The Agency Problems Embedded in Firm’s Equity Investment

We find that agency problems are embedded in firm’s excess and abnormal equity investments that are mainly dictated by controlling shareholder’s motives and ethical choices manifested in ownership and board structure. The excess equity investment is gauged with respect to industry average. The abnormal equity investment is specifically referred to the number of nominal investment companies that are fully controlled by the controlling owners while subject to little governance. Our empirical evidences of 345 Taiwanese non-financial listed firms show that firm’s excess and abnormal equity investments are negatively correlated with controlling shareholder’s cash flow rights while are positively correlated with the control–cash flow deviation, and board affiliation. The results are supportive of the positive incentive hypothesis and the negative entrenchment hypothesis put forth by La Porta et al. (2002, Journal of Finance 57, 1147–1171) and Claessen et al. (2002, Journal of Finance 57, 2741–2742). The negative relation between equity investment and firm’s value further supports the agency postulation that corporate excess and abnormal equity investments represent a leeway for controlling shareholder to exploit wealth of minority shareholders. This study potentially contributes to the literature of business ethics by portraying an empirically testable linkage from controlling owner’s ethical choices to his actions and therefore firm’s value. Yin-Hua Yeh, Ph.D., is Professor and Director of the Graduate Institute of Finance at Fu-Jen Catholic University (FJU) in Taiwan. He is also the Director of the Center for Corporate Governance and Business Ethics at FJU. His main research and teaching areas are corporate governance, corporate finance, and merger and acquisition. Tsun-Siou Lee, Ph.D., is Professor of Finance at National Taiwan University. His main research and teaching areas are corporate governance, futures and options, and financial innovation. Pei-Gi Shu, Ph.D., is Professor of Business Administration at Fu-Jen Catholic University in Taiwan. He is also the Vice Dean of Management College at FJU. His main research and teaching areas are mutual funds and behavioral finance.     

Codes of Ethics,Orientation Programs,and the Perceived Importance of Employee Incorruptibility

The purpose of this study was to determine the degree to which the review of corporate ethics codes is associated with individuals’ perceptions of the importance of virtue ethics, or more specifically, employee incorruptibility. A convenience sample of individuals working for a university or one of several business organizations located in the Mountain West region of the United States was compiled with a self-report questionnaire. A usable sample of 143 persons representing both the public and private industries was secured for use in this study. The results of an analysis of covariance showed that reviewing ethics codes during employee orientation was positively related to individuals’ beliefs that incorruptibility is an important individual virtue. The managerial implications of the findings are discussed along with suggestions for future research.     

Agency Theory,Reasoning and Culture at Enron: In Search of a Solution

Applying evidence from recently available public information on Enron, I defined Enron’s culture as one rooted in agency theory by asserting that Enron’s members were predominantly agency-reasoning individuals. I then identified conditions present at Enron’s collapse: a strong agency culture with collectively non-compliant norms, a munificent rare-failure environment, and new hires with little business ethics training. Turning to four possible antidotes (selection, objectivist integrity, integrity capacity, and stewardship reasoning) to an agency culture under these conditions, I argued that the currently available ethics literature would have made little difference toward averting Enron’s collapse if any of the recommendations from the relevant ethics literature had been implemented. I conclude by identifying new directions for business ethics literature in order to make it more implementable under the conditions identified at Enron. Essentially, we need a way to clearly determine (1) the difference between connivance and commitment, (2) what is meant by balance with regard to the multiple dimensions of ethics and legal theories, and (3) the proper balance between agency and stewardship reasoning. Brian E. Kulik is a Ph.D. candidate in Management at Washington State University’s School of Business. His work focuses on the prevention of corporate corruption, corporate governance and ethics, teamwork and diversity, and research methods. His research to date has appeared in the Western and National Academy of Management conference proceedings and the journal Organizational Analysis. He earned M.S. degrees from Washington State University and The University of Cincinnati, and M.B.A. from The University of Denver.     

Applying Stories of the Environment to Business: What Business People Can Learn From the Virtues in Environmental Narratives

The use of narrative to communicate and convey particular points of view in society has increasingly become the focus of academic attention in recent years. In particular, MacIntyre. (1985, 1988, 1990, 1999) has paid attention to the role of narrative in the conflict between different traditions when developing his virtue approach to ethics. Whilst there has been continued debate about the application of virtue approaches, some arguing that it is incompatible with business, I disagree and have already argued for a form of virtue that will focus business on society’s needs rather than better business itself. Here I continue to develop the argument in two ways. First, I will explore the predominant business narrative and offer some comment on the ‘virtues’ that it promotes. However, rather than accepting this narrative, I want to challenge it with a narrative from the environmental tradition. I consider how adopting the virtues promoted by an environmental narrative it would shape business practices and challenge current business conventions. As a second step, I will focus on how we can change managers’ perceptions of business to reflect these environmentally based virtues.     

Andersen and the Market for Lemons in Audit Reports

Previous accounting ethics research berates auditors for ethical lapses that contribute to the failure of Andersen (e.g., Duska, R.: 2005, Journal of Business Ethics 57, 17–29; Staubus, G.: 2005, Journal of Business Ethics 57, 5–15; however, some of the blame must also fall on regulatory and professional bodies that exist to mitigate auditors’ ethical lapses. In this paper, we consider the ethical and economic context that existed and facilitated Andersen’s failure. Our analysis is grounded in Akerlof’s (1970, Quarterly Journal of Economics August, 488–500) Theory of the Market for Lemons and we characterize the market for audit reports as a market for lemons. Consistent with Akerlof’s model, we consider the appropriateness of the countervailing mechanisms that existed at the time of Andersen’s demise that appeared to have effectively failed in counteracting Andersen’s ethical shortcomings. Finally, we assess the appropriateness of the remedies proposed by the Sarbanes–Oxley Act of 2002 (SOA) to ensure that similar ethical lapses will not occur in the future. Our analysis indicates that the SOA regulatory reforms should counteract some of the necessary conditions of the Lemons Model, and thereby mitigate the likelihood of audit failures. However, we contend that the effectiveness of the SOA critically depends upon the focus and attention of the␣Public Companies Accounting Oversight Board (PCAOB) towards assessing the ethical climates of public accounting firms. Assessments by the PCAOB of public accounting firm’s ethical climate are needed to sufficiently ensure that public accounting firms effectively promote and maintain audit quality in situations where unconscious bias or economic incentives may erode the public accounting firm’s independence.     

Government Intervention,Perceived Benefit,and Bribery of Firms in Transitional China

This article examines whether (1) government intervention causes bribery (or corruption) as rent-seeking theory suggested; (2) a firm’s perceived benefit partially mediates the relationship between government intervention and its bribing behavior, as rational choice/behavior theory suggested; and (3) other firms’ bribing behavior moderates the relationship between government intervention and a firm’s perceived benefit. Our study shows that government intervention causes bribery/corruption indeed, but it exerts its effect on bribery/corruption through the firm’s perceived benefit. In other words, a firm’s perceived benefit fully mediates the relationship between government intervention and its bribing behavior. We also find that other firms’ bribery positively moderates the relationship between government intervention and a given firm’s bribery. This study partly proves that firms are rational actors. Potential benefit encourages them to practice bribery. Besides, this research also supports the rent-seeking view of bribery/corruption, which argues that government intervention is a source of bribery/corruption. However, we have also identified that only those government interventions that will create “rent” can cause bribery/corruption.     

Determinants of R&D collaboration of service firms

This article examines the determinants of R&D collaboration of service firms. Different from manufacturing firms, we expect that types of innovation, public financing, innovation protection, purchase of external R&D, firm’s absorptive capacity, spillovers, and certain innovation barriers determine the firm’s decision to collaborate in R&D. Results indicate that firms that undertake R&D collaboration tend to undertake process innovation, receive public funding, can protect their innovations, and typically subcontract the development of their technologies. The article provides implications for theory and practice.     

Organizational Commitment: A Proposal for a Wider Ethical Conceptualization of ‘Normative Commitment’

Conceptualization and measurement of organizational commitment involve different dimensions that include economic, affective, as well as moral aspects labelled in the literature as: ‘continuance’, ‘affective’ and ‘normative’ commitment. This multidimensional framework emerges from the convergence of different research lines. Using Aristotle’s philosophical framework, that explicitly considers the role of the will in human commitment, it is proposed a rational explanation of the existence of mentioned dimensions in organizational commitment. Such a theoretical proposal may offer a more accurate definition of ‘affective commitment’ that distinguishes feelings from rational judgments. The use of a philosophical explanation coherent with psychological findings also allows the discovery of a wider moral concept of ‘normative commitment’. Tomás F. González Cruz is Senior Lecturer in Business Administration at the University of Valencia, Spain. He earned his Bachelor’s degree in Business Administration in Valencia University. Likewise, he has a Doctorate in Business Administration at Valencia University. His principal research interests are: Organizational design and the way in which it is a source of sustainable competitive advantage, ethics, leadership, resource and competence-based theory, total quality management. Manuel Guillén is Senior Lecturer in Management, at the University of Valencia (Spain). Prof. Guillén earned his PhD in Management with a specialization in ethics and strategic management integration. He has been Visiting Scholar at the University of St. Thomas, Minnesota (USA); at the Notre Dame University, Indiana, USA; and guest Visiting Student at IESE Business School doctoral program, in Barcelona. He has presented some of his research at the top conferences in the field (International Strategic Management Society Conference, Annual Conference of the European Business Ethics Network, EBEN) and has published in business ethics and management journals. Since 1997 teaches Business Ethics Seminaries in different Business Schools, institutions and companies.     

Constructing Good Decisions in Ethically Charged Situations: The Role of Dramatic Rehearsal

This paper develops a pragmatist approach to ethical business decision-making. It draws primarily on the work of John Dewey and applies his deliberative approach to ethics to the challenges of business practitioners. In particular the paper proposes the value of Dewey’s concept of dramatic rehearsal in emphasizing the task of “constructing the good” in ethical decision-making. The contribution of the paper is, first, to build on recent foundational work to bring American pragmatism into the mainstream business ethics literature; second, to offer a perspective that is accessible to practitioners and integrates ethics into their daily tasks; and third, to identify a number of related research imperatives – in particular the importance of focusing efforts on gaining a deeper understanding of the deliberative process itself.     

The Location of Markets,Perceived Entrepreneurial Risk,and Start-up Capital of Micro Rural Firms

It is argued that when founders of SMEs perceive the probability of a successful and lucrative venture to be greater, they are more likely to provide a greater proportion of the start-up capital. This paper provides an empirical examination of two concurrent hypotheses. Firstly, that the size of the debt or equity is affected by factors influencing perceived entrepreneurial risk. Secondly, that the location of the market for the firm’s output is a major factor reducing perceived entrepreneurial risk and increasing equity of the start-up capital. A statistical analysis based on the simultaneous tobit model is used. Results show that significant factors influencing risk perception include the size of the new business and the sector of economic activity, as well as entrepreneurial experience and the location of the markets for the firm’s output. The results highlight implications for the design and implementation of rural development policies and especially for the instruments supporting rural business creation.     

Cross-Sector Partnerships: City Regeneration and Social Justice

In recent years, firms have greatly increased the amount of resources allocated to activities classified as Corporate Social Responsibility (CSR). While an increase in CSR expenditure may be consistent with firm value maximization if it is a response to changes in stakeholders’ preferences, we argue that a firm’s insiders (managers and large blockholders) may seek to over- invest in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens and has a “warm-glow” effect. We test this hypothesis by investigating the relation between firms’ CSR ratings and their ownership and capital structures. Employing a unique data set that categorizes the largest 3000 U.S. corporations as either socially responsible (SR) or socially irresponsible (SI), we find that on average, insiders’ ownership and leverage are negatively related to the firm’s social rating, while institutional ownership is uncorrelated with it. Assuming that higher CSR ratings is associated with higher CSR expenditure level, these results support our hypothesis that insiders induce firms to over-invest in CSR when they bear little of the cost of doing so.     

The Role of Business Ethics,Personality, Work Values and Gender in Vocational Interests from Adolescents

The present study investigates how business ethics are related to vocational interest. Special attention has been paid to the relationship between business ethics and the interest in ‘enterprising’ and ‘social’ oriented professions. The results show that business ethics is only significantly correlated in a negative way, to enterprising vocational preferences. Moreover, the negative contribution of business ethics to the preference for entrepreneurial and managerial professions remains after controlling for personality and work values. Some work values also predict the entrepreneurial interest: Earnings, Influence, Competition, Innovation and Creativity. The personality traits Extraversion (positive) and Agreeableness (negative) have predictive validity, but this effect disappears after controlling for work values. In the ‘Discussion’ section, we pay attention to possible consequences of the negative relationship between business ethics and Entrepreneurial interest for Corporate Social Responsibility (CSR). We argue that efforts concerning realistic job previews will only be meaningful if they are completed with efforts to make people more sensitive for ethics in two other domains, namely education and business.     

The Effect of Ownership Structure on Corporate Social Responsibility: Empirical Evidence from Korea

Relatively little research has examined the effects of ownership on the firms’ corporate social responsibility (CSR). In addition, most of it has been conducted in the Western context such as the U.S. and Europe. Using a sample of 118 large Korean firms, we hypothesize that different types of shareholders will have distinct motivations toward the firm’s CSR engagement. We break down ownership into different groups of shareholders: institutional, managerial, and foreign ownerships. Results indicate a significant, positive relationship between CSR ratings and ownership by institutions and foreign investors. In contrast, shareholding by top managers is negatively associated with firm’s CSR rating while outside director ownership is not significant. We conclude that different owners have differential impacts on the firm’s CSR engagement.     

Multi-Stakeholder Labour Monitoring Organizations: Egoists,Instrumentalists, or Moralists?

This article examines four leading multi-stakeholder labour monitoring organizations. All operating in the maquiladora industry, these organizations are viewed in light of the growing global trend toward industry self-regulation, or what has been referred to as the ‘global out-sourcing of regulation’. Their Board compositions, codes of conduct and monitoring and enforcement strategies are all examined as a means of tentatively positioning these organizations along an ‘egoist-instrumentalist-moralist’ ethical culture continuum. Such a framing provides insights into the perceived salience of these organizations’ broader stakeholders, the effectiveness of codes of conduct on workplace practices more generally, and the role that ethics plays in the governance and accountability of these increasingly important types of organizations. Jeff S. Everett teaches financial accounting at the University of Calgary's Haskayne School of Business. Along with his research on maquilas, Jeff conducts research in the areas of professional ethics, environmental accounting, and accounting education. Dean Neu is a professor of accounting at the Haskayne School of Business. His research examines how accounting numbers play a crucial role in shaping public perceptions and public policy. Currently a research assistant at the Haskayne School of Business. Daniel Martinez is examining issues related to fair trade, corruption, and economic development in indigenous communities.     

Social Contracting in a Pluralist Process of Moral Sense Making: A Dialogic Twist on the ISCT

This paper applies Wempe’s (2005, Business Ethics Quarterly 15(1), 113–135) boundary conditions that define the external and internal logics for contractarian business ethics theory, as a system of argumentation for evaluating current or prospective institutional arrangements for arriving at the “good life,” based on the principles and practices of social justice. It does so by showing that a more dynamic, process-oriented, and pluralist ‘dialogic twist’ to Donaldson and Dunfee’s (2003, ‘Social Contracts: sic et non’, in P. Heugens, H. van Oosterhout and J. Vromen (eds.), The Social Institutions of Capitalism: Evolution and Design of Social Contracts (Cheltenham, UK, Edward Elgar Publishing, Ltd.) pp. 109–126; 1999, Ties that Bind: A Social Contracts Approach to Business Ethics (Boston, MA, Harvard Business School Press); 1995, Economics and Philosophy 11(1), 85–112; 1994, Academy of Management Review 19(2), 252–284.) integrated social contracting theory (ISCT) of economic ethics will further develop this promising and influential approach to moral reasoning, ethical decision-making, and stakeholder governance. This evolutionary, interactive learning-based model of ethical norm generation via dialogic stakeholder engagement is particularly appropriate within economic communities that are experiencing value conflict and pressures for institutional change.Jerry M. Calton is Professor of Management at the University of Hawaii at Hilo. His research interests encompass multi-stakeholder learning dialogue, trust-based network governance, and the social contracting approach to ethical decision-making. His publications have appeared in the Journal of Business Ethics, Business & Society, Business Ethics Quarterly, the Journal of Corporate Citizenship, and elsewhere.     

Strategic Risk-Taking Propensity: The Role of Ethical Climate and Marketing Output Control

In the wake of the current financial crises triggered by risky mortgage-backed securities, the question of ethics and risk-taking is once again at the front and center for both practitioners and academics. Although risk-taking is considered an integral part of strategic decision-making, sometimes firms could be propelled to take risks driven by reasons other than calculated strategic choices. The authors argue that a firm’s risk-taking propensity is impacted by its ethical climate (egoistic or benevolent) and its emphasis on output control to manage its marketing function. The firm’s long-term orientation is argued to moderate the control–risk propensity relationship. The authors also extend research on risk and performance and argue that the association of risk-taking propensity and firm performance is contingent on the ownership (publicly traded versus privately held) structure of the firm. Based on survey data from a sample of manufacturing industries in the United States, the results show significant impact of ethical climate and marketing output control on a firm’s risk-taking propensity; also risk-taking propensity shows a stronger association with firm performance in privately held firms than in publicly traded firms.     

Finance as a Driver of Corporate Social Responsibility

Finance is grease to the economy. Therefore, we assume that it may affect corporate social responsibility (CSR) and the sustainability of economic development too. This paper discusses the transmission mechanisms between finance and sustainability. We find that there is no simple one-to-one relationship between financial development and sustainable development but there are various – often indirect – linkages. It appears that most of the literature concentrates on the role of public shareholders when it comes to changing corporate policy and performance in a more sustainable direction. However, this focus neglects the potential impact of the credit channel and private equity on a firm’s non-financial policies and performance. These very powerful mechanisms can govern business policies and practices. Therefore, there appears to be much more scope for finance to promote socially and environmentally desirable activities and to discourage detrimental activities than has been acknowledged in the academic literature so far.Bert Scholtens received his Ph.D. at the University of Amsterdam in 1994. Since 1999 he has been working at the Department of Finance of the University of Groningen, the Netherlands. His research particularly looks into the interactions between financial institutions and sustainable development/corporate social responsibility. He has recently published in, among others, Ecological Economics, Journal of Banking and Finance, Finance letters, Journal of Investing, and Sustainable Development.     

Allhoff on Business Bluffing

The moral status of business bluffing is a controversial issue. On the one hand, bluffing would seem to be relevantly similar to lying and deception. Because of this, business bluffing can be taken to be an activity that is at least prima facie morally condemnable. On the other hand, it has often been claimed that in business bluffing is part of the game and that therefore there is nothing morally questionable in business bluffing. In a recent issue of this journal, Fritz Allhoff puts forward a novel defence of business bluffing. In this article, I will examine Allhoff’s arguments for the moral acceptability of business bluffing and argue that they are implausible. Dr. Jukka Varelius is a Visiting Fellow in the Centre for Professional Ethics at the University of Central Lancashire, UK. His research concentrates on questions of biomedical ethics, psychiatric ethics, and business ethics. His publications include ‘Voluntary euthanasia, physician-assisted suicide and the goals of medicine’ Journal of Medicine and Philosophy 2006, 31 (2): 1--18, ‘Execution by lethal injection, euthanasia, organ-donation and the proper goals of medicine’ Bioethics, forthcoming, and ‘Autonomy, well-being and the case of the refusing patient’ Medicine, Health Care and Philosophy, forthcoming.     

Modeling the Relationship Among Perceived Corporate Citizenship,Firms’ Attractiveness,and Career Success Expectation

Drawing on propositions from the signaling theory and expectancy theory, this study hypothesizes that the perceived corporate citizenship of job seekers positively affects a firm’s attractiveness and career success expectation. This study’s proposed research hypotheses are empirically tested using a survey of graduating MBA students seeking a job. The empirical findings show that a firm’s corporate citizenship provides a competitive advantage in attracting job seekers and fostering optimistic career success expectation. Such findings substantially complement the growing literature arguing that corporate citizenship brings firms competitive advantages without solid evidence from the perspective of recruitment and human resources. Finally, managerial implications and limitations of this study are also discussed.     

Living in Agreement with a Contract: The Management of Moral and Viable Firm–Stakeholder Relationships

In a contractual firm–stakeholder relationship the participants are expected to act according to the agreement and for mutual benefit. By acting against the agreement at the expense of the other participant, however, may result in higher individual profits within a short period of time. Building on the unlocked iterated prisoner’s dilemma (PD) setting, Scanlon’s [Scanlon, T.␣M.: 1998, What We Owe to Each Other (Belknap Press of Harvard University Press, Cambridge, Mass)] version of contractualism, and the social dilemma literature, this article considers what types of behaviors should be followed by both parties in an established firm–stakeholder relationship in order to reach an outcome that is defensible both in terms of morality and viability. It is argued that a normative foundation, which advises firms and stakeholders to ground their behavior on principles that could not reasonably be rejected by others, forms a basis for moral and viable behavior that can be expressed in the form of a strategic rule that excludes defection and utilizes the option to exit in response to the other participant’s defection. Then, a set of testable propositions is developed that describe how a firm and its stakeholders can further promote moral and viable relationships.Kalle Pajunen received his Ph.D. in strategic management. His current research interests include research methodologies, turnaround processes, stakeholder theory, strategic leadership, and business ethics. His recent articles appear (or are forthcoming) for instance in Advances in Strategic Management, Human Relations, Journal of Management Studies, and Leadership.