Ethical Dilemma-Information Asymmetry

Ethical Dilemma-Information Asymmetry

Information asymmetry is a significant source of organizational ethical dilemmas experienced during transactional processes, such as swapping debt for equity or management buyouts. During the mentioned business exchanges, one party with better information regarding the true nature of a business, the hidden cost of debt, and the actual equity value can be tempted to take advantage of the less informed entity (Bergh et al., 2018). For instance, during management buyout procedures, the existing stockholders often have more information about the actual value of a business based on its performance on the stock exchange market.

If a business is underperforming, as reflected by declining share prices, and stockholders own this information exclusively, they may sell it to management at an exorbitant profit. The stockholders could also share the actual value of the business with managers, and the latter may demand to buy the entity at a loss for its dismal performance. The ethical dilemma in the above situation arises when stockholders want to tell the truth about a business’s performance for management to institute urgent corrective measures but sell it at a loss or if the actual value of the organization should be hidden for profit-making purposes.

The board of directors may prevent the above ethical dilemma prompted by information asymmetry by having an established corporate culture that encourages open and honest communication amongst employees, executives, stockholders, and other stakeholders. Further, the board members should oversee the implementation of policies, rules, and regulations that forbid engagement in activities that promote information asymmetry (Bergh et al., 2018). Lastly, the board of executives should create performance management systems to assess the real-life observation of implemented policies and establish punitive measures where necessary.

References

Bergh, D. D., Ketchen, D. J., Orlandi, I., Heugens, P. P., & Boyd, B. K. (2018). Information asymmetry in management research: Past accomplishments and future opportunities. Journal of Management, 45(1), 122-158. https://doi.org/10.1177/0149206318798026

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Ethical Dilemma-Information Asymmetry

“Information asymmetry lies at the heart of the ethical dilemma that managers, stockholders, and bondholders confront when companies initiate management buyouts or swap debt for equity.” Comment on this statement. What steps might a board of directors take to ensure that the company’s actions are ethical concerning all parties? (Farnham, 2014, p. 605).