Question

What does it mean that the board of directors represents the shareholders of a corporation? Do you believe that a focus on shareholders and profit may lead to the types of ethical problems that have been seen in some large corporations recently? Why or why not?

Answer 1

The board of directors are elected by the shareholders to run the corporation and hence they represent them. They are entrusted with the responsibility of taking decisions that are in the best interests of the company and for the welfare and common good of stakeholders and the company. Since all the shareholders cannot participate in the day to day operations of a company, the board of directors are nominated. Excessive focus on profits and shareholders welfare in most cases lead to unethical decisions being taken by the BOD which include window dressing of accounts, postponing expenses, overbooking of revenue, and indulging in complex financial transactions. The reason why companies engage in such activities is primarily due to the fact that the shareholders provide stable financial source of money for the business to run and the company is not liabile to repay till it shuts down the business. Hence, in a bid to satisfy the shareholders, corporations take such steps to show good profits, earnings per share and pay high dividends.