulate and implement relevant guidelines in an organization (Davila and Crowther, 2007, p. 13). The managers are required to play exemplary roles to their employees. This involves embracing teamwork, observing respect for potential clients and coworkers, and developing the professional skills through innovation. Involving the workers in the decision-making process encourages the exchange of ideas, creativity, and development among the working team. The employees can apply the set ethics and guidelines to solve emerging issues in the work environment. Teamwork enables a business to adapt easily to change, especially the emerging ethical trends in the professional world. Corporate governance should allow the management board to review and edit organizational ethical standards, without necessarily tampering with the normal operations of the firm. The management team should integrate the skills, experience, and knowledge of all the individuals who influence the operational, financial, and managerial performance of the company (Monks, and Minow, 2004, p.35). Embracing ethical decision-making is essential in achieving the desired corporate governance goals.
According to a report in 2012, creditors held claims of approximately $2.5 billion on the Dynergy Inc’s subsidiary. The management board mismanaged funds; the subsidiary had more expenses than the revenue, which resulted to a deficit. The attempt of the mother company to merge with the bankrupt subsidiary indicates the ignorance of the management board on the stakeholders’ welfare. The shareholders of the mother company would have to share the financial risks accrued by the mismanagement of the executives. The shareholders of the company’s subsidiary would benefit from the financial plan generated by the corporate governance committee. The shareholders would receive 1% dividends, and a five year 13.1% warrant for the company’s common stock (Lee, 2013, p.768). This measure would enable the stakeholders to retrieve their investments, and trust on the company’s affairs. The restructuring process required the application of market knowledge and skills to foster improvement in the company’s operations.
The investors of Dynegy Inc sued the management team for improper transfer of company’s assets in one of the subsidiaries. This occurred in an effort to restructure the company from the bankruptcy threat, which was to occur due to mismanagement of the firm’s resources. The Chief Finance Officer, the Chief Executive Officer, and one of the investors’ breached the fiduciary roles owed to the company’s stakeholders (Lee, 2013, p.768). The corporate team failed to inform the shareholders on the company’s performance, especially regarding the fraudulent transfer of ownership in one of its subsidiaries. An investigation by the bankruptcy examiner revealed that Dynegy acquired absolute ownership of the subsidiary in an unscrupulous manner. The shareholders had a right to know about the transaction since they played a major role in the governance of the firm. Respect for a firm’s stakeholders is an essential element in increasing the productivity level, and enhancing healthy working relationships.
The lawsuit against Dynegy Inc in 2012 had a major impact on the overall corporate governance structure. According to Lee (2013, p.771), the company’s shares dropped by 35% on March 9, 2012 after the public received the news on the lawsuit. The failure of corporate governance team to safeguard the interests of the company’s shareholders has adverse effects on its performance in the global market. Disclosure of a firm’s information is essential to the stakeholders, as it gives them a chance to give opinions that help in the development process. Involvement in fraudulent acts damages the corporate governance structures since the public loses trusts in the management measures of the company. Dynegy was already struggling with a bankruptcy challenge when the shareholders filed a lawsuit against the management team. This indicates that the corporate board violated the shareholders’ rights, which is against the principles of corporate governance.
Dynegy’s information system was ineffective, which allowed the corporate team to conduct fraudulent acts without informing the key shareholders. The firm was already at the brink of insolvency during the transaction, which led to a massive decline in the firm’s revenue. The management team failed to incorporate skills and accountability aspects while selecting the top officials. The drop in the company’s shares had a negative impact on the shareholders’ value, as they encountered massive losses (Lee, 2013, p.774). Successful firms formulate effective and transparent market strategies to increase the shareholders’ profitability. The capital market portrays companies’ performance; investors are likely to risk their assets in the most profitable organizations. Failure to satisfy the firm’s shareholders reflects a negative result on the share market, which leads to decline in the stock, and a sequential withdrawal of potential investors (Rashidah, 2006, p.117). Dynegy’s shareholders should have established a system to review the management team’s activities; this measure would be useful in detecting the fraudulent behaviors that led to poor performance. Corporate ethics is a vital tool in the corporate governance strategies; the ethics safeguards the company’s interest, and helps to prevent against conflict of interest among the individuals in a firm setting.
Krafts Foods Company in the United States of America is an example of a firm that believes in the power of corporate governance and ethics to achieve organizational goals. It is the largest food and beverage firm in the country. Its success is attributed to the effective corporate governance tactics, which involve communal decision-making processes. The company’s revenue was negatively affected between 2011 and 2012 due to the agricultural drought in the region. There were few suppliers, who provided goods at high prices, which led to reduced sales for the firm. Comprehensive ethical standards among the companies management team, the employees, shareholders, consumers, and suppliers enabled the company to perform well despite the challenges. The management board formulated strategies to ensure that customers received high quality services at the scheduled time; this in turn led to an increment in the firm’s revenue base, which was beneficial to the stakeholders. The strategies included contracting several suppliers to deal with the shortage problem, and facilitating accountability in the company’s financial performance. The company has increased customer loyalty over the years due to its ability to observe business ethics in its performance. The food industry faces challenge due to the emerging health concerns (Tinker, Merino, and Neimark, 2010, p.47). Kraft Foods Company has focused on creating awareness among the stakeholders regarding healthy eating habits, which has helped to increase its social responsibility standards. Effectiveness in the firm’s performance has enhanced public trust in its corporate governance structure.
The recent financial crisis that occurred in the year 2007 contributed to the development of unethical practices in several corporate firms. Some corporate governance managers sacked employees in the excuse of the financial meltdown. Effective corporate governance mechanisms provide the appropriate remedies to such problems to avoid abuse of power by unscrupulous board members. It is essential to note that even though several firms collapsed during the financial distress, some thrived due to the existence of stable corporate governance and ethical standards. Google Company performed well during the financial crisis period due to its comprehensive corporate governance strategies. The company, however, lacks appropriate corporate governance structure to regulate its operations. The firm has recently embarked on increasing its acquisitions, which has tampered with its fiscal discipline. The management team has focused on developing internal projects, which has affected the shareholders negatively. Failure to observe business ethics that require communal decision-making has contributed to the poor governance of the Google Company. The double click acquisition cost the company approximately $3billion; failure of the investment to produce positive returns may damage the corporate governance structure of Google Company. The shareholders will be exposed to market risks and low profitability margins.
Google Company faced a $4billionfine penalty for failing to observe the required corporate ethical practices in the EU countries. The firm has encountered major challenges in the global market, especially in China. The cyberspace regulation aspect has contributed to expansion problem for the company (Girard, 2009, p.45). The management team should embark on creating ethical strategies that can enable the firm venture into the unexploited marker, without necessarily breaking the law of the land. Adopting an effective Corporate Social Responsibility can help Google to regain the public trust. This objective can be accomplished by overcoming the prevailing social challenges developed by increased acquisitions. Failure to uphold business ethics through transparent and accountable governance measures may lead to the bankruptcy of the firm. Google has survived in the global market due to its diverse workforce. The management board should involve the workforce in the decision making process of the company to enhance equity and fair representation of shareholders’ interests.
The shareholders and investors played a crucial role in the performance of any business entity (Thompson, and Strickland, 2003, p.17). A company should embark on establishing relevant strategies to attract potential investors. This measure can be accomplished by ensuring that the management board meets the requirements modern investment community. Sufficient information regarding the company’s operations contributes to transparency and accountability, which are vital for attracting capital. A good corporate governance structure should provide a system that safeguards a company’s financial and non-financial position. Stability of a business entity relies on the corporate governance and the ability of the staff members to observe ethics. Investors are likely to involve in business transactions with firms that are stable, both financially and in managerial activities. The ability to provide timely, accurate, and balanced business objective improves a company’s public image, which may be a competitive advantage in the global market. Upholding the shareholders’ interests and rights should be a priority in any company; this measure allows a firm to exercise ethical standards, which involve maximizing value for the well-being of company owners.
Business structures encounter various risks in the course of operation due to emerging economic trends in the global market. The management team should ensure that business decisions allow the occurrence of such risks and that they provide the necessary remedial to avoid major losses. Effectiveness of the management board influences the performance of the business. The team should embrace formal mechanisms in the corporate governance system to enhance efficiency in the work place. Establishing achievable targets for the departments in a company helps to increase productivity among the employees; this in turn leads to a rise in the shareholders’ revenue. Corporate governance recognizes the productive teams in an organization and rewards their efforts to motivate them. Employee motivation is imperative in strengthening the organizational culture of the firm. Business entities comprised of employees with diverse opinions and beliefs; motivating them and rewarding their efforts is vital in uniting them for the common goal of the company.
Effective corporate governance measures help the management team to establish the cost of capital in the international capital market. The globalization aspect has increased the level of competition among firms; companies strive to attract potential investors and increase the market share. Effective social corporate responsibility and relevant ethical standards help to improve the credibility of the organization, and increase the investor confidence. Companies should disclose annual reports that reveal both the financial and managerial performance. This helps to detect any mistake and correct to facilitate efficiency. The annual reporting strategy enables potential investors and the company’s stakeholders to assess and control the business operations to maximize the value. Hiring auditing committees allows transparency to prevail in a firm, as managers organize their tasks in a suitable manner. The auditors can detect when a firm faces a bankruptcy risk, and they can help to formulate counteractive tactics to deal with the challenge. A company can have both internal and external auditors to facilitate the effectiveness in the assessment of capital (Davies, 2006, p.26). Internal committee can comprise of managers and selected employees, who have vast knowledge of the company’s financial records. Observing organizational corporate ethics is essential in enhancing transparent outcomes, especially when conducting a company’s audit tasks.
According to Hugh and Elisabetta (2008, p. 14), lack of accountability increases the chances of accounting fraud, which affect the business performance negatively. this issue affected the performance in Dynegy Inc, as the executives did not provide transparent information regarding the company’s financial performance. The shareholders would have sufficient knowledge on the financial position of the firm if the management team gave clear records of the transfer of ownership. Large corporations collapse due to the managers’ failure to observe ethics in the corporate governance practices. The distribution of the rights and roles among the company’s stakeholders helps to strengthen the governance structure. The participants have sufficient knowledge of the firm’s ethics and expectations, which enable them to work according to the set regulations. Corporate ethics provides the measures that the participants use to attain organizational goals by embracing social, regulatory, and economic ethical standards. Business ethics ensures that the staff members align the objectives of the firm with the stakeholders’ interests to create a mutual gain for all parties involved. The emergence of corporate scandals has raised concern among the members of the public and the policy makers over the last few years. The need to regulate corporate governance in companies has contributed to political intervention in an attempt to regain public trust in the process.
Corporate governance varies with the laws applicable in different countries. Corporate ethics depends on the organizational culture of the firm. Dynegy Inc has various rules that govern the board members and the executives. This, however, was not effective in 2012, when the managers involved in unethical practices. Firms should observe integrity when selecting the corporate governors to enhance transparency and accountability in the operations. Developing a code of conduct helps the members to outline the necessary strategies that can maximize the value to the stakeholders. Establishing the rights of stakeholders is a fundamental principle in enhancing transparency in the corporate governance mechanism. Some of the rights include availing the company’s information to the shareholders and allowing them to participate in the decision-making of the firm. The openness of the company’s management board encourages the shareholders to increase their investments, which increases the lifespan of the organization. This aspect was not observed in Dynegy Inc, as shareholders had to sue the corporate governance team for not revealing crucial information on the company’s operations in 2012. Commitment to the entity’s activities improves the members’ creativity level, a crucial aspect required to achieve the set organizational objectives. Various corporate governance models provide different outcomes, depending on the desired objectives of the institution. The Anglo American model, for instance, focuses on the shareholders' interests. The multi stakeholder model seeks to maximize the value on customers, shareholders, employees, managers, and the rest of the society.
Corporate ethics involves the ability to differentiate the right acts from the bad, and the effort to seek the wellbeing of others. The shareholders at Dynegy faced several challenges, including bankruptcy of the firm’s subsidiary and mismanagement by the corporate governors. The management failed to honor the principles of corporate governance, which require the shareholders to have sufficient information regarding the company’s performance. In the lawsuit, the shareholders declared that they were not aware of the fraudulent transfer of ownership of the firm’s subsidiary, nor did they know about the insolvency of the company. It is essential for the stakeholders to select a team of directors who are ready to maximize the value of Dynegy Inc, rather than their own selfish interests.
References
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