Ethical responsibilities of owners and managers: formula sheet

Key formulas

Ethics

Ethics = principles of right and wrong that guide conduct

Reasoned framework, wider than law and wider than self-interest.

Morality

Morality = beliefs and standards of right and wrong held by a person or society

Can differ between individuals and cultures.

Business ethics

Business ethics = ethics applied to business decisions and relationships with stakeholders

Use this as your standard definition in written answers.

Law and ethics relationship

Law = minimum required standard; ethics = what ought to be done, often higher

Legal does not always mean ethical. Ethical does not always mean legally required.

Duty of loyalty

Act in good faith in the company's best interests; no personal gain from position

Covers use of property, information and opportunities.

Duty of care

Reasonable care, skill and diligence expected of a prudent person in that role

Judged by the role and the knowledge the person holds, not hindsight.

Conflict of interest handling

Identify → Disclose → Withdraw from decision → Independent approval → Record

Use this sequence for any conflict scenario.

Honesty and confidentiality

No misleading statements; no misuse of confidential or price-sensitive information

Insider dealing is a breach even if the company loses nothing.

Agency relationship

Principal (owners) → hires → Agent (managers), who act on the principal's behalf

Use this wording to define the problem. The conflict comes from differing goals plus information asymmetry.

Total agency costs

Agency costs = monitoring costs + bonding costs + residual loss

Learn all three parts. Students often list only monitoring.

Shareholder wealth objective

Shareholder wealth = dividends received + change in share price

Total shareholder return is a common measure used to link pay to performance.

Incentive alignment test

Good scheme: manager's reward rises when shareholder value rises, and falls when it falls

Options alone give upside without downside, so they can encourage excess risk.

CSR – shareholder vs stakeholder view

Shareholder view: duty = maximise owner value within the law. Stakeholder view: duty = balance the interests of all affected groups

Use both views to give a balanced answer. Say which one the scenario supports.

Elements of an effective code of conduct

Clear standards + training + communication + monitoring + enforcement

If one element is missing, explain how that weakens the code.

Elements of a good whistleblowing policy

Clear channel + confidentiality + protection from retaliation + independent investigation + feedback

Use as a checklist when judging a policy in a case.

Drivers of ethical culture

Tone at the top + incentives + role models + open communication + consistent discipline

Culture is shown by behaviour, not by written statements.

Benefits and costs of CSR

Benefits: reputation, staff and customer loyalty, lower regulatory risk. Costs: money, management time, risk of greenwashing

Always give both sides when asked to evaluate CSR.

Quick revision

• Ethics concerns what is right and wrong in behaviour; business ethics applies this to how a business operates.
• Owners and shareholders have rights, but also duties such as using their influence responsibly and not harming other stakeholders.
• Managers and directors owe duties of care, honesty and acting in the company's interest, not their own.
• The agency problem arises when managers (agents) act for owners (principals) but have different interests.
• Separation of ownership and control is the main cause of the agency problem.
• Typical remedies: monitoring, audits, independent directors, performance-linked pay and clear disclosure.
• Agency costs are the costs of monitoring managers and of any loss when they act against owners' interests.
• Stakeholders are all groups affected by a company, not only shareholders.
• Conflicts can arise between shareholders and lenders, or between owners and employees.
• CSR means a company takes responsibility for its effect on society and the environment beyond legal minimums.
• A code of conduct sets out expected behaviour and works only if it is communicated and enforced.
• In answers, name the duty, the person, the risk and the control.

Common mistakes

• Saying that ethics and law are the same thing. Fix: State that law is the enforced minimum and ethics can demand more. Give one legal-but-unethical example.
• Writing only a definition without linking it to stakeholders. Fix: Always add who is affected and how, such as customers losing trust or investors facing losses.
• Saying shareholders have no responsibility because of limited liability. Fix: State that limited liability limits financial exposure only. Ethical responsibility comes from the owner's influence over the company.
• Treating all shareholders as equal in power and duty. Fix: Separate controlling owners, institutions and small retail holders. Say that greater influence brings greater responsibility.
• Saying directors owe duties directly to the biggest shareholder or the person who appointed them. Fix: State that the duty is owed to the company, acting in its best interests as a whole.
• Treating every conflict of interest as a breach. Fix: Say a conflict becomes a breach when it is hidden or acted on to gain personally. Disclosure and independent approval manage it.
• Treating agency problems as only a shareholder versus manager issue. Fix: Also mention shareholder versus lender, majority versus minority shareholders and other stakeholders when the question allows.
• Listing only monitoring costs as agency costs. Fix: Always give monitoring, bonding and residual loss, with a short example of each.
• Treating CSR as charity only Fix: Say CSR also covers how a company treats staff, customers, suppliers and the environment in its core business.
• Saying a code of conduct guarantees ethical behaviour Fix: State that a code needs training, monitoring, enforcement and leadership example to work.

Exam tips

• Learn one-sentence definitions of ethics, morality, law and business ethics word for word.
• In discuss questions, always give both a benefit and a cost of ethical behaviour.
• Name specific stakeholders instead of writing 'society' alone.
• In MCQs, reject extreme options that use words like 'always' or 'never' about ethics and profit.
• Use a short example in every written answer to show application.
• Link every duty to a named group and a fact in the scenario. Generic lists score poorly.
• Always say who the owner is: controlling, institutional or retail. The expected answer changes with the type.
• Use the words stewardship, engagement, voting and minority protection correctly. Examiners look for them.