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IAI Actuarial Core Principles · Business Finance

Ethical Responsibilities of Owners and Managers in Business Finance

This chapter covers the duties owners, shareholders, managers and directors owe to each other and to society. To answer questions, define the duty, name who owes it and to whom, explain the conflict or risk if it fails, and give a control such as a code of conduct, disclosure or oversight.

What this chapter covers

This chapter is about how people who own and run a company should behave. It starts with basic ideas of ethics and business ethics. It then looks at owners and shareholders, then managers and directors. It ends with the agency problem, conflicts between stakeholders, corporate social responsibility (CSR) and codes of conduct.

The chapter is mostly descriptive. You will rarely calculate anything. Marks come from clear definitions, correct use of terms and applying ideas to a short scenario. Examiners like answers that link a duty to a person, a risk and a remedy.

It connects directly to the rest of CB1. Corporate governance and organisation is the closest neighbour, because governance structures are the tools that enforce ethical behaviour. It also links to how corporates are financed, since dividend, debt and risk decisions create conflicts between shareholders, lenders and managers. It also supports company accounts, where honest reporting is an ethical duty. Actuaries also work under professional standards, so the thinking carries into your career.

CB1 is a written paper of 3 hours 15 minutes, and recent papers open with multiple-choice questions before written questions. Ethics and governance material suits both formats: short definitions suit MCQs, and scenario questions suit written answers. The chapter has no heavy calculation, so it is a good place to secure marks with steady reading and practice. Students who treat it as common sense often write vague answers and lose marks. Precise terms and structured points make the difference. Since the CB1 pass mark is at least 50%, reliable marks from a descriptive chapter help offset weaker areas such as accounts or project evaluation.

Ethical responsibilities of owners and managers: topics in the order to study them

  1. 1Ethics and Business Ethics: Basic ConceptsIt gives you the vocabulary of ethics, values and fairness that every later topic uses.
  2. 2Ethical Responsibilities of Owners and ShareholdersOwners are the starting point of a company, so their duties and rights come before those of the people they appoint.
  3. 3Ethical Responsibilities of Managers and DirectorsOnce you know what owners expect, you can see what managers and directors owe them and others.
  4. 4Agency Problem and Stakeholder ConflictsIt shows what goes wrong when owners and managers have different interests, building on the two previous topics.
  5. 5Corporate Social Responsibility and Codes of ConductIt closes the chapter with the practical responses: CSR and codes of conduct that reduce conflicts and set standards.

How to prepare Ethical responsibilities of owners and managers

Treat this as a concepts chapter. Build clear definitions first, then practise applying them to short scenarios.

  1. Read the topics in the study order above and write a one-line definition of each key term in your own words.
  2. Make a simple table in your notes: person (owner, shareholder, manager, director), their main duties, who they owe them to, and what can go wrong.
  3. For the agency problem, learn the cause (separation of ownership and control), typical examples and the usual remedies such as monitoring, incentive alignment and disclosure.
  4. List the stakeholder groups (shareholders, employees, lenders, customers, suppliers, community) and note where each can conflict with another.
  5. Write short answers to practice questions using a fixed pattern: define, apply to the case, state the risk, suggest a control.
  6. Link each idea to governance in CB1 so you can reuse the same points in different questions.
  7. In the last days, revise from your one-line definitions and attempt past-style MCQs to check precise wording.

Common mistakes in Ethical responsibilities of owners and managers

  • Writing general moral opinions instead of using defined terms.

    Fix: Learn short definitions of each key term and use them in the first line of your answer.

  • Treating shareholders as having no ethical duties.

    Fix: Remember that owners and shareholders also have responsibilities, such as using voting power and influence fairly.

  • Mixing up the principal and the agent in the agency problem.

    Fix: Say it plainly: owners are principals, managers are agents who act on their behalf.

  • Naming a problem without suggesting a control.

    Fix: Always finish with a remedy such as monitoring, incentive alignment, disclosure or a code of conduct.

  • Treating CSR as only charity or donations.

    Fix: Describe CSR as the wider responsibility for the impact on employees, customers, community and environment.

  • Ignoring stakeholders other than shareholders.

    Fix: List all stakeholder groups and note where their interests can conflict with shareholders.

Last-day revision: Ethical responsibilities of owners and managers

  • 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.

Ethical responsibilities of owners and managers practice questions

Ethical responsibilities of owners and managers in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ethical responsibilities of owners and managers: frequently asked questions

Is this chapter calculation-based?

No. It is mainly descriptive. You are tested on definitions, understanding of duties and applying ideas to short scenarios.

How does this chapter link to corporate governance?

Governance structures such as boards, independent directors and disclosure are the tools used to enforce ethical duties and reduce the agency problem. Study them together.

What is the agency problem in simple words?

It is the risk that managers, who run the company for owners, act in their own interest instead. It arises because ownership and control are separated.

How should I structure a written answer on ethics?

Define the key term, apply it to the situation in the question, state the risk or conflict, and suggest a control or remedy. Short, clear points score better than long essays.