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Understanding Moral Risk: Navigating Ethical Challenges in Corporate Culture

This presentation by Amos Vilane explores the concept of moral risk, which refers to situations where agents or counterparties engage in unethical behaviors leading to exposure to losses. It discusses pressures from executives, particularly CEOs to CFOs, that can drive aggressive accounting practices. The session outlines strategies for minimizing moral risk, including establishing clear ethical codes, providing ethics training, and protecting whistleblowers. The importance of assessing managerial ethics and the conflict between maximizing profits versus shareholder wealth is also examined.

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Understanding Moral Risk: Navigating Ethical Challenges in Corporate Culture

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Presentation Transcript

  1. Focus On Ethics“What about Moral risk?”` • Presentation by: AMOS VILANE • ID: MA0N0241

  2. BRIEF HISTORY

  3. Focus On Ethics“What about Moral risk?” • Moral risk…exposure to loss resulting from wilful, improper, or illegal act by an agent or. counterparty…unethical behaviour • Reasons for engaging in unethical practices • Pressure from CEO to CFO…to use aggressive accounting to “make the numbers work” • Reason for Accounting Fraud is “Pressure to hit the numbers” …portraying a wrong image to attract investors

  4. Ways To Minimize Moral Risk • Build awareness through code of ethics- which spells out general principles of right and wrong conduct • Companies must write detailed standards of conduct….because some ethical codes are faulted because the are Vague and abstract • some organizations administer honesty tests prior to hiring new workers • other organizations require ethics training of mid –level managers.

  5. Ways To Minimize Moral Risk • Provide whistle blower protection for employees with ethics related concerns……to strengthen corporate ethics • Establish an Ethics director • Evaluate managers’ ethics in performance reviews

  6. Benefits • CFOs who stand up to CFOs pressure improve their ethical standards in their performance. • Unethical practices • Cheating on expense accounts • Forging signatures

  7. Challenges related to ethics • ATTITUDES vs ACTUAL ACTIONS • People who otherwise might do the right thing can be pressured to do something wrong e.g. CFO by CEO • Is “hitting the numbers or making the numbers work” ! An appropriate goal ? If not, why do executives emphasize it? Refer to the contrast between profit maximization and shareholder wealth maximization. • CEOs act unethically because they want to be seen to have attained the expected targets of the corporations they are managing or else they may lose their jobs. • Also, the CEOs want to attract more people to buy shares from the corporation, so they portray a wrong image that their company is doing quite well • At times, out of greed, CEOs would act unethically to get more bonuses using information from the “cooked books”, thus they put pressure on CFOs to “make the numbers work.

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