Desired Ethical Practices and Corporate Governance :
Some important factors of ethical issues as listed below, if not handled properly, would affect the corporate governance practices.
(1) Conflict of interest:
In case of mergers and acquisitions, (M&As), an audit firm offers consultancy services through their consultancy division. The expertise of auditors’ of the audit division, might be used by the consultancy division in valuations and this may be considered as an example of conflict of interest
(2) Transparency:
In financial statements and annual reports, “disclosures of actual facts to stakeholders” helps the investors and others to take decisions. Non transparent practice is window dressing of data and figures in the financial statements.
(3) Insider Trading:
The growth of the global economies depends (among other factors) upon the successful participation of financial and other competitive markets. Any changes in prices (interest rates, exchange rates and prices of commodities) significantly affect the profitability of the companies; thereby affect the economic growth of a nation. There are many ways price of a product, and/or interest rate of an investment instrument, and/or exchange rate of a foreign exchange transaction can change or move upwards and/or downwards. Any person, who by virtue of his position in a corporate, can have access to sensitive information relating to the price. If such person makes use of this information to his advantage, which is unethical, it is called as insider trading.
(4) Mergers & Acquisitions (M&As):
In the competitive international business environment, mergers and acquisitions play a crucial role in business expansion across borders.Management Buyout is one type of takeover. In this case, the management decides to bid for the company. If successful, they can convert the company to a private company and at a later date depending upon the market conditions sell it in the market and make good profits. Unethical aspects relating to such take over, may be that during the buyout confidential information is leaked by employees/managers for their benefit and there will be a possibility of bringing down the share prices by the vested parties for buying them at a very cheaper rate.
(a) Golden parachute:
Special incentives and benefits are offered to top executives to avoid a takeover situation. These benefits would include bonuses, stock options, etc., In view of the golden parachute; the top executives might not support the takeover of the company
(b) Hostile Takeovers:
When there is opposition from the board or employees or officers of the target company not to allow mergers and acquisitions, it is called as hostile takeovers. On account of vested interests, and to protect their own interests, managers may oppose the M & A.
(c) Green mail:
It is a process through which the management of the target company sends green mails to prevent a shareholder or group of share holders to take over a company. There is a possibility of the buy back of the shares at a premium by the company at a later stage. Hence green mails are considered unethical.
In short, mergers and takeovers are considered unethical, if they ignore the interests of the shareholders.