Ethics and Global Corporate Behaviour: An Analysis from the Perspective of Shareholder and Ethical Compliance

Abstract

Ethical values in corporations are essential for firm survival as they promote a prudent and efficient working environment within the owner-manager agency setting. Despite this, the literature has been silent on how ethics at various levels affect corporate behaviour. This thesis intends to fill this void by examining the influence of ethics on firm volatility and agency costs from two perspectives.
First, the thesis examines the influence of religiosity as a source of ethics from the perspective of the controlling shareholder. Religiosity from the shareholder’s view is defined as the importance of religion in the countries where the major shareholders are located (shareholder country religiosity). Second, the thesis develops a comprehensive ethical screening framework that fulfils the Maqasid al-Shariah and responds to contemporary ethical challenges. In addition to the current Shariah screening practices, the framework covers the aspect of environmental, social and governance performance as well as earnings qualities. Using the comprehensive framework, a set of non-financial companies are screened for their fulfilment of religious and ethical values. The study then conducts a comparative analysis to identify the performance and efficiency of firms screened using the framework. The analysis is performed on a global scale that covers up to 72 countries with more than 80,000 firm-year observations for ten years between 2007 and 2016.
In sum, the shareholder and the firm-level perspective of religiosity and ethics demonstrate a positive influence on corporate behaviour in terms of lower volatility and agency costs. Thus, the results lead to two main implications. Firstly, the significant influence of religious norms on individual (shareholder) behaviour which serve as an external and informal institutional mechanism for corporate control. Secondly, the efficiency of the comprehensive framework in screening for religiously-compliant companies with high ethical practices and financial performance. This finding provides a proposed enhancement to the current screening criteria.