How Business Ethics Affect Stockholder Equity

In business parlance, a stockholder (also called a shareholder) is any entity that purchases at least one share of a company's stock. Stockholders can be individuals or institutions and are considered "owners" of the company because they invest their money in the company by purchasing shares of stock.

Because stockholders take a risk when investing money in a company, they receive a share of the company's profits through dividends and increasing stock value. They also have rights to participate in certain company decisions, such as electing new members of the board of directors.

Importance of Good Business Ethics

Good business ethics require all participants in a company's business and culture to behave in a fair, transparent, law-abiding manner. The ethical practice of business creates value for that company in the marketplace and can sway investors to choose one company over another. This expectation of ethical behavior also applies to the relationships between the stockholders and the business. Both sides need to behave ethically, or the repercussions can affect everyone involved.

Unethical actions can harm a stock's price and hinder investor trust. In contrast, the practice of ethical behavior by company leadership can improve the value of the company's stock and lead to increased revenues down the road.

Examples of Business Ethics Issues

The classic example, often-cited, is the Enron upset in the early 2000s. Enron, a major American energy company, had been wildly successful, posting revenues of billions of dollars. In 2001, it was revealed that Enron's profitability was due to accounting fraud. Enron had sold out its ethical standards to chase down better profitability.

When this news was revealed to the public, the entire corporation collapsed. Stockholders lost value, and the laws around corporate ethics were changed for the better. In this case, the stockholders had invested in Enron assuming that their profitability had come by legal means. When the truth was revealed, the company crashed. Many other examples have come to light in the years since.

Alternately, there can be wrongdoing on the part of shareholders as well, especially in cases with conflict of interest. Consider Martha Stewart, who fell under suspicion for insider trading – a situation where someone with insider knowledge buys or sells stock before the rest of the public has a chance to know what's going on.

In Stewart's case, she was accused of selling stock shares in a company a day before bad news about the company caused the stock values to drop dramatically, saving Stewart from a financial loss. Insider trading is unethical because it gives certain privileged individuals the chance to avoid losses or achieve financial gains that other stockholders don't have.

Newer Business Ethics Examples

More recent examples of ethical issues that affected company stockholders and their equity include the Volkswagen scandal regarding the company's detection of emissions tests. However, many, like the University of Northern Iowa, have argued that this is not an ethical issue because a conscious decision was made to do the wrong thing. Nevertheless, it can be argued that such gray areas still impact stockholder equity as the public reacts to scandals of this kind.

Boeing underwent similar scrutiny in 2019 for a flawed flight plan system that they did not alert pilots to. NPR explains that Boeing further dug its own grave in terms of stockholder loyalty and image in the business world by blaming pilots for two high-profile 737 Max crashes.

Ethically, this decision was a black-and-white one; Boeing was to blame and should not have attempted to point the finger at the pilots. Stockholders and travelers alike reacted negatively to this breach of their interests.

Laws Covering Ethics

The United States has laws prohibiting all kinds of unethical behavior. Most companies also have extensive ethical policies that they expect all employees and stockholders to adhere to. Entities that break these laws - whether individuals or corporations - can and should expect significant fines and jail time.

These aren't the only consequences, however. Entities also face major losses in the court of public opinion and the stock market.

While the primary relationship between a company and its stockholders is financial – money invested for money returned – the situation can't be focused entirely on profit alone. Profit that breaks laws or promotes unethical behavior can be far more expensive to a corporation than standard business. The benefits of business ethics to stakeholders is clear.

Likewise, individuals who engage in unethical behavior such as insider training or fraud can find their personal lives affected as well as their financial situation. Ethical business behavior isn't just the right thing to do; it's also the best for business.