This week’s articles look at the take up of ethical governance by CEOs, board secretaries and auditors.

How powerful CFOs camouflage and exploit equity-based incentive compensation 
While numerous studies have examined the impact that powerful CEOs have on their compensation and overall firm decisions, relatively little is known about how powerful CFOs influence their compensation and important firm financial reporting and operational outcomes.

This is somewhat surprising given the critical role CFOs play in the financial reporting process of a firm. Using managerial power theory (Bebchuk and Fried in J Econ Perspect 17:71–92, 2003) and the theory of power and self-focus (Pitesa and Thau in Acad Manag J 56(3):635–658, 2013), the authors predict that powerful CFOs employ a two-part strategy to camouflage excessive incentive compensation above what efficient contracting would dictate.

First, powerful CFOs use their power and influence to negotiate shorter incentive pay duration to maximise the present value of their performance—based compensation. Second, when their incentive equity compensation vests, the authors suggest that CFOs manage earnings to further enhance their personal income.

Consistent with their theoretical expectations, the authors find higher levels of income-increasing accrual-based earnings management and real transactions management, a potentially unethical practice, in firms with powerful CFOs who have short pay durations. The authors discuss the implications of their analysis in the context of mitigating CFO power and managing the ethical environment “tone at the top.”

Denton Collins, Gary Fleischman, Stacey Kaden and Juan Manuel Sanchez. 2018. How Powerful CFOs Camouflage and Exploit Equity-Based Incentive Compensation. 
Journal of Business Ethics, 153(2), 591–613.


Do board secretaries influence management earnings forecasts? 
The role of board secretaries is a unique institutional feature in China. Individuals in this senior executive role are responsible for coordinating information disclosure.

The authors study the impact of board secretaries on management earnings forecasts and find that their legal expertise, accounting expertise and foreign experience help improve management earnings forecast quality. The quality of forecasts, as indicated by their occurrence, frequency, precision and accuracy, is also positively associated with the role duality (e.g. board director, CFO or other senior executive role) and equity holdings of board secretaries and negatively associated with their political connection.

The quality of forecasts is found to increase the compensation of board secretaries. Finally, the authors show that the equity holding of board secretaries reduces litigation risks and increases corporate philanthropic giving.

Read the full-text of this Open Access article online for free

Lu Xing, Tinghua Duan and Wenxuan Hou. 2019. Do Board Secretaries Influence Management Earnings Forecasts?
Journal of Business Ethics, 154(2), 537–574.


The relationship between philanthropy and the cost of capital 
Prior studies in business ethics highlight the role of philanthropy in shaping stakeholders’ perceptions of a firm’s underlying moral tendencies and values (“character”). Scholars argue that philanthropy-based character inferences influence whether and how stakeholders engage with firms.

The authors extend this line of reasoning to examine the impact of philanthropy on firms’ contracting costs in the capital market. The authors posit that philanthropy-based character inferences reduce investors’ agency concerns, thereby reducing firms’ cost of capital. The authors also posit that the strength of the philanthropy–cost of capital relationship is contingent on uncertainty regarding a firm’s character, visibility of a firm, and prevailing philanthropic norms.

The authors test and find support for their arguments in a longitudinal study of philanthropy and the cost of capital. These findings have implications for business ethics research on corporate philanthropy and corporate social performance and for organisational research on social judgment.

Leon Zolotoy, Don O’Sullivan and Jill Klein. 2019. Character Cues and Contracting Costs: The Relationship Between Philanthropy and the Cost of Capital. 
Journal of Business Ethics, 154(2), 497–515.


An analysis of financial trading misconduct investigations
High-profile failures in financial trading have led to interest in how the culture of the industry produces risky and unethical behaviours among traders. Yet, there is no established theoretical framework for studying this: the authors apply safety culture theory to examine ten recent high-profile trading mishaps investigated by the UK financial regulator.

The results show that the dimensions of safety culture (e.g. Management Commitment to Safety, Systems and procedures) used to understand organisational accidents in domains such as aviation also explain failures in Risk Management within financial trading organisations. This counters narratives focusing on traders who are unethical ‘rule breakers’, and emphasises the value of a systemic approach, whereby safety culture theory is used to explain why risky behaviours in financial trading occur.

Safety culture therefore provides a conceptual basis for further research on risky and unethical behaviours in financial trading, alongside providing insights for possible intervention.

Read the full-text of this Open Access article online for free

Meghan P. Leaver and Tom W. Reader. 2019. Safety Culture in Financial Trading: An Analysis of Trading Misconduct Investigations. 
Journal of Business Ethics, 154(2), 461–481.


Ethical leadership and internal whistleblowing
Studies have shown that internal whistleblowing could be utilised as an effective way to stop an organisation’s unethical behaviours. This study investigates the relationship between ethical leadership and internal whistleblowing by focusing on the mediating role of employee-perceived organisational politics and the moderating role of moral courage.

An analysis of data collected at three phases indicates that employee-perceived organisational politics partly mediates the relationship between ethical leadership and internal whistleblowing. Also, moral courage is found to moderate the effect of employee-perceived organisational politics on internal whistleblowing and the indirect effect of ethical leadership on internal whistleblowing via employee-perceived organisational politics.
Theoretical and practical implications of these results are discussed.

Jin Cheng, Haiqing Bai and Xijuan Yang. 2019. Ethical Leadership and Internal Whistleblowing: A Mediated Moderation Model.
Journal of Business Ethics, 155(1), 115–130.


Ethical awareness, ethical judgment and whistleblowing
This study aims to examine the ethical decision-making (EDM) model proposed by Schwartz (J Bus Ethics, doi:  10.1007/s10551-015-2886-8, 2016), where the authors consider the factors of non-rationality and aspects that affect ethical judgments of auditors to make the decision to blow the whistle.

In this paper, the authors argue that the intention of whistleblowing depends on ethical awareness (EAW) and ethical judgment (EJW) as well as there is a mediation–moderation due to emotion (EMT) and perceived moral intensity (PMI) of auditors. Data were collected using an online survey with 162 external auditors who worked on audit firms in Indonesia as well as 173 internal auditors working in the manufacturing and financial services.

The result of multigroup analysis shows that emotion (EMT) can mediate the relationship between EAW and EJW. The nature of this relationship is more complex and then tested by adding moderating variables using consistent partial least squares approach. The authors found that EMT and PMI can improve the relationship between ethical judgments and whistleblowing intentions.

These findings indicate that internal auditors are more likely to blow the whistle than external auditors; and reporting wrongdoing internally and anonymously are the preferred way of professional accountants to blow the whistle in Indonesia.

Hengky Latan, Charbel Jose Chiappetta Jabbour and Ana Beatriz Lopes de Sousa Jabbour. 2019. Ethical Awareness, Ethical Judgment and Whistleblowing: A Moderated Mediation Analysis.
Journal of Business Ethics, 155(1), 289–304.