Business Law and Ethics - Assignment Example

Business Law and Ethics Qn. 1. Pozen (51) discusses that major global financial institutions had to be salvaged from the risk of insolvency in 2008. The efforts to redeem these institutions entailed the injection of government assistance into the management of the institutions, as organizational boards were blamed of being unable to uphold the oversight of the organizations (Pozen 51). The same case had taken place ten years before, during the time of the failure of the corporate governance of Enron. The failure pushed congress towards the institution of the Sarbanes-Oxley Act, which required constant review of the board’s control capacity, which was to be rechecked by a quasi-government control board (Pozen 52-53). However, in 2008 – regardless of compliance to SOX reform standards, many institutions went through failure, which demonstrated that there was need to employ further control measures (Pozen 54). The changes planned, so as to improve the decision-making processes of the boards include that all boards would only have seven members; where the CEO is among them, and the six others are independent. It was also a requirement that the board members should be well versed with the company’s business areas, and would be required to spend more time deliberating on company matters. They would take two days each month, above the ordinary board’s business time (Pozen 55-58). The implementation of professional boards in Kuwait has already started, and will not be a hard task, as Kuwait-based companies have already worked on realizing compliance of the standards required from professional boards. These standards include that the boards should only have seven members. One example of a compliant company’s professional board is that of Kuwait Finance & Investment Company which has implemented the seven-member professional board standard (Kuwait Finance & Investment Company 1). The company has also met the standard that the board members should be highly experienced in the business areas of the company. For instance, from the case of KF & IC, the different members were selected on the basis of their knowledge of the Kuwait business environs, and their experience in the financial and investment business (KF & IC 1). Compliance to the professional board standards is also demonstrated from the case of Kuwait and Middle East Financial Investment Company (KMEFIC), which has implemented the seven board member system (KMEFIC 1). Further, the board members were selected on the basis of their experience in the finance and investment business environment of Kuwait and the Middle East. The new system has been working in Kuwait, mainly because the Kuwait-based companies share in the needs to down-size the number of board members, as well as to prioritize the capacity of the members, towards contributing to the effective oversight of the company. Qn. 2. The gatekeepers are economic players affiliated to senior regime leaders and players (Hertog 290). The gatekeepers are the brokers that are best studied and documented in popular writings and western press, as actors that played a critical role around the senior figures in the regimes – ordinarily sheikhs and prices. The gatekeepers control the access of the VIPs of the region to high-level individuals, and also to the resources that the senior regime members could dispose (Hertog 291). Gatekeepers already existed during the pre-oil time, at Kuwait and other nations like Arabia, although their relevance increased with increase in the administrative complexity, the centralization and the riches of the gulf nations. Among the famous gatekeepers of the 1970s, which was an oil-boom time include Ghaith Pharaoh of Saudi Arabia (Hertog 291). They acted as the mediators between royal personalities like King Fadh, who was a Prince before, and Sultan, who was a prince in charge of the defense ministry. The gatekeepers addressed the finer details of national contracts, and scooped a very large share – allowing Western contractors to engage the decision-making processes, which influenced the resource allocation of these nations. However, this side of their work was opaque and informal, therefore was not officially open practice (Hertog 292). Different from the nature of the gatekeepers of the oil-boom era, who are long gone, their functions are still felt, although they are held by lower-class individuals. An example of these personalities is the Tuwajiri family that works closely with Saudi Arabia’s king, Mr. Abdallah. Others are the Tayer, Ghurair and the Tajir families of the UAE, who are close allies to the ruling class (Hertog 292). Many of them, but not all, take advantage to monetize the control of resources, but all of them can act as contact points for the exchange of large-scale state resources to ordinary classes. Due to the highly centralized nature of the government models at the Gulf region, as well as the unrestricted power of leaders, the information and resource-filtering role of gatekeepers is of critical importance (Hertog 293). Gatekeepers are viewed as relatively more powerful, when compared to common people holding senior positions like cabinet offices, as their responsibilities are highly technocratic. Gatekeepers – ordinarily – come from non-tribal lineages, and therefore will characteristically have no status group to associate with (Hertog 293). More than their role as contract brokers, their role has greatly impacted the social mobility witnessed in these nations. An example from Saudi Arabia is that of Id Bin Salem who changed from an ordinary mechanic to attain the keeper position, where he advised King Sand and was also the Privy Purse – during the 950s. Another case is that of the Darwish family, which had a very humble non-Arabic origin, but rose to take leading advisory positions at the “Al-Thani Rulers court of Qatar” (Hertog 293). The family acted as the mediation agents between foreign corporations and the Qatar people. Qn. 3. The ‘rentier state’ theory, which is commonly used as a model explanation into the survival of Arabian monarchies, contributes to the conception of political stability at the gulf region. The Persian gulf, commonly referred as the Arabian Gulf by the Arabs has proved to be a fast-growing economic center globally (Beblawi 87-88). The region has amassed vast control of gas and oil supplies, which have revolutionized the region’s wealth. The discovery of oil overturned the conception of the region’s history, as the areas were previously viewed as poor tribal lands at the Arabia desert. The region had never attracted colonization, unlike other regions, but all that changed after the discovery of the most important energy source in the current day (Beblawi 87-88). The discovery of oil also changed the internal structure of the nations at the Gulf region, as they increasingly earned exogenous rents from the resource, which has become the major source of national revenues. The Rentier theory by Beblawi and Luciani explains the resilient nature of the Arab monarchs of the Gulf region. The theory contrasts the outlook of these monarchs with the experiences of their neighboring oil states, including Libya and Iran – which are continually undergoing revolutionary changes (Beblawi 87-88). The theory seeks to explain the continued stability of the gulf region monarchs as a function of their rentier nation status. The model holds that there is a strong relationship between the high prices of their oil and gas resources and the resiliency of their autocratic rule. The common conception of the theory is that with increases in the prices of the oil resources among the oil-rich nations, the nations’ standing in the areas of free press, free speech, free and fair electioneering, the independence of the judiciary, the independence of political parties and the rule of law are eroded (Beblawi 87-88). The justification behind the view is that the more the prices of the oil resources grow, the less, these nations will regard the outlook of the global community towards them. The theory holds that these states are likely to manipulate the global economic and political environments, as a way of increasing the inflow of rents into their economies, as well as increasing their influence. The different following are the different areas of manipulation: the perpetuation of monopoly, the imposition of trade restrictions and the pursuit of aid or subsidies in exchange for more influence in the politics and economics (Beblawi 87-88). The theory proceeds, further, to argue that the continued control of the globally consumed oil resources undermines the development of democratic rule and the dominance of civil rights. Therefore, the authoritarian role of these nations, in determining the supply of the critical resource globally is an important determinant of the continued authoritarian rule among the oil-rich Gulf nations. Qn. 4. WorldCom is a typical example of a company that failed due to accounting abuses, ineffective corporate governance and greedy activities within the company. The failure of the company left the senior executives and workers disappointed, either due to debt or the drop of the Company’s share value (Holmes 18). In 1998, the company acquired MCI, and was at its highest profitability levels in 1999, when its shares traded at more than USD 64. At the time, the CEO was a millionaire, although he resigned later, in 2002 from the CEO post. Two months after his resignation, the company declared itself bankrupt. The failures was traced to a number of factors, including its issue of loans to senior staff, its growth through acquisitions and the failure of its corporate governance (Holmes 18). The company had started as a long-distance telephone company, but grew rapidly through the acquisition of other companies, which made it grow into the second-largest company in the US long-distance telephone industry (Jeter 57). The uncontrolled growth was also caused by Ebbers’ inappropriate financing of purchases, through placing his holdings as collateral. After the price of the company’s stocks fell, his personal assets could not meet the debt obligations – which the board hid – so as to protect the image of the company. The company offered friendly loans and stock options, which increased its rate of growth. Upon the discovery of the non-liquid nature of the company, the board hesitated to sell Ebbers’ shares, for the fear that it would cause a drop in the share value of the company. They felt that the drop in the company’s share value would reduce the confidence of investors, in the future of the company. During the autumn of 1998, the chairman to the SEC (Securities and Exchange Commission) Mr. Arthur Levitt expressed his dissatisfaction that the auditors and the analysts of the company were participants in the inappropriate corporate games. The hero from the WorldCom case was Cynthia Cooper, who investigated the company, exposing accounting irregularities, which were committed to mislead investors (Jeter 58). Cooper did her investigations in secret, many times during the night, so that she could avoid suspicion from the members of the accounting and misrepresentation racket (Partnoy 140). Her attention to the misappropriations had started in March 2002; after a line manager complained before her that their immediate boss, Mr. Scott Sullivan had misappropriated a USD 400 million reserve fund. The investigations revealed that the senior executives had committed clever manipulations, which were designed to hide a USD 4 billion deficit, borne through inappropriate accounting practices and misallocated expenses (Partnoy 220). At the closure of WorldCom’s case, it was not clear whether Ebbers would be held accountable for the irregularities that pinned his subordinate. The legal fate of Grubman was also not clear. Due to her efforts, Cynthia Cooper was recognized by the Time Magazine as among the people of the year. Qn. 5. A nation’s legal system, which is the framework used during the development and the enforcement of legal standards – largely determines the functions of the political, social and the economic institutions in place (Sullivan & Sheffrin 19).The legal systems of different nations can be classified into two areas, including common and civil law. Common laws are based on the long-standing customs derived from important court decision-making processes. They help in guiding the behaviors of institutions, businesses and people. In the absence of clear legislative directives, common law courts develop new standards to guide the issue in question. Civil law, on the other hand, is derived from abstractions and distinguishing substantive principles, which serve as the referral legal basis of law (Sullivan & Sheffrin 29). Most civil law standards are derived from codification, natural law and legislative positivism (Zweigert & Hein 50). The two legal systems influence what is considered right and what is wrong, therefore are likely to affect businesses positively or negatively. For instance, the legal pressure imposed on companies so that they can meet CSR and environment-friendly business practices is placing compliant businesses at an advantage, and others at a disadvantage. An example in this case is the taxes levied on business, whether doing business locally, importing or exporting from the country (Sullivan & Sheffrin 29). The tax requirements imposed on businesses obligates them to increase the price of products, which makes them vulnerable to their competitors, who may be providing the same products at a lower price. Further, some businesses are barred by legal policies, where an example could be the restriction of alcohol advertising. As a result, the businesses that would have benefited from the particular market are locked out or restricted. Government policy can also affect business positively, for instance, in the case where tax reliefs are offered or subsidies given, which improve the profitability of businesses (Sullivan & Sheffrin 54). The decisions made and the regulations imposed affect businesses positively or negatively. Examples include the environmental consideration imposed on airlines, which has increased the costs borne, while investing in safety and environment-friendly business. The extra investments in safety and eco-friendly business increase the expense borne by businesses, which reduces their profitability. The costs of business licensing are affecting the costs of doing business and the extent to which businesses can market their services and products. For example, import and export quotas influence the markets that can be explored by different businesses (Sullivan & Sheffrin 29). For example, in Canada, there are stringent regulations on the advertising of tobacco and alcohol, which affect businesses adversely. Another example is the case of China, where the government policies in favor of Chinese companies, more than foreign companies are driving US technology companies out of the booming technology market (Zweigert & Hein 50). Qn. 6. The corporate governance reorganizations of the last two decades led to the realization of positive outcomes, but did not address the basic problems in governance practices. The corporate governance model, besides failing to counter the incidence of corporate collapse and financial crisis, also enhanced the manipulation of share value and the abuse of accounting practices and principles. The corporate governance model also fostered the capacity of companies, towards triggering and absorbing more business and financial risks, which increased profit maximization in the short term (Clarke 75-78). Some of the areas of failure, which led to the 2008 financial crises, include the corporate governance culture of offering excessive bonuses to senior managers and CEOs; capitalization on short-term profit making, and the exploitation of customers. Following these basic reasons behind the incidence of the financial crises, Sir Mervyn, the governor for the Bank of England gave a warning in 2011 – that without imposing bank reforms, the country would suffer a major crisis another time. There is a view that the insufficient implementation of corporate governance principles and codes caused the financial crisis (OECD 1). The OECD pointed out a number of weak areas in the implementation of corporate governance, which led to the crises: risk management, executive remuneration, exercising shareholder rights, and the ineffective practices of the board. Major failures among critical policy makers are also, appear to stem from the ineffective implementation of the principles covering the different areas. The view is also supported by the UKFRC (UK Financial Reporting Council), which discussed its findings that the problem areas that led to the incidence of the financial crises fell under the areas of implementing the codes of the corporate governance system (Financial Reporting Council 2). The third view explaining the cause of the financial crises was that it was caused, primarily, by the in effective implementation of the different codes. The view holds that the failure resulted from the organizational structure of the institutions, which were underlined by basic market assumptions like self-regulation, shareholder primacy, self-interest pursuit, and market fundamentalization (Caulkin). The conclusion was that the financial crisis was triggered by the invisible changes of the market, as well as the visible aspects of management, after it was hijacked by the forces of Reagonomics. Qn. 7. The effects felt in the Kuwait business environment include that oil windfalls are known to affect other economic sectors adversely, which takes place after the increase of the real exchange levels of Kuwait’s currency. As a result, the change rendered other commodities, which were previously exported by the economy noncompetitive. This phenomenon is commonly referred as the Dutch disease. The effect of Kuwait’s dependence on its oil reserves, as a consequence, limits the success of the other sectors, where businesses could play competitively – nationally and internationally (Sachs & Warner 43-44). As a result, many businesses in the other sectors are rendered non-competitive, which may end up in their complete death with time. In the long term, the effect is that the Kuwait economy has become fully reliant on oil exports and the importation of almost all other commodities, which makes the entire business environment and economy vulnerable to the changes in the supply of oil. For instance, an increase in the oil amounts exported by Kuwait is likely to trigger the increment of the prices of other commodities, which affects businesses adversely. Some of the areas affected by the Dutch disease acutely include manufacturing and agriculture, which renders the economy’s efforts towards economic diversification quite impossible. The second effect of over-dependence on oil exports include that the long-term price volatility and the deflation of the primary commodity hinders economic development. Since the 1970s, oil price volatility has heightened, making oil prices twice as dynamic as those of other major commodities (Sachs & Warner 45). As a result, the Kuwait economy is likely to undertake economic stock more frequently, as the entire economy is more susceptible to the sharp boom-bust cycles. The price volatility of oil affects the budgetary process of the country negatively, and also cripples the administration of public finances. As a consequence, state planning is affected, and in the process – economic performance is likely to shift from planned figures by more than 30 percent. These cycles affect income distribution, investment and poverty eradication measures – which are primary determinants of the performance of the business environment (Sachs & Warner 46). The enclave nature of the oil-dependent economy, which is worsened by its capital-intensive nature, affects the linkages between the macro economy and the creation of nation-wide changes like employment creation. These cyclic changes and the long-term effects of the economy’s dynamics affect the development of business, the creation of business opportunities as well as the substantial utilization of business strongholds (Sachs & Warner 47). The oil industry is highly capital-intensive; therefore the Kuwait economy is only able to produce a few employment opportunities, from a unit of capital investment. As a result, the long term effect of the dependence on oil slows the levels of individual investing in business, which fosters higher money circulation. The long-term consequence is that the cycle of low business investment levels affects the national investing capacity, which affects the profitability of complementary or supportive businesses. Qn. 8. The mechanisms of a rentier economy promote the inflow of massive rent amounts, which tends to increase the consumption of foreign products. These products belong to different classes, including consumable products like fuel, food and medicine, as well as industrial and technology products. This consumption pattern shifts consumption behavior of the rentier nation towards an industrial mode of consumption and production. As a result, a situation of over-dependence on the foreign revenue triggers a relaxation of the constraints that should be employed in the way of foreign exchange (Hertog 296). Therefore, there is the effect of replacing the consumption of imported goods at the expense of locally produced products, which results from the increasing abundance of foreign currency. The consequence of all these changes in the general outlook of the demand triggers a change of business inclination towards the trading of industrial and manufactured products, at the expense of non-manufactured products like agricultural produce. The economic changes explained affect the poor populations in the rentier economy, as the food stuffs imported from foreign countries are produced under the economies of scale, but local food products are produced under – ordinarily expensive conditions. This situation triggers a business behavior which is distinguished by the gap between the affluent spenders that benefit from the rents, and the poor group which is marginalized from the foreign revenues (Hertog 297). As a result, there will be a prevalent trade and spending gap which is not met by the businesses operating within the economy, as they are likely to pursue high-return markets. The effect of the rentier economy on the business behavior of the state include that the availability of excess rents shifts government spending towards capital-intensive spending on development and other projects. The increased spending on capital intensive spending stems from the government’s pursuit to acquire foreign technology. The short term effects of the shift include that the projects employ a large population and the projects offer the state a sense of prestige (Hertog 298). The increased levels of temporary work influence the business outlook of the state positively, triggering the entry of more players. However, the abundance of money circulation is not long term; therefore a reduction in the money available for business reduces abruptly, which affected the businesses in operation negatively. The problems are long term, as the industries in the given state are affected, to the level that they cannot employ the larger population of the given nation. The situation increasingly perpetuates the dependence of the entire economy on the exportation of the major source of rents, which affects the stability of the economy, as it depends on the price variations of the oil prices. The changes of the economy’s stability further affect the availability of business and the money in circulation, which affects business behavior adversely. The continued reliance on the importation of goods changes the nation’s business outlook, to one that allows for the dumping of excessive produce from industrialized nations. As a result, the nation’s business behavior shifts towards the exploitation of the non-booming industries and sectors, due to the perpetuated reliance on domestic product substitution (Hertog 297). The consequence, especially in the long term, is that businesses shift businesses towards the marketing of imported goods and the booming sector, which is likely to influence the business sector in the long term. Qn. 9. Fiduciary duties are the legally founded obligations of one party, to take actions that serve the best interest of the other. The party that holds the duties is ordinarily the fiduciary, and they are entrusted with the mandate to care for the property or the money of the other party. Fiduciary duties are classified into two major categories: the duty of care and the duty of loyalty (Frankel 127-128). The duties to be served by the fiduciary vary depending on the relationship developed between them and the counter-party (entrustor). Recently, the courts bestowed fiduciary obligations on clergymen, physicians and union officers. Fiduciary relations are found in different legal situations, including trusts, wills, contracts and elections. One example where fiduciary duties are held is the case of the corporate directors of a company. Fiduciary remedies and duties are traceable to common equity grounds. In addition to the remedies offered under common law, fiduciaries account for the inappropriately acquired profits, regardless of whether the principal suffered any effects or injury. The differences and the similarities between different fiduciary relationships demonstrate why legal principles are employed for the regulation of fiduciaries. This is also why the legal principles change from one fiduciary class to another (Frankel 127-128). The features of fiduciary relationships include that they are relationships founded on service delivery, where the fiduciary offers services that are allowable under public policy, to the entrustors. The different public policy officers that offer fiduciary include escrow agents, bailees, brokers, agents, corporate officers and directors, co-ventures, partners, lawyers and trustees. Some fiduciary relationships fall under a different class, where the partners are both entrustors and fiduciaries for each other (Frankel 127-128). One example of such relationships is that between the partners in a partnership business. The second characteristic of the relationship is that the fiduciary is entrusted with authority over the entrustor and the property in question. The third characteristic of a fiduciary relationship is that the only purpose for the relationship is the service offered to the entrustor. The fourth characteristic of fiduciary relationships is that the costs of monitoring the services are likely to be very high. Lastly, alternative controls to contain the risks to be borne by the entrusted are often weak or unavailable (Frankel 127-128). The laws that are applicable to the coverage of fiduciary duties include contract, employment, brokerage, agency and business laws. These laws confer to the fiduciary, the duty of care, where they are required to inform the principals about reaching any business decisions (Langbein 929). They are also required to exercise all care, during the execution of their duties, which is judged from the indication of negligence. The duty of loyalty comes in; in the case the fiduciary’s actions indicate a conflict of interest, for instance using the position for personal gain. The duty is checked using a conflict of interest evaluation, where the consent of other directors or shareholders was not sought. In the case of an employment relationship, the fiduciary is not allowed to take advantage of the business of the entrustor, through accessing business that would have benefited them (Langbein 929). This example is replicated in the case Green & Clara Pty Ltd where Green, a senior employer took advantage of the knowledge of a construction contract available to Bestobell. Without notifying the employer, Green formed a company under the name of Clara Pty Ltd, and submitted a construction tender. The tender went through, and he got the contract, at the expense of Bestobell. The court held that all profits earned by Clara from the contract were to be awarded to Bestobel, due to Green’s breach of fiduciary duty. The application of the law evaluates the level of benefit earned from the breach, or the damage incurred by the principal (Langbein 929). Works Cited Beblawi, Hazem. “The Rentier State in the Arab World,” in Luciani, G., The Arab State, London. London: Routledge, 1990. Print. Caulkin, Simon. Corporate apocalypse. Management Today, 1 Jan 2009. Web. April 12 2013. . Clarke, Blanaid. ‘Where was the “market for corporate control” when we needed it’, in Sun, W., Stewart, J. and Pollard, D. (eds.), Corporate Governance and the Global Financial Crisis: International Perspectives. Cambridge: Cambridge University Press, 2011. Print. Financial Reporting Council. The UK Corporate Governance Code. Financial Reporting Council, 2009. Web. April 12 2013. . Frankel, Tamar. “The New Palgrave Dictionary of Economics and the Law, Definition of ‘fiduciary duties.’” by Tamar Frankel 2 (1998): 127-128. Print. Green & Clara Pty Ltd v. Bestobell Industries Pty Ltd [1982] LexisNexis Academic. 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