Despite the corporation being an entity in itself, it does not make decisions, manage risk or determine its own ethical stance. This is carried out by individuals, namely the board of directors. For this reason, the board carry the responsibility of accountability of the firm’s behaviour and actions in regards to performance and conformance. As discussed previously, strategy is the fundamental role of the board and each of the individual directors on the board must be aware of, and accountable for, the firm’s strategy formulation, implementation and monitoring.
Firstly, the enforcement of accountability is through legal avenues such as the Corporations Act (2004) which, under section 2.D, details the responsibilities of officers and employees and outlines the penalties for infringement of these responsibilities. As the board of directors carry the responsibility of the firm’s strategy, they therefore also carry the responsibility of the firm’s actions. For this reason, the corporation will never be prosecuted, but rather the individual’s responsible for the action of the firm, namely the directors, will be held accountable. Shown in figure 4 below is the impact of statutory demands, such as the Corporations Act (2004) on the firm’s strategy, which is directly attributable to the board of directors.
For example, allowing a firm to trade whilst insolvent is a breach of the Corporations Act (2004) under section 588G, as it also in breach under section 254T to distribute dividends for profits not yet earned. It is reported that Babcock and Brown where actually insolvent on the 29/11/2008, though were not placed into administration, albeit involuntarily, until March of 2009. The firm was only placed into involuntary administration after it missed a $15Mil interest payment to the firm’s note-holders; however evidence has proven the firm distributed dividends for profits not yet earned leading up to the time the firm was declared insolvent. Despite not yet being charged criminally for breaching his fiduciary duty, it has been proven in the trial to date that Phil Green and Jim Babcock were ‘cognizant of the company’s perilous financial state’ (Schwab, 2010). A memo exchange between the two states ‘we have fully used our $2.5 billion corporate facility’, however this was followed up with Phil Green publicly announcing a $750Mil forecast profit. The firm were distributing dividends from reports showing monies owed to the firm in the future.
With the Babcock and Brown example, it can also be said that accountability is as much a voluntary, ethical responsibility issue, as it is a legal issue. Therefore, the second issue of accountability and ethics is that of a voluntary responsibility, known as corporate social responsibility. Directors who make up the board do need to conform to legal standards; however these are unenforceable standards, set by society, which a firm can choose to conform with. It is with society that a firm also has a responsibility to, as shown in figure 4. The benefit of conforming to these standards is an increase in reputation, an increase in potential customer base and a potential increase in profits. Qantas, for example, has met all statutory requirements for aircraft maintenance, however are now defending a public backlash due to the reliability of their aircraft. Despite commercial air travel being proficient for over 50 years, the concept of high speed and high altitude is still perceived as high risk and therefore any increase in that risk, which could have been avoided, is to the detriment of the company. With three planes suffering engine problems, preventable by above-standard maintenance, Qantas are faced with a decrease in their once loyal customers. This had, and will have, a direct impact on the share price and shareholders will be left to question the board of directors why this happened. Qantas, as a firm, did not allow this to happen, though the individuals who make up the decision making capacity of the firm, namely the board of directors, are responsible for not meeting the standards set by society. The result will be that demand for Qantas will decrease, as a result of customers taking their money elsewhere, the share price will drop, as a result of shareholders taking their investment dollars to less risky organisations and employees will potentially leave on moral grounds.
Finally ethics, like everything else in business, is subjective to context. The decision of which is usually down to the group or the leader. Unfortunately, ethics moves in a grey scale and no shade of grey is ever determined by everyone to be the right shade. Instead, boards are forced to work to a consensus and strive to please the multitude, and accepting they will upset the few. Unfortunately, this is also a sliding scale where the board are judged depending on the performance of the firm. While the firm is performing well, the majority do not question firm behaviour or ethics, however as soon as there is a sign of faltering, the firm’s performance is directly attributed to the behaviour and ethics.
This could not have been any clearer than in Babcock and Brown. During the roaring economical phase between 2004 and 2007, shareholders were content with their dividend and the capital growth of the firm and the inflated share price. However, as soon as things began to turn, shareholders began to ask questions of the firm’s behaviour. It was only when the wheels began to come off did people realise they were investing money into a shell company, who took their money and placed it into a private fund to leverage high levels of debt. There was a clear disconnect between the perception of risk aversion held by the board to that held by the investors. Between 2004 and 2009 there was no change to the way the company conducted their business, or how it raised capital, the only thing that changed was the perception of the shareholders and this only came about due to a lacklustre performance.
From both the examples of Babcock and Brown and Qantas, it can be suggested that the actions and outcomes of the firm are not finite to a group of shareholders or employees, but rather they are infinitely at the mercy of the whole of society. Therefore, the board of directors must implement a strategy that focuses on the balance of performance and conformance for society as a whole, as they are accountable for their behaviour.
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