Chapter 6 - Shareholders and Business Ethics

What is the “crucial problem of separation of ownership and control” in corporations?

It refers to the gap between owners (shareholders) and controllers (managers). Shareholders legally own the company but do not run it, so managers control decisions that owners benefit or suffer from.

What does “locus of control” mean in the separation of ownership and control?

Shareholders have very limited management power—they provide capital but do not control day-to-day decisions. Managers hold the actual control, creating potential conflicts of interest.

What does “fragmented ownership” mean in corporate governance?

Ownership is spread across many small shareholders. Because no single owner holds enough power to influence management, managers gain even greater autonomy and discretion.

What does “divided functions and interests” mean in the separation of ownership and control?

Shareholders and managers have different roles and incentives: shareholders want long-term returns, while managers may prioritize personal goals (bonuses, job security, prestige), leading to ethical and governance problems.

What are the rights of shareholders in firm–shareholder relations?

Shareholders have:

• The right to sell their stock

• The right to vote at the general meeting

• The right to information about the company

• The right to sue managers for alleged misconduct

• Residual rights if the corporation is liquidated

What are the duties of managers in firm–shareholder relations?

Managers have three key duties:

• Duty to act for the benefit of the company

• Duty of care and skill

• Duty of diligence

What is a principal–agent relationship in corporate governance?

Managers (agents) run the company on behalf of the corporation (principal).
They often have different goals → conflict of interest + information asymmetry.

What two features make agency relationships ethically risky?

• Inherent conflict of interest

• Information asymmetry (managers know more than owners)

What is the main ethical issue in executive accountability and control?

Whether non-executive directors are truly independent so they can properly supervise management.

What is the role of executive vs non-executive directors?

• Executive directors: Run the corporation.

• Non-executive directors: Monitor executives and protect shareholder interests.

What ensures independence of non-executive directors?

They must have:

• No conflicts of interest

• No personal financial ties

• Outside perspective

• Limited terms

• Enough information + resources

What is the main ethical concern with executive remuneration?

CEO pay often becomes excessive, rising faster than shareholder returns, creating fairness and accountability issues.

What ethical problems exist with executive pay?

– Performance-related pay causing unrest
– Globalisation driving salary increases
– Boards failing to reflect shareholder/stakeholder interests

What is insider trading?

Buying or selling securities based on material non-public information.

Why is insider trading considered unethical?

It is unfair, misappropriates property, harms investors and markets, and undermines fiduciary trust.

Why is insider trading illegal?

It erodes long-term trust in financial markets.

What is shareholder democracy?

The idea that shareholders can influence corporate accountability and performance through voting and engagement.

What are the three limits to shareholder democracy?

cope of activities, availability of information, and ability to draw attention to issues

What is shareholder activism?

Using shareholder rights to push for changes in company policy, such as speaking at meetings or filing lawsuits.

Who typically engages in shareholder activism?

Wealthy investors or large institutional shareholders.

What is socially responsible investment (SRI)?

Investment that seeks financial returns while meeting ethical, social, or environmental goals.

What are examples of negative criteria in ethical investment?

lcohol, child labour, animal rights violations, tobacco, weapons, pornography, poor labour practices, oppressive regimes, harmful environmental products.

What are examples of positive criteria in ethical investment?

Conservation, ethical employment, public transport, community development, green tech, environmental performance.

In the situation where you are a Marketing Director at PharmChemCo and learn in a confidential managers’ meeting that a top-selling herbicide may have lethal side effects and the information will be public next week, what are the main ethical issues you are facing when deciding whether to sell your stock or warn your friend?

Misusing material non-public information (insider trading), breaking confidentiality, harming uninformed investors, risking public health, violating duties to the company, and potentially manipulating the market by warning others to sell early.

In the PharmChemCo scenario where dangerous herbicide findings are kept secret until publication, who are the main stakeholders affected by your decision about selling shares or telling your friend?

You, PCC shareholders, your friend Freddie, Freddie’s clients, PCC employees, consumers exposed to the herbicide, regulators, and the overall financial market relying on fairness and trust.

In the PharmChemCo scenario, after learning confidentially that lethal herbicide side effects will soon be revealed and will likely crash the stock price, what is the ethically appropriate action for you to take and why?

Do not sell your shares, do not tell Freddie, and follow legal reporting channels because insider trading is illegal, violates confidentiality, harms investors, and breaches your professional duties as a senior manager.

In the PharmChemCo scenario, is there an ethical difference between you selling your own PCC shares based on secret safety information and you telling Freddie so he and his clients can sell early?

Both are illegal insider trading: selling your shares is insider dealing, and telling Freddie is “tipping,” which spreads the harm and can have an even larger unethical market impact.