Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability
Cowton, Christopher. Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability.Journal of Business Ethics. Aug2011, Vol. 102, p21-32. 12p. DOI: 10.1007/s10551-011-1190-5. Available from: Business Source Complete, Ipswich, MA. Accessed September 21, 2012.
Mr. Cowton wrote this article to bring, what he perceives to be an injustice, to the forefront of ethical debates regarding corporate governance. In the last few decades, corporate governance has become a popular topic amongst academia and ethicists. The most common theory is that corporate governance should favor the interest of its shareholder over other stakeholders. However, growing amounts of people believe that corporate governance should give just as much consideration to the welfare of the creditors that it gives to shareholders. Creditors do not receive consideration by the company until the company becomes insolvent or bankrupt; then, the company and its assets belong to the creditors, until the debts are absolved. There is some debate as to whether shareholders own the company, or just stock. The article is developing the theory that creditors should be considered equally with shareholders when a corporation determines its governance policy.
The writer stipulates that there are two sides to every story and he uses many quotes to prove his point. One debate is over two theories of corporate ownership. Property theory maintains that shareholders own the company, while contractual theory states the company is an assemblage of contracts. Stockholders deserve no more rights than any other contract holder. Another debate is over risk. Some scholars believe that since shareholders take a risk by waiting for the proverbial crumbs, they should be given some control to make it worth such a risk. Creditors have a fixed claim to the debt owed them, and will receive their money before any is distributed to shareholders.
There are at least six ways creditors can protect themselves. Creditors can maintain ownership of goods and lease them to the corporation; require collateral, which would guarantee payment; get a personal guarantee from major stockholders; restrict corporations from participating in risky activities while the debt is owed; sell the contracts to third parties; or inflate interest and prices to offset the risk. Other than voting rights and selling their stock, the shareholder has no course of protection. However, many people believe the corporation should be governed to offer as much protection to the creditor as it offers to the stockholder.
If default on debt to creditor keeps shareholders from making money, then it seems to me the governance of shareholders’ wealth would also benefit the creditors. If the shareholders are making money, then the bills are being paid. Mr. Cowton seems determined to declare it unethical for corporations to give control to shareholders and leave creditors with no power until the company has failed. I have to wonder if the creditor feels the same way about shareholders having control, when it is the corporation going bankrupt.
This comment has been removed by the author.
ReplyDeleteExcellent Review! As an owner in stock, I would have to side with the current business practice of shareholders being given consideration before creditors. I agree with the point in your review that creditors have more power to reduce their risk. Most shareholders, unless a major owner, hold nothing but a vote or an annual dividend stipend. The risk of ownership is theirs. If the company is successful the benefits can be lucrative. However, if the company folds, there can be little left to split up between shareholders . Giving equal consideration to creditors would be a negative impact on the business of selling shares. The risks would outweigh the gains and people would become creditors rather than shareholders. Or as risk goes, the gains would have to be bigger.
ReplyDeleteIt seems to me that creditors already have one up on shareholders when distributing funds at solvency. An objective view tells you that any change to the creditors' risk will change the cost of credit. If you give more consideration to creditors (reducing their risk), you will lower the cost of borrowing money. This will benefit the shareholders (of a successful business) in the long run. If you give less consideration to creditors (increasing their risk), you will increase the cost of borrowing money. This will hurt the shareholders (of a successful business) in the long run. It’s all give and take, and it will reach an equilibrium no matter what approach you take.
ReplyDelete