In today’s financial organizations, corporate finance is an important part of the organization. It is important because it controls the aspect of finance that deals with funding. Since corporate finance involves a lot of risks and financial activities, there could be cases when the people involved in these activities could decide to use unethical behaviors when dealing with the organization’s finances so for this reason, moral ethics must be used to prevent and avoid these unethical behaviors.
What is Corporate Finance?
Corporate finance is the aspect of finance that deals with the management structure of a firm, actions managers take concerning the handling of a firm and the tools or instruments used in sharing financial resources in a firm. Corporate finance is divided into three aspects;
- Capital budgeting
- Working capital
- Capital structure
This is the planning in finance that is used to determine if the projects in a firm or an organization are valuable enough to receive funding for investments like new products, research development, new machinery, etc. The main aim of capital budgeting in corporate finance is to increase the value of the organization to the shareholders.
Using Ethics in Capital Budgeting
Using ethics in capital budgeting in corporate finance requires using moral principles in business operations to increase value of the organization.
Ethical issues in capital budgeting often arise especially when actual results are being compared. Ethical issues can arise in capital budgeting when;
- Employers are being indecisive especially when it comes to budgeting finances.
- When an organization have no financial goals
- When they don’t use the right budgeting methods.
- When budgets are not done consistently.
Most financial organizations do not have a budget and this could result in unethical behaviors like lying about funds just to increase the cue of a shareholder.
This is a financial metric that represents the ability of a firm to pay short-term obligations that are available to the firm or organization. In essence, current assets minus current liabilities results in working capital. If an organization’s current assets are less than current liabilities then the organization has a working capital deficiency.
According to cfainstitute capital structure is the mix of debt and equity that is used to finance a company’s assets. Capital structure is the result of a firm’s financial decisions that are guided by capital structure policies.
Corporate finance is very necessary for raising capital, managing risks and financial planning in an organization.
Ethical Concerns in corporate finance
It is important to note that ethics and corporate financing go hand in hand. Ethical Concerns in corporate finance is a situation where problems or conflicts come up in the organization or firm and must be addressed.
The same way individuals can be involved in conflict is the same way businesses can be involved too because some of the activities in the firm can be questioned ethically.
Ethics in corporate finance are very necessary especially for the proper running of the organization. Ethical issues in corporate finance are usually challenging because they can be difficult to address most times especially if there are no rules or guidelines that can be used in handling the situation but they are necessary for maintaining smooth running of the organization. There are many reasons why ethical issues occur, some of these reasons are because the workers see it as a norm or as an advantage to gain personally. Some of these ethical Concerns in corporate finance are;
Generating fake financial reports
This is one of the main ethical issues to be concerned with in corporate finance. It is using financial recording tricks to make an organization’s financial records look like what the organization wants it to look like rather than it’s actual state or performance. Fake financial reports can be gotten by either faking the records to increase revenue or faking them to reduce expenses and liabilities.
Despite different measures ethical bodies like Security and Exchange Commission have taken to stop faking of financial records, this issue is still common among financial organizations.
Many corporate financial organizations fake financial reports for the following reasons;
- Pressure to show a picture of positive performance in the organization
- To gain large bonuses from executive boards.
In order to provide shareholders with accurate pictures of financial operations, the financial reports need to be accurate and represent financial information exactly as it is going on in the organization because failure to do this could result in serious consequences for both the shareholders and for the organization.
This is selling or buying company’s or organization’s stocks or shares without the general knowledge of the organization. The insider in this could be the manager, or the person in charge of the organization.
Using organization’s funds for personal gain or misuse of assets
Most CEOs or CFOs make use of the organization’s funds for personal gain without giving a record for it or putting it back into the organization’s finances. Using an organization’s funds for anything other than the organization is misuse of assets because it gives bad financial records to the organization. In general terms, this is simply stealing from the organization.
Some organizations fail to tell investors about their loss because they could lose the investor and fail to look successful. This is unlawful and unethical because the investor could find out later which can create a bigger loss for the company. Although it is important to keep some information that could damage the corporation, there are some to not keep or create a facade for.
Focus on half of the organization
Some corporations focus on part or just the executives and forget about the workers thereby giving more power to the executives to allow them to pressure the other teams in the organization.
Having personal issues with your leader or boss
This is another unethical behavior in an organization. Having issues with your boss could be in different forms like bullying,abuse, discrimination, sexual harassments or too much workload on a particular worker. According to a news release from the EEOC, $505 million dollars was secured in 2029 for victims of discrimination and harassment in private sectors and government organizations.
Health and Safety of the workers
The International Labor Organization stated that over 7,000 workers die every year due to negligence and work related accidents. Workers are entitled to work in environments where their health and safety are properly watched and controlled.
Invasion of Privacy
Most organizations now keep track of their employees’ activities on their computers. Although organizations are allowed to monitor company’s email, the organization crosses the line and it becomes spying or invasion of worker’s privacy.
Racism and Ethnicity
It’s hard to believe but most organizations still practice racism, ethnicity and tribalism. Some employers treat their workers based on their tribes or race.Some give preferential treatment to the workers that are from the same race as them.
Social media ethics
Some employees are punished because of what they post on their social media platforms because they consider some posts to be disloyal.
Refusal to take responsibility
It is very necessary for employers to take responsibility for every action taken in the organization. Some employers or leaders are scared of losing their jobs and so refuse to take responsibility for any wrong occurrence in the organization.
Biased method of employment or Nepotism
Some workers are employed in an organization not because they are qualified for the job but because they have a relationship with the employer or have tipped the employer. This results in professional workers not being qualified for the job.
Lack of accountability
Lack of accountability especially in monetary areas could result in the corporation running at a loss. Every money that is spent in the organization should be accounted for by the leader or employer or whoever is in charge of the organization. It is usually the manager that is responsible for giving accounts of every monetary action taken in the organization. If he is unable to give an account, he could be suspected or accused of stealing funds.
Most employers used foul languages on their workers or clients. Verbally abusing your clients will result in bad service.As an employer, it is very important to not use foul languages on anyone both inside and outside of the organization.
How These Ethical Concerns Can Be Handled With Ease
There are many ways to curb or handle these ethical issues. Some of them are;
Implementing a system that encourages employees or workers to report ethical problems they see to their executives or superiors.
If an employee sees someone in the organization behaving in an unethical manner, there should be a way for him or her to report to the executives or superiors.
Sometimes the executive or superior could be the one behaving in an unethical manner and it would not be safe in some cases going to the manager of the organization.
Empowering employees to handle any ethical issues by themselves in the right way.
Train your employees by empowering them to handle any unethical issues
that they see or notice in the organization in the right way.
Leading by example
A good executive or leader in an organization should lead by example and follow every rule and regulation in the organization because every worker will only follow in the footsteps of the leader.
Respond to reports made about unethical behaviors in the organization
If immediate action is taken when a report concerning any unethical behavior in the company or organization, it will encourage other workers to keep reporting especially if actions taken are fair enough.
Other ways you can handle ethical issues with ease is by;
- Accessing your company’s or organization’s needs and resources by asking questions like; What are the challenges faced in the organization? What values are necessary in the organization?
- Building a strong foundation in the organization.
- Keeping values and integrity as the main focus in the organization.
- Keep to promises and commitments made to the employees because being true to your word is a good aspect of having integrity.
Importance of Ethics in Corporate Finance
Ethics are established in corporations to promote integrity among employees and also gain their trust.
Before an organization can see the Sense in following rules or ethical codes of conducts, they have to see the importance of it and some of these importance are;
Good ethical conduct brings profitability in the organization and reduces loss. It also strengthens sales and keeps the organization open for more investments.
There is profitability when an organization maintains a good reputation with it’s clients or investors, when it minimizes financial risks, avoids legal or unethical issues and has a dedicated workforce.
Promotes good moral and professional behavior
Organizations that have a firm ethical culture motivates the employees to perform their roles with integrity and good moral behavior which in turn helps in building trust between the executives, shareholders and workers. Ethics helps workers avoid issues that can affect the reputation of the organization thereby making them professionals.
Reassurance of Safety
Workers feel safe when working in an organization that is backed up by ethical codes and conducts. This will build the reputation of the organization.
Other importance of Ethics;
- Good ethics in corporate finance strengthens the relationship between the employer and worker.
- Ensures and stimulates positive vibes or ambiance in the organization.
Ethics are for the protection,balancing and preservation of stakeholders or shareholders interests. In corporate finance, ethics are required to be obeyed. Unethical behavior results in loss of finance and penalty .
Ethical behavior guides a worker in performing functions in the organization whether people are watching or not.
Bad ethics can cause a strain in the relationship between an employer or worker and also lead to damage to the organization’s name.
With tools like Formplus, you can report any unethical conduct going on in your corporate financial organization rather than going to the employer because some organizations cover up issues of unethical behaviors.
Writing down punishments attached to Amy unethical behavior will help remind workers in an organization about ethics.
Corporate Finance Ethics is mandatory to ensure that the organization conducts their duties objectively and alongside honesty and integrity.