Stock Investor Alert Detecting Unethical Practices Of Companies


In the context of Nepali stock market, it is time for investors to shift their focus towards the future of organisations. This shift can be achieved by examining organisations and their activities from an ethical and managerial perspective, while also considering their performance. The extent to which management is morally inclined to connect with society through corporate operations is a critical factor. The ethical behaviour exhibited by managers is based on the prevailing societal and corporate standards and values. Although ethical standards may lack strict benchmarks, the evaluation of the ethical dimension of management can be based on its dedication and activities in promoting openness, integrity, and commitment to a wide range of business stakeholders. The efficacy of managerial practices significantly influences the overall success of an organisation. 

Understanding and examining managerial practices are crucial issues that are possible through quantitative and qualitative analysis. It is advisable for stock investors to avoid relying exclusively on quantitative data, which is presented in numerical format, while making judgments, especially in situations pertaining to the selection of stocks within stock markets. The use of qualitative managerial analysis in decision-making processes is widely recognised as a helpful and versatile instrument applicable to various institutions. The combination of different qualitative indicators can provide informative insights, allowing for a thorough assessment of the organization’s managerial strengths. Through an examination of qualitative qualities and a comprehensive evaluation of various organisational aspects, management analysis provides a precise representation of the current situations and realities inside the operational environment.

Enron's lessons

The Enron Corporation's narrative serves as a painful illustration of a company's rapid ascent and sudden collapse. Enron shares reached a peak valuation of $90.75 at their highest point. However, immediately before its declaration of bankruptcy on December 2, 2001, the value of these shares was a meager $0.26, causing significant disruption within the financial community on Wall Street. The occurrence of this economic crisis left stockholders in a state of confusion as a prominent corporation in the United States appeared to undergo a rapid and unexpected decline. The events that have been seen can be interpreted as an example of poor leadership driven by self-interest. It is astonishing to contemplate the extent to which Enron's leadership was able to mislead regulatory authorities over an extended period of time through the creation of fictitious assets and the utilization of unrecorded financial practices. 

Therefore, the decline of esteemed enterprises is observed as a consequence of inadequate leadership and management. As such, numerical measures, such as earnings per share (EPS), dividend per share (DPS), debt-equity ratio, historical pricing data, market risk factors, and beta (B), play a vital role in informing stock acquisition decisions. However, it is important to acknowledge that qualitative considerations hold equal, if not greater, significance in this regard. In certain instances, financial statements may accurately reflect the numerical data; yet, the occurrence of insider trading or unethical conduct by management can result in corporate failure and a sudden decline in stock value. This highlights the significance of incorporating qualitative analysis in conjunction with quantitative data when making decisions.

The presence of vulnerabilities in accounting data resulting from unethical management practices poses a substantial risk that necessitates timely detection. In order to detect such unethical practices, the managerial quality check procedure might be carried out autonomously or in conjunction with rational data analysis. In such a situation, stock investors must be ready to conduct a thorough analysis of the company. Such measures could include: Comprehensive case studies and meticulous micro-analyses are conducted to evaluate the transparency, integrity, and accountability practices of the relevant firms. Triangulation methods are used to confirm and validate different parts of reality. This includes the internal consistency of qualitative data, management principles and procedures, financial records, and cash flow data. Comprehensive analysis of longitudinal data over several years in order to effectively address and minimize the potential risks associated with persistent embezzlement within accounting practices.

Promoting ethics

The significance of ethical practices in relation to the overall performance of organisations necessitates attention from analysts, policymakers, and practitioners. The prioritisation of a forward-looking view should take precedence over immediate gains or losses, with long-term investors necessitating a comprehensive comprehension of the fundamental factors that drive a corporation, including its vision, purpose, core values, and operational strategies.  As the stock market undergoes maturation, it becomes increasingly crucial for regulatory bodies like SEBON (Securities Board of Nepal), NEPSE (Nepal Stock Exchange), and the Boards of Directors of listed companies to reassess their roles. They need to ensure clarity and transparency in the market. It is imperative for these regulatory entities to implement practical and ethically sound protocols and frameworks. The promotion of openness and ethics within the financial sector encompasses various crucial elements. These factors encompass the periodic distribution of financial performance reports by management, the prompt disclosure of relevant information by the company's board, the comprehensiveness and transparency of information provided to the public, and the availability of senior management for interaction with analysts. 

Furthermore, it is imperative for the Board of Directors (BOD) to place the utmost importance on the principles of transparency and accountability, as well as the autonomy and distinctiveness of roles between the board and executive committee. This involves the implementation of the agenda set in board meetings, the unbiased appointment of external auditors, and a thorough evaluation of their audit activities. Furthermore, it is imperative for stock investors to exercise caution and remain alert regarding the utilisation of innovative accounting methods that could potentially manipulate quantitative measurements. On the other hand, individual investors should take comprehensive management indicators, such as ethical practices, into consideration as a crucial factor in their investment decision-making process.

(The author is an Assistant Professor of Faculty of Management at Nepal Commerce Campus, Tribhuvan University)


Dr. Binod Ghimire
How did you feel after reading this news?