Mondragon Cooperatives Corporation

The shareholders are the owners of the firm and they consequently are the dominant group, on behalf of whose interest the firm should be run. Many people believe that the corporations exist and operate solely for the benefits of share holders (Crane and Matten 2010). Today, except small number of organizations, the separation of ownership and management is the common pattern in large organizations. This has been caused immensely for the modern capitalism. And the owners who invest in these companies expect that the managers may operate the business on behalf of them in their interest. However there are some crucial differences of with regard to the ownership of corporations such the locus of control, fragmented ownership and divided functions and interest (Crane & Matten, 2010) in this type of companies. ABC also characterizes by these ownership considerations. In the aspect of locus of control, the shareholders of ABC have indirect and impersonal control over their property while the actual control lies in the hand of Director Board. Then, in the aspect of fragmented ownership, there are many shareholders of the ABC and hard to find one of them as the owner of the company. Further, in the aspect of divided functions and interest, shareholders of ABC seek the profits while the management expects the growth. The MCC is considerably differing compared to ABC and there is no separation of ownership and management in MCC since all the owners are works in the company. Issues Identified Principal Agent Relation

There is an agency relationship between shareholder and the management as introduced by Jenson and Meckling (1976 as cited in Crane & Matten, 2010). Shareholders can be identified as the principle while the management can be identified as the agent. Within this relationship, shareholders expect that the management may act on behalf of them. But there is an inherent conflict of interest between the share holders and managers in a capitalist company such as ABC. Shareholders interest lies on enhancing profits and raising share price which requires much effort from managers and suggest low salaries for them. But the managers interested in high salaries, power and prestige (Crane & Matten, 2010). For an instant, when the managers attempt to bring down the cost of the product by using poor materials, it may badly affect the companys image and customer retention in the long run. Though the managers can earn more on the increased sales and organizational performance, it may harmful to the organization and erode the shareholder value in the long run. Further, the information asymmetry is there as the

shareholders have only a limited knowledge and insight qualifications, actions and goals of the management. But in MCC there is no separation of these two parties and no conflicting within them: thus it may reduce this situation of conflicting interest of both parties in MCC. Executive Accountability and Control The central ethical issue here is the independence of the supervisory, non-executive board members. As described by Crane and Matten (2010), ABC has fulfilled the ethical requirement of independence by independently appointing adequately competent directors to judge the business from outside the company who are not having any financial interest in the company. Further, the board has continuously changed in the Annual General Meeting. Thus, the ABC has controlled the ethical issue in the aspect executive accountability and control through corporate governance. But in MCC, there is no conflicting of interest as the board and the share holders are

the same. The board of directors is elected by the members of the co-op. Each member of the coop has one vote regardless of the size of his capital account. Thus the control is maintained by them self. Executive Remuneration Another ethical problem can be arise with relate to the executive remuneration. Today, many organizations apply the performance-related pay system leads to large salaries that cause unrest within the companies. Sometimes they offer shares and share options for executives. Also, the influence of globalization on executive pay leads to significant increases in salary. Further, in this case the influence of the board is limited and board often fails to reflect shareholders interest. In ABC also salaries of executives are very high and it is based on their performance, industry standards, and trends and requirements with globalization. That is a significant ethical issue in the aspect of shareholders of ABC. But in MCC, there are no significant differences in the salaries of executives and workers and the before-tax differential between the lowest paid and the highest paid is limited to three. Mergers and Acquisitions In general, from social point of view, mergers and acquisitions are acceptable if the owner uses the transferred assets more productively and to create wealth. Central ethical issue is managers who pursue interest may not congruent with share holder interest. For an instant, executive prestige can be the interest of managers while profit and share price are the interest of shareholders. If managers make such decision on their interest that may arises an ethical issue. ABC managers have acquired a much reputed company which engages in a separate industry and later the acquisition has caused a huge loss to the company. The management was interested in

acquiring the company to have the prestige with that expansion of the company. But really that is not ethical in the aspect of shareholders. Financial Markets and Insider Dealing The role of financial markets and insider trading may also arise some ethical issues in ABC. As long as the rules of the market are fairly set and every player plays according to these rules, there is no ethical dilemma to be expected (Crane & Matten, 2010). In this point, there is an assumption of perfect market and all the publicly available information about the company is reflecting through the share price. But sometimes information efficiency in the market is quite flawed. Therefore, some companies not made any profit but worth billions on the market. Ethical issue may arise when bonds based entirely on speculation without always fully revealing amount of uncertainty and that may much unfavourable for investors.Further, Insider trading may occur when securities are bought and sold on the basis of material non-public information (Moore,1990 as cited in Crane and Matten, 2010). Moores (1990) ethical arguments has discussed the fairness, misappropriation of property, harm to investors and the market and undermining of fiduciary relationship with related to insider trading.This may erode trust in the market in the long term; hence its illegality. But in MCC all the shareholders are actively involved in companys activities and know much information of the organization. Thus, these ethical issues are less likely occurring in MCC.

Two approaches to ethical shareholding Shareholder activism Buy shares in company for right to speak at the AGM Issues: Gets involved with the enemy Only an option for reasonably wealthy individuals Voice concern and challenge the company on allegedly unethical practices Possibility of broad media attention by disrupting the meeting

Socially responsible investment (SRI) Ethical investment is the use of ethical, social and environmental criteria in the selection and management of investment portfolios, generally consisting of company shares Ethical Examples of positive and negative criteria for ethical investment Negative criteria Alcoholic beverages production and retail investment

Animal rights violation Child labour Companies producing or trading with oppressive regimes Environmentally hazardous products or processes Genetic engineering Nuclear power Poor employment practices Pornography Tobacco products Weapons

Positive criteria Conservation and environmental protection Equal opportunities and ethical employment practices Public transport Inner city renovation and community development programmes Environmental performance Green technologies

Ethical Investment Main concerns with SRI movement Quality of information Most information provided by firms and is difficult to verify

Dubious criteria See table in previous slide

Too inclusive 90% of Fortune 500 firms are held by at least 1 SRI fund

Strong emphasis on returns: Usually, SRI fund managers screen for performance first, then select using ethical criteria Firms taking longer-term perspectives and thus sacrificing short-term profitability therefore unlikely to be included (See Vogel, 2005)

Shareholding for sustainability Further, there is some specific right of shareholders on their ownership and there are some specific duties of mangers. More importantly, the main task of a manager is to manage the property of shareholders in their interest. If the duties of the management are not properly defined, it may always a delicate one and that conflict may continue to plague the relationship

between share holders and managers (Crane & Matten, 2010). Thus, the corporate governance should be there to ensure the corporation is run according to the shareholders intention. The corporate governance should be complying with some requirement in order to manage the shareholder-management relationship in an effective manner. There should be a separate body of people that supervises and control the management on behalf of the share holders (Crane & Matten, 2010). The ABC also has corporate governance with the purpose of controlling the management. Complying with the general practice of duel structure of the leadership of the publicly owned corporations, ABC, has established the board including three executive directors who are actually responsible for running the corporation and six non-executive independent directors who are suppose to ensure that the corporation is being run in the interest of shareholders.