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BUSI BUSINESS ETHICS NESS ETHICSBUSINESS ETHICS
When evaluating one’s goals and objectives, a vital question must be
asked: What is your highest aspiration?
A. WealthB. Fame
C. Knowledge D. Popularity
E. Integrity
If integrity is second to any of the
alternatives, then it is subject to sacrifice in situations where a
choice must be made. Such
situations will inevitably occur in every person’s life.
Can ethics be taught?
Teddy Roosevelt said, “To educate a person in mind and
not in morals is
to educate a menace
to society.”
Ethics is essential to the functioning of a free society: 2nd U.S. President John Adams observed: “We have no government armed with power capable of contending with human passions unbridled by morality and religion. Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other.”
“Indeed I tremble for my country when I reflect that God is just, that His
justice cannot sleep forever.” Thomas Jefferson
“God who gave us life gave us liberty. Can the liberties of a
nation be secure when we have removed a conviction that these
liberties are the gift of God?”
U.S. Declaration of Independence The second paragraph of America's founding
document states:
"We hold these truths to be self‑evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness."
If we want to produce people who share the
values of a democratic
culture, they must be taught
those values and not be left to acquire them by chance.
Cal Thomas, The Death of
Ethics in America
President
Lincoln said:
Honor is
better than
honors.
WHAT IS ETHICS• Ethics may be referred to some standardized form of
conduct or behavior of individuals understood and accepted in a particular field of activity
• The work “ETHICS” has its origin in Greek word “Ethics” means character, norms, morals and ideals prevailing in a group and society.
• Ethics is a mass of moral principles or set of values about what conduct ought to be. They give an idea what is right or wrong, true of false, fair or unfair, just or unjust, proper or improper, e.g. Honesty, obedience, equality, fairness, etc and respect and then doing the right thing
Formation of Ethics• Formation of ethics An individual’s ethics are formulated
through the operation of forces in the individual’s environment.
• Family influences• The formation of ethics begins when the individual is a
child. Thus the family environment has a significant influence in determining what the child learns about good and bad, right and wrong.
• Peer influences• As the child develops contacts outside the home through
home, school, play and work, peers exert considerable influence on the individual’s ethical beliefs.
• Experiences
• As a person matures and develops as a human being, he or she will be exposed to many critical experiences that will be affect his or her ethical standards.
• Values and morals• One’s ethical standards are also greatly influenced by
values and morals. People who place high value on money and material possessions may not have strong ethical standard regarding behaviors that facilitate the accumulation of that wealth.
• Situation Factors • People often change their ethics in response to unknown
situational factors. An employee, who is threatened with loosing a job that has been held for years, may commit unethical acts in order to save the job.
• Religion • One of the oldest sources of ethical inspiration is religion.
More than 1,00,000 different religion exist across the globe .Despite doctrinal differences, the major religion coverage on the believe that ethics is an expression of divine will that reveals the nature of right and wrong in business and others walks of life.
• The legal system• Laws are rules of conduct, approved by legislatures, that
guide human behavior in any society .They codify ethical expectations and change as new evils emerge. But law cannot cover all ethical expectation of society. Whenever ethics the law codifies, it is binding on businesses. The society expects businesses to abide by the law. Obeying the law is presumed to be ethical behaviour.
• Law breaking in business is common. Taxes are evaded, hundreds of employees die because of occupational disease, many perish because of industrial accidents, and million others receive disabling injuries on the job. The blame for these death and injuries had to be shared by employees and employers who fail to adhere to occupational health and
• safety laws. Consumer suffer because of poor quality and high priced products by the supplied by the businessmen .Businesses that degrade the environment by disregarding environment protection laws cause misery to the society.
BUSINESS ETHICS
• Business ethics are the principles and standards that:
- Define acceptable conduct in business- Should underpin decision making
• An alternative definition is: ”the moral values which govern business behaviour and restrains companies from pursuing the interest of the shareholder at the expense of all other considerations”
- Some activities might be profitable and legal but nevertheless are considered to be unethical
- An ethical decision is one that is both legal and meets the
shared ethical standards of the community
• Businesses may adopt ethical policies because they believe in them or they believe that by showing they are ethical, they improve their sales.
• Two good examples of businesses that have strong ethical policies are The Body Shop and Co-Op.
• Some examples of ethical policies are:• Reduce pollution by using non-fossil fuels. • Disposal of waste safely and in an environmentally
friendly manner. • Sponsoring local charity events. • Trading fairly with developing countries
Carter McNamara has defined: “Business ethics is generally coming to know what is right and wrong in the workplace and doing what is right-this is in regard to efforts of products/ services and in relationships with stakeholders.”
“Attention to ethics in the workplace sensitizes managers and staff to how they should act so that they retain a strong moral compass.
Contd….
• Interest in business ethics has been increasing since 1960’s
• Interest has been spurred by headlines of business scandals
• A 1982 study reported that of the Fortune 500 companies,115 companies (23%) had been convicted of at least one major crime or paid penalties of serious misbehavior
• Is the importance of business ethics declining in business and government practices?
• Greater focus on ethics, morals and values.
• Why is Business Ethics Important
For a business to achieve long-term profits, customer relationship is of utmost importance. To gain a long-term relationship with customers and achieve customer return for the business, the business needs to be based on ethics. The trustworthiness of a business, its customer service, its customer care, its way of dealing with customers and its urge to retain their old customers, is a part of the business ethics. Business ethics leave a long-lasting impression on the customers and the impression on their minds builds trust, fetching a business more customers while retaining the older ones
• Ethics is important to business in general and HR in particular, for several
• reasons as stated below: Ethics corresponds to basic human needs
• It is men basic nature that he desires to be ethical, not only in his private life but also in his business affairs where, being a manager he knows that his decisions may affect the life of thousands of employees. Moreover, most people want to be the part of organization which they can respect and be proud of, because they perceive its purpose activities to be honest and beneficial to society. Most HR manager would like to respond to this need of their employees and, they (managers) themselves feel an equal need
• to be genuinely proud of the company they are directing. These bases ethical needs compel the organizations to be ethical oriented.
• Values create credibility with the public• . A company perceived by the public to be ethical and
socially responsive will be honored and respected even by those who have no intimate knowledge of its actual working. There will be an instinctive prejudice in favour of its products, since people believe that the company offers value for money. Its public issues will attract an immediate response.
• Valued give the management credibility with its employees. Values are supposed to be a common language to bring the leadership and its people together. Organisational ethics, when perceived by employee as genuine, create common goals, values, and language. The HR management can have credibility with its employees simply because it has credibility with the people. Neither a sound business strategy, nor a generous compensation policy and fringe benefits can win employee credibility, but perceived moral and social uprightness can.
• Values help better decision making• . Another point of great importance is that an ethical attitude
helps the management make better decisions, that is ,decision which are in the interest of the public, their employees, and the company’s own long-term good, even though the decision making is slower. This is so because respect for ethics will force a management to take various aspect-economic, social and ethical-in making decision. Ethics and profit go together
• . A company which is inspired by ethical conduct is also profitable. Value-driven companies are most likely to be successful in long run, though in the short run, they may lose money.
• Law can’t protect society, ethics can• . Ethics is important because, law and lawyer cannot do
everything to protect society. Technology develops faster than the government can regulate. People in an industry know the dangers in the particular technology better than the regulatory agencies. Further; the government cannot always regulate all activities which are harmful to the society. Where law fails, ethics can succeed. An ethically-oriented management takes measures to prevent pollution and protect workers health even before being mended by law .An ethically sound HR manager, who can reach out to agitated employees, will quell a trouble more effectively than the police.
THE MAJOR PRINCIPLES OF BUSINESS ETHICS:• No discrimination should be done on the basis of caste,
color , and religion,• The polices should be fair and transparent• Proper provision of safety should be provided by the
company to the employees. • There should be proper honesty, loyalty, and integrity in the
employees.• The company’s resources should not be utilized by the
employees for their personal usage• Company should provide better environment condition
• Information about employee’s personal lives, health, and work evaluations should be kept confidential.
• Regular measurement of employee satisfaction should by company.
• To neither give nor take any illegal payment, remuneration, gift, donation, or comparable, benefits to obtain business or favours.
• To comply with all regulations regarding preservation of the environment.
• Employee should report to management any actual or possible violation of code or an event that could affect the business or reputation of the employee’s company.
Globalization: a key context for business ethics
What is globalization?
According to Scholte globalization is not:
1. G as Internationalization: the recent increase in cross-border transactions as the new defining element of G
2. G as Liberalization: an increase in trade liberalization and various kinds of deregulation.
3. G as Universalization: an increasing global spread of products, lifestyles and ideas. Ex: Christianity or Islam have spread over large parts of the globe.
4. G as Westernization: G results in the export of western culture to other, culturally different world regions. Ex: British legacy in India, the Spanish legacy in South America and the French legacy in Africa.
G is the progressive eroding of the relevance of territorial bases for social, economic and political activities, processes and relations.
Social connections: personal relations to family members or friends, or economic relations such as shopping or working took place within a certain territory. Two developments:
a) Technological in nature: modern communication technology-telephone, radio, TV, and the interment-allows people to easily connect with other people all over the globe. Ex: Heineken beer, drive the same model of Toyota car, Credit card use over the globe
b) Political in nature: territorial borders have been the main obstacles to worldwide connections between people.
Ex: within the EU national borders have been eroded.
Relevance of globalization for business ethicsa) Cultural issues: contradicting ethical demands between
different regions. Ex: Europeans tend to regard child labour very unethical than Asian countries- Women can freely sunbathe topless on most European beaches than Asian countries- Chinese regard more unethical to sack employees in times of economic downturns than Europeans
b) Legal issues: French laws are only binding on French territory, Uk laws on UK territory-global financial markets are beyond the control of any national government and struggle of governments against issues such as child pornography on the internet.
c) Accountability issues: Argument-MNCs are economically more powerful than many governments
Ex: the GDP of Denmark is about the same as the turnover of General Motors-whereas the Danish government has to be accountable to the Danish people and must face elections, the managers of General motors are formally accountable only to the small group of people who own shares in the company.
Sustainability: a key goal for business ethics
Sustainability refers to the long-term maintenance ofsystems according to environmental, economic andsocial considerations
The three components of sustainability
What is a corporation? The corporation is the dominant form of business entity in the
modern global economy.
A corporation is essentially defined in terms of legal status and the ownership of assetsLegally-Corporations are regarded as independent from those who work in them, manage them, invest in them or receive products or services from them. It’s a separate entity on its own right.
Ownership of assets-rather than shareholders owning the assets associated with a corporation, the corporation itself owns those assets.
Corporations have three key features:
1. Corporations are typically regarded as ‘artificial persons’ in the eyes of the law
2. Corporations are notionally ‘owned’ by shareholders, but exist independently of them-limited liability-shareholders not responsible for the debts
3. Managers and directors have a ‘fiduciary’ responsibility to protect the investment of shareholders
Can a corporation have social responsibilities?
Milton Friedman 1970 classic article “The social responsibility of business is to increase its profits”
Vigorously argued against the notion of social responsibilities for corporations based on three main arguments:
1. Only human beings have a moral responsibility for their actions
2. It is managers’ responsibility to act solely in the interests of shareholders
3. Social issues and problems are the proper province of the state rather than corporate managers- Corporate managers are neither trained to set and achieve social goal nor democratically elected to do so.
Long and complex debate but generally support from literature for some degree of responsibility accredited to corporations. It is necessary to show legal independence from their members, they also have agency independent of their membersTwo argument based on:Firstly, apart from individuals taking decisions within companies, every organization has a corporate internal decision structure which directs corporate decisions in line with predetermined goalsSecondly, All organizations manifest a set of beliefs and values that lay out what is generally regarded as right or wrong in the corporation – the organizational cultureEX: Response to child labour and other human rights problems
Corporate Social ResponsibilityWhy do corporations have social responsibilities?Widely accepted businesses have responsibilities beyond simply making a profit. The corporation takes on SR due to promote its own self-interest. For example-Business reasons:Socially responsible might be rewarded with extra and / or more satisfied customers whilst irresponsibility may result in boycotts or other undesirable consumer actions. Ex: In 2001 oil giant Exxon Mobil refuse to sign up to the Kyoto global warming protocol. Employees may be more attracted/committed to workVoluntarily committing to social actions and programmes may forestall legislation and ensure greater corporate independence from government.
Long-term investment which benefits corporation( better-educated)Friedman argued –when they are carried out for reasons of self-interest, they are not CSR at all, but merely profit maximization ‘under the cloak of social responsibility’
Moral reasons: Corporations cause social problems-duty to solve those & prevent further problem arising Corporations should use their power and resources responsibly in society. All corporate activities have social impacts of one sort or another Corporations rely on the contribution of a wide set of stakeholders in society rather than just shareholders
What is the nature of corporate social responsibilities?
The most established and accepted model of CSR which addresses our second question is the ‘Four-Part Model of CSR’ proposed by Archie Carroll. He regards CSR as a multi-layered concept, which can be differentiated into four interrelated aspects- economic, legal, ethical, and philanthropic responsibilities
Philanthropic Responsibilities
Desired by Society
Ethical Responsibilities
Expected by Society
Legal Responsibilities
Required by Society
Required by SocietyEconomic Responsibilities
Stakeholder
A stakeholder of a corporation is an individual or a group which either: is harmed by, or benefits from, the corporation; or whose rights can be violated, or have to be respected, by the corporation
Shareholders : Lack of regulation of global capital markets, leading to financial risks and instability
Employees : Corporations outsource production to LDCs in order to reduce costs in global marketplace; raised potential for exploitation of employees with different cultural backgrounds and divergent moral standards
Consumers : Global products face protests about cultural imperialism and westernization. Vulnerable consumers in LDCs face possibility of exploitation by MNCs
Suppliers and Competitors : Suppliers in LDCs face regulation from MNCs through supply chain management. Small scale indigenous competitors exposed to powerful global players
Civil society (pressure groups, NGOs, local communities) :Global business activities brings the company in direct interaction to local communities with possibility for erosion of traditional community life; globally active pressure groups emerge with aim to “police“ the corporation in countries where governments are weak and tolerant
Stakeholder theory of the firm
A Stakeholder in an organization is …. Any group or individual who can affect, or is affected by, the achievement of the organization’s objectives.
But what do we mean here by ‘affects’ and ‘affected by’? To provide a more precise definition, Evan and Freeman (1993) suggest we can apply two simple principles.• The principle of corporate rights Which demands that the corporation has the obligation not to violate the rights of others.• The principle of corporate effectSays that companies are responsible for the effects of their actions on others. In the light of these two basic principles.
Stakeholder theory of the firm:Traditional management model
Stakeholder theory of the firm
Corporate accountability – the firm as a
political actor Corporate accountability refers to whether a corporation is answerable in some way for the consequences of its actions.
During the late 1980s and 1990s, we witnessed a growing tendency toward the ‘privatization’ of many political functions and processes formerly assigned to governments. There were two major reasons for this development :
• Government failure• Increasing power and influence of corporations
Both developments assign to business a considerably widened array of political responsibilities, which in turn result in a growing demand for corporate accountability with regard to the use of this power.
Transparency is the degree to which corporate decisions, policies, activities and impacts are acknowledged and made visible to relevant stakeholders
Corporate CitizenshipA major landmark in this process was the joint statement
on ‘Global Corporate Citizenship- the Leadership Challenge for CEOs and Boards’, that was signed by CEOs from around 40 of the world’s largest MNCs at the annual World Economic Forum.
CC reveals three different perspectives• A limited view of CC – this equates CC with corporate
philanthropy• An equivalent view of CC – this equates CC with CSR• An extended view of CC – this acknowledges the
extended political role of the corporation in society
Corporate CitizenshipA major landmark in this process was the joint statement
on ‘Global Corporate Citizenship- the Leadership Challenge for CEOs and Boards’, that was signed by CEOs from around 40 of the world’s largest MNCs at the annual World Economic Forum.
CC reveals three different perspectives• A limited view of CC – this equates CC with corporate
philanthropy• An equivalent view of CC – this equates CC with CSR• An extended view of CC – this acknowledges the
extended political role of the corporation in society
Corporate CitizenshipCorporate Citizenship describes the corporate function for
governing citizenship rights for individuals
These rights are governed by the corporation in different ways :
Social role of the corporation in governing citizenship
Social rights Corporation as provider / ignorer
Civil rights Corporation as dis-/enabler
Political rights Corporation as channel / blockage
Approaches to Ethical Standards
• The Utilitarian Approach
Some ethicists emphasize that the ethical action is the one that provides the most good or does the least harm, or, to put it another way, produces the greatest balance of good over harm. The ethical corporate action, then, is the one that produces the greatest good and does the least harm for all who are affected-customers, employees, shareholders, the community, and the environment. Ethical warfare balances the good achieved in ending terrorism with the harm done to all parties through death, injuries, and destruction. The utilitarian approach deals with consequences; it tries both to increase the good done and to reduce the harm done.
• The Rights Approach
Other Philosophers and ethicists suggest that the ethical action is the one that best protects and respects the moral rights of those affected. This approach starts from the belief that humans have a dignity based on their human nature per se or on their ability to choose freely what they do with their lives. On the basis of such dignity, they have a right to be treated as ends and not merely as means to other ends. The list of moral rights-including the rights to make one’s own choices about what kind of life to lead, to be told the truth, not to be injured, to a degree of privacy, and so on-is widely debated; some now argue that non-humans have rights, too. Also, it is often said that rights imply duties – in particular, the duty to respect others’ rights.
• The Fairness or Justice Approach
Aristotle and other Greek philosophers have contributed the idea that all equals should be treated equally. Today we use this idea to say that ethical actions treat tall human beings equally-or if unequally, then fairly based on some standard that is defensible. We pay people more based on their harder work or the greater amount that they contribute to an organization, and say that is fair. But there is a debate over CEO salaries that are hundreds of times larger than the pay of others; many ask whether the huge disparity is based on a defensible standard or whether it is the result of an imbalance of power and hence is unfair.
• The Common Good Approach
The Greek philosophers have also contributed the notion that life in community is a good in itself and our actions should contribute to that life. This approach suggests that the interlocking relationships of society are the basis of ethical reasoning and that respect and compassion for all others-especially the vulnerable-are requirements of such reasoning. This approach also calls attention to the common conditions that are important to the welfare of everyone. This may be a system of laws, effective police and fire departments, health care, a public educational system, or even public recreational areas.
• Virtue Approach
A very ancient approach to ethics is that ethical actions ought to be consistent with certain ideal virtues that provide for the full development of our humanity. These virtues are dispositions and habits that enable us to act according to the highest potential of our character and on behalf of values like truth and beauty. Honesty, courage, compassion, generosity, tolerance, love, fidelity integrity, fairness, self-control, and prudence are all examples of virtues. Virtue ethics asks of any action, “What kind of person will I become if I do this?” or “Is this action consistent with my acting at my best?”
• Putting the Approaches Together
Each of the approaches helps us determine what standards of behavior can be considered ethical. There are still problems to be solved, however.
The first problem is that we may not agree on the content of some of these specific approaches. We may not all agree to the same set of human and civil rights.
We may not agree on what constitutes the common good. We may not even agree on what is a good and what is a harm.
The second problem is that the different approaches may not all answer the question “What is ethical?” in the same way. Nonetheless, each approach gives us important information with which to determine what is ethical in a particular circumstance. And much more often than not, the different approaches do lead to similar answers.
• Making Decisions
Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced method for exploring the ethical aspects of a decision and weighing the considerations that should impact our choice of a course of action. Having a method for ethical decision making is absolutely essential. When practiced regularly, the method becomes so familiar that we work through it automatically without consulting the specific steps.
The more novel and difficult the ethical choice we face, the more we need to rely on discussion and dialogue with others about the dilemma. Only by careful exploration of the problem, aided by the insights and different perspectives of others, can we make good ethical choices in such situations.
We have found the following framework for ethical decision making a useful method for exploring ethical dilemmas and identifying ethical courses of action.
What is ethical decision?• The decision is likely to have significant effects on
others• The decision is likely to be characterized by choice, in
that alternative courses of action are open• The decision is perceived as ethically relevant by one or
more parties
Models of ethical decision-making
Models of ethical decision-making seek to represent two things:
• The different stages in decision-making people go through in responding to an ethics problem in a business context.
• The different influences on that process.
Stages in ethical decision – making
According to this model, individuals move through a process whereby they :-
• Recognize a moral issue• Make some kind of moral judgment about that issue• Establish an intention to act upon that judgment• Finally actually act according to their intentions
Recognize moral issue
Make moral judgment
Establish moral intent
Engage in moral
behaviour
Individual influences on ethical decision – makingIndividual influences on ethical decision-making relate to these
facets of the individual who is actually going through the decision-making process.
The factors and their likely influence on ethical decision-making are summarized as follows :
Factor Influence on ethical decision-making
Age and Gender Very mixed evidence leading to
unclear association with ethical
decision-making
National and Cultural
Characteristics Appear to have a significant effect on
ethical beliefs, as well as views of what
is deemed an acceptable
approach to certain business issues
Education and
Employment Somewhat unclear, although some
clear differences in ethical decision
– making between those with
different educational and
professional experience seem to be
present
Psychological
Factors : Cognitive Small but significant effect on
Moral development ethical decision - making
Locus of control At most a limited effect on
decision-making, but can
be important in predicting
the apportioning of
blame/approbation
Personal values Significant influence – some
empherical evidence citing
positive relationship likely,
Personal integrity Significant influence likely,
but lack of inclusion in
models and empirical tests
Moral imagination A new issue for inclusion with
Considerable explanatory potential
Situational influences on decision-makingProcesses of ethical decision-making are thought to depend on
the issue faced when making the decision
The two main types if situational influences• Issue-related factors:- The decision process we go through will
vary greatly according to what type of issue it is that we are dealing with. Some issues will be perceived as relatively unimportant and prompt us into fairly limited ethical decision-making, where as issues seen as more intense may well necessitate deeper, and perhaps somewhat different moral reflection.
• Context-related factors:- By context, we mean the organizational context in which an employee will be working-especially the expectations and demands placed on business people within the work environment that are likely to influence their perceptions of what is the morally right course of action to take.
A Framework for Ethical Decision MakingRecognize an Ethical Issue
1. Could this decision or situation be damaging to someone or to some group? Does this decision involve a choice between a good and bad alternative, or perhaps between two “goods” or between two “bads”?
2. Is this issue about more than what is legal or what is most efficient? If so, how?
Get the Facts
3. What are the relevant facts of the case? What facts are not known? Can I learn more about the situation? Do I know enough to make a decision?
4. What individuals and groups have an important stake in the outcome? Are some concerns more important? Why?
5. What are the options for acting? Have all the relevant persons and groups been consulted? Have I identified creative options?
Evaluate Alternative Actions6. Evaluate the options by asking the following questions:• Which option will produce the most good and do the
least harm? (The Utilitarian Approach)• Which option best respects the rights of all who have a
stake? (The Rights Approach)• Which option treats people equally or proportionately?
(The Justice Approach)• Which option best serves the community as a whole, not
just some members? (The Common Good Approach)• Which option leads me to act as the sort of person I want
to be? (The Virtue Approach)
• A stakeholder is any individual or organization that is affected by the activities of a business. They may have a direct or indirect interest in the business, and may be in contact with the business on a daily basis, or may just occasionally.
• The main stakeholders are:• Shareholders (not for a sole trader or partnership
though) – they will be interested in their dividends and capital growth of their shares.
• Management and employees – they may also be shareholders – they will be interested in their job security, prospects and pay.
• Customers and suppliers.• Banks and other financial organizations lending
money to the business.• Government – especially the Inland Revenue and the
Customs and Excise who will be collecting tax from them.
• Trade Unions – who will represent the interests of the workers?
• Pressure Groups – who are interested in whether the business is acting appropriately towards their area of interest.
Stakeholders versus Shareholders• It is important to distinguish between a STAKEHOLDER and a
SHAREHOLDER. They sound the same – but the difference is crucial!
• Shareholders hold shares in the company – that is they own part of it.
• Stakeholders have an interest in the company but do not own it (unless they are shareholders).
• Often the aims and objectives of the stakeholders are not the same as shareholders and they come into conflict.
• The conflict often arises because while shareholders want short-term profits, the other stakeholders’ desires tend to cost money and reduce profits. The owners often have to balance their own wishes against those of the other stakeholders or risk losing their ability to generate future profits (e.g. the workers may go on strike or the customers refuse to buy the company’s products).
• Fair pay and working conditions • Supplier • Regular business and prompt payment • Customer • Fair price and safe product • Local community • Jobs and minimum disruption • Government • Employment for local community • Environment • Less pollution • Social responsibility for one group can conflict with other
groups, especially between shareholders and stakeholders.
• Fair price and safe product • Local community • Jobs and minimum disruption • Government • Employment for local community • Environment • Less pollution • Social responsibility for one group can
conflict with other groups, especially between shareholders and stakeholders.
“The self is not something that one finds. It is something that one
creates”.
Thomas Szasz
Understanding corporate governance
With regard to the ownership of corporations, there are however some crucial differences :
• Locus of control. The control of the owned property no longer lies in the hands of the owner. The actual control lies in the hands of the directors, the board, or another committee, Shareholders thus have at best indirect and impersonal control over their property
Fragmented ownership. There are so many shareholders of a corporation that one individual could hardly consider themselves to be the owner in the same way that the plumber next door owns her own companyDivided functions and interests. Shareholders have interests that are not necessarily the same as the interest of those who control the company. Shareholders might seek profits whilst managers seek growth.Shareholders is the protection of their right to property which , in the given context, amounts to certain specific rights • The right to sell their stock• The right to vote in the general meeting• The right to certain information about the company• The right to sue the managers for misconduct• Certain residual rights in case of the corporation’s liquidation
Ethical Issues in corporate governance
Concept of corporate governance
Corporate governance refers to the direction, control and management of an organization. Directors owe the following legal duties to their company:
To act in good faith, in the best interests of the company To act with care and diligence and To avoid conflicts between their role as a director and personal interests
Current debate surrounding corporate governance • A central part of corporate governance is to ensure the
maximization of shareholder value. So company directors need to: • Assess their obligations carefully and • Follow corporate governance guidelines
Current guidelines and practices of corporate governance Guidelines cover items such as: • Functions and structure of the board
of directors • Conduct of directors • Role of shareholders • Compensation of senior officers and directors • Role of company accountants and auditors • Audit committees • Customer and supplier relations, etc.
A summary of the ASX corporate governance guidelines for example includes:Lay solid foundations for respective roles and responsibilities of board and management Structure the board to add value Actively promote ethical and responsible decision making Safeguard integrity in financial reporting Promote timely and balanced disclosure of all company material matters Respect the rights of shareholders
Concept of corporate governance
Corporate governance refers to the direction, control and management of an organization.
Directors owe the following legal duties to their company:
– to act in good faith, in the best interests of the company
– to act with care and diligence and
– to avoid conflicts between their role as a director and personal interests
Current debate surrounding corporate governance
• A central part of corporate governance is to ensure the maximization of shareholder value.
• So company directors need to:– Assess their obligations carefully and– Follow corporate governance guidelines
Current guidelines and practices of corporate governance
– Functions and structure of the board of directors
– Conduct of directors
– Role of shareholders
– Compensation of senior officers and directors
– Role of company accountants and auditors
– Audit committees
– Customer and supplier relations, etc.
• Structure the board to add value
• Actively promote ethical and responsible decision making
• Safeguard integrity in financial reporting
• Promote timely and balanced disclosure of all company material matters
• Respect the rights of shareholders
• Recognise and manage risk
• Encourage enhanced performance of board and management
• Remunerate fairly and responsibly
• Recognise the legitimate interests of stakeholders
A summary of the ASX corporate governance guidelines for example includes:
• Lay solid foundations for respectiveroles and responsibilities of board and management
Shareholders and globalization
Globalization has had a crucial impact on the role of shareholders, the nature of their ownership, and the scope of their activities. With global equity and finance markets being probably the most globalised, or deterritorialized markets, the consequences of this reformed role for shareholders is beginning to become increasingly visible.
We might think of shareholders becoming players in the global arena in four different ways :
• Share holders might become directly involved abroad by buying shares of companies in other countries
• Shareholders might be involved indirectly by buying shares in a domestic company that operates globally by selling goods and services worldwide.
• The role of shareholders in explicitly multinational corporations (MNCs). Investing in such companies makes shareholders indirect players in global capital markets, especially if these companies are heavily involved in foreign direct investment activities in other countries
• Share holders may become direct players in international capital market by investing in funds that explicitly direct their money in global capital markets
Shareholding for sustainability
With shareholders having the potential to use their power and ownership rights to encourage companies to live up to their role as corporate citizens, they might be said to contribute to one of the major goals of business ethics: the triple bottom line of environmental, economic, and social sustainability.
We will have a look at two selected aspects under which shareholder become directly involved in contributing to sustainable corporate behaviour.
• Looks to shareholders aligning their investment decisions to the criterion of sustainability.
• Concepts of linking ownership, work, and community involvement
The Dow Jones Sustainability Group Index stated that companies are assessed in line with general and industry specific criteria, which means that they are compared against their peers and ranked accordingly. The companies accepted into the index are chosen along the following criteria:
• Environmental sustainability :
For example, environmental reporting, eco-design, environmental management systems, executive to environmental issues
• Economic sustainability
For Example, Strategic planning, quality – and knowledge management, supply-chain management, corporate governance mechanisms
• Social sustainability
For example, employment policies, management development, stakeholder dialogue, affirmative action and human rights policies, anti-corruption policies.
Employees as stakeholders
Like shareholders, employees take on a peculiar role among stakeholders as they are closely integrated into the firm.
Whereas shareholders basically ‘own’ all material and immaterial assets of the firm, employees, in many cases even physically ‘constitute’ the corporation.
They are perhaps the most important production factor or ‘resource’ of the corporation, they represent the company towards most other stakeholders, and act in the name of the corporation towards them. This essential contribution, as well as the fact that employees benefit from the existence of their employers, and are quite clearly affected by the success or otherwise of their company, is widely regarded to give employees some kind of definite stake in the organization.
The legal and the economic side of the relation between employees and the corporation are worthy of examination.
On the legal level, there is normally some sort of contract between the corporation that stipulates rights and duties of two parties. This legal relationship, furthermore, is quite strongly embedded into a rather dense network of legislation that provides a legally codified solution to a large number of issues between companies and employees.
This characteristic has strong implication also for the economic aspect of firm stakeholder relationships. This relation between firms and employees is characterized by certain externalities on both sides – by which we mean that there are costs to each that are not included in the employment contract.
These ‘hidden costs can lead to situations of ‘asset specificity’ – that is, employees ‘invest’ time and effort in developing ‘assets’ specific to a particular employer and vice versa.
Ethical issues in the firm – employee relation
Management of human ‘resources’ – an ethical problem between rights and duties
Employees are, in principle, managed by the human resources department – a term which already indicates a firm problem from an ethical perspective. As it is, the term ‘human resource management, and its implications have been a subject of some debate in business ethics.
Rhetoric RealityNew working patterns Part-time instead of full-time jobsFlexibility Management can do what it wantsEmpowerment Making someone else take the risk and
responsibilityTraining and development ManipulationRecognizing the contribution of the individual
Undermining the trade union and collective bargaining
Team working Reducing the individual’s discretion
Employing people worldwideGlobalization has led to a situation where many corporations in the industrialized world have transferred
significant amounts of their manufacturing to low-wage countries of Eastern Europe, South East Asia, Africa, or South America. While the simple explanation for this is obviously the lower costs associated with production in these countries, these ‘favourable’ conditions for companies are often accompanied by questionable working conditions for workers: low wages, high risks for health and safety, inhumane working conditions, just to name a few.
In the following, we will look at some of the underlying issues involved here, namely:
• National culture and moral values
There is a connection between national cultures and moral values across the globe. Its four dimensions characterizing different cultural values: Individualism/collectivism, power distance, masculinity/femininity, and uncertainty avoidance.
• Absolutism versus relativism
Absolutism, represented the idea that if an ethical principle were to be considered valid, it had to be applicable anywhere
Relativism, by contrast, represent no one view of ethics can be said to be right since it must always be relative to the historical, social, and cultural context.
• The race to the bottom
• Apart from adapting or not adapting to existing employment standards in foreign cultures.
Towards sustainable employment
We have a great deal about respecting and guaranteeing employee’s rights in the workplace.
• This inevitably suggests certain tensions when we think in terms of sustainability
• Sometimes protection of wages and conditions for workers may have to be sacrificed to encourage sustainable economic development and maintain employment.
Expansion of environmentally damaging industries such as the airline industry can often be seen to be good for job creation. Looking at it this way, there usually have to be some sacrifices or trade-offs between protecting employees and promoting various aspects of sustainability
Three main ways in which these problems and tensions have been addressed, both in theory and in practice:
• Re-humanized workplaces
The ‘alienation’ of the individual worker in the era of industrialized mass production
• Wider employment
The mechanization of work has led to the situation where large number of unemployed people have become a normality in many countries, threatening not only the right to work, but the social fabric of particular communities.
• Work-life balance
The increasing threat of unemployment for some has been matched with most almost exactly the opposite problems for others, namely the increasing incursion of working hours into social life
• Consumers and ethics• Consumers and ethics• This lecture focuses on the influence of the consumer on
business ethics.• Do consumers have rights that companies have a duty to
respect?• Is a good reputation with consumers likely to generate
ethical consequences for society as a whole?• Organizational responsibility to respect consumer
rights?• Laws relating to product safety• Laws ensuring availability of product information• Ethical duty to respect the expectations of consumers at
• the time of buying the product, thus treating them as an ‘end’ and not as a ‘means’.
• Ford Pinto case as an example: initially not illegal, but was the product consistent with the expectations of consumers?
• 2. What are the ethical consequences of consumer demand?
• What is an ‘ethical product’ in the eyes of the consumer?• Crane (2001) – ethics is part of the ‘augmented product’. • Consumer response can be positive or negative (ethical
direction) and can be focused on the product, the marketing, the corporation, or the country (ethical content).
Consumers as StakeholdersEthical consumption?• Recent expansion: boycotts, animal testing, avoiding
sweatshop products, avoiding child labour products, fair-trade, organic, recycling
• The conscious and deliberate choice to make certain consumption choices due to personal moral beliefs and values (Crane & Matten, 2007: 341)
• Beyond self-interest, considering others, not extremists or oddities, encouraging managers to consider ethical implications
• A business needs to respond to the interest of its consumers so as to generate sales revenue and a profit. Maximising profit means selling goods to where there is most demand.
• The interests of shareholders, who benefit through dividends and capital gains, are brought into harmony with the demand of consumers which is met on the market.
• A profitable business can also generate employment, pay increases for employees, cheaper products for consumers, more charitable donations, etc.
• Therefore, many stakeholders can benefit when a business focuses on satisfying consumer demand.
• 3. Is consumer demand a proxy for the interests of ‘society’?
• It is argued that consumers represent the interests of society more immediately & effectively than a democratic electorate.
• In the political mechanism politicians are insulated from competition for five years at a time (in the UK).
• In a competitive market producers have to respond to changes in consumer demand (seen in price fluctuations) on a daily basis.
• One could argue that the market is more democratic than the political system.
• 4. Problems with these market-based consequential arguments
• Unlike the political system, not every person capable of influencing the decision has a vote. Producers aim at market niches & segments.
• How ethical is consumer demand? Existence of ‘black’ markets for illegal goods… (recreational drugs, illegal weapons, child pornography, slaves, prostitution, etc).
• This brings in the rights of other stakeholders. Can consumers
be satisfied ethically to the extent that they do not violate the
rights of others? Existence of ‘externalities’
• 5. Finally: is meeting consumer demand consistent with the rights & freedom of consumers?
• Different theories of freedom: positive and negative (Berlin, 1958/2002).• Negative freedom from interference – the right to take any opportunity so
long as one respects this right in others.• Positive freedom from influences that are contrary to our ‘true’ interests
(e.g. is a smoker ‘free’ in choosing to smoke, if this is contrary to their true interests?)
Ethical issues in business (Suppliers, Competitors and Business Ethics)
• Ethical issues arising from the nature of markets• - The 18th Century economist Adam Smith demonstrated how in
a free market the self interest of producers and consumers will produce an outcome desirable to all concerned- But the market can also lead to inequality of income, wealth and market power:
• Monopoly suppliers can exploit consumers• Monopsony buyers can exploit supply firms• World wide inequality of income can result in unethical practices
such as the child labour• Ethical issues and society - examples• Involvement in the community
• Honesty, truthfulness and fairness in marketing• Use of animals in product testing• Agricultural practices e.g. intensive faming• The degree of safety built into product design• Donation to good causes• The extent to which a business accepts its alleged
responsibilities for mishaps, spillages and• leaks• The selling of addictive products e.g. tobacco• Involvement in the arms trade• Trading with repressive regimes
• Ethical issues arising from internal and industry practices - examples
• Treatment of customers - e.g. honouring the spirit as well as the letter of the law in respect to warranties and after sales service
• The number and proportion of women and ethnic minority people in senior positions
• The organization's loyalty to employees when it is in difficult economic conditions
• Employment of disabled people• Working conditions and treatment of workers• Bribes to secure contracts• Child labour in the developing world
• Business practices of supply firms• Unethical practices in marketing - examples • Pricing lack of clarity in pricing• Dumping – selling at a loss to increase market share and
destroy competition in order to subsequently raise prices• Price fixing cartels• Encouraging people to claim prizes when they phoning
premium rate numbers• “Bait and switch” selling - attracting customers and then
subjecting them to high pressure selling techniques to switch to an more expensive alternative
• High pressure selling - especially in relation to groups such as the elderly
• Dumping – selling at a loss to increase market share and destroy competition in order to subsequently raise prices
• Price fixing cartels• Encouraging people to claim prizes when they phoning
premium rate numbers• “Bait and switch” selling - attracting customers and then
subjecting them to high pressure selling techniques to switch to an more expensive alternative
• Counterfeit goods and brand piracy• Copying the style of packaging in an attempt to mislead
consumers• Deceptive advertising• Irresponsible issue of credit cards and the irresponsible
raising of credit limits• Unethical practices in market research and competitor
intelligence
• Ethical issues arising from internal and industry practices - examples
• Treatment of customers - e.g. honouring the spirit as well as the letter of the law in respect to warranties and after sales service
• The number and proportion of women and ethnic minority people in senior positions
• The organization's loyalty to employees when it is in difficult economic conditions
• Employment of disabled people
• Bribes to secure contracts
• Child labour in the developing world
• Business practices of supply firms
• Unethical practices in marketing - examples
• Pricing lack of clarity in pricing
• Unethical practices relating to products - examples • Selling goods abroad which are banned at home• Omitting to provide information on side effects• Unsafe products• Built in obsolescence• Wasteful and unnecessary packaging• Deception on size and content• Inaccurate and incomplete testing of products• Treatment of animals in product testing• Ethics and the supply chain
• - It would be hypocritical to claim to be a ethical firm if it turned a blind to unethical practices by suppliers in the supply chain. In particular:
• The use of child labour and forced labour• Production in sweatshops• Violation of the basic rights of workers• Ignoring of health, safety and environmental standards• An ethical producer has to be concerned with what is
practiced by all firms (upstream and downstream) in the supply chain.
• Bribery • This is a key ethical issue in business• It first needs to be stated that bribery to secure a contract
(especially a contract with a public sector body) is against the law and severe penalties can result
• However, it is sometimes seem (wrongly) as a victimless crime and is often rationalized in terms of “if we don’t offer a bribery, others will”
• From a moral or ethical perspective it should be approached not in terms of “can we get away” with it but is it right to offer a bribe to secure a contract
• Institute of Business Ethics Suggestions for Good Practice
• The Institute recommends that organizations issue statements of ethical practice in respect of:
• Relations with customers• Relations with shareholders and other investors• Relations with the government and the local community• The environment• Relations with competitors• Issues relating to international business• Behaviour in relations to mergers and takeovers• Ethical issues concerning directors and managers• Compliance and verification
• What is an Ethical code?• This is a set of principles governing morality and
acceptable behaviourIt is likely to cover:
• Personal behaviour e.g. when dealing with customers and suppliers
• Corporate behaviour e.g. when negotiating deals• Behaviour towards society e.g. when recruiting• Behaviour towards the environment e.g. when deciding
on process
Global Ethical Issues
Wages and hours
Child labour
Discrimination
Legal and ethical business practices
Product safety and quality
Environment
“……Even if we know we can get away with doing something wrong, even if no one ever discovers what we are up to,
our vice harms us more than it hurts any of our victims.”
-SOCRATES
Is ethics same as law?- No - although the law should reflect the ethical views
of society there are certain activities permitted by law
which some individual or groups in society or individual
might regard as unethical.
- Ethical considerations are about what is right and what is
wrong- The law is about what is lawful and what is unlawful
The following business activities are legal but might pose ethical dilemmas for individuals:
- Profiting from gambling - Selling goods manufactured by low wage in developing countries - Engaging in the fur trade - Experimenting on animals
FACTORS THAT AFFECT ETHICAL BEHAVIOUR
MODERATORS
INDIVIDUALCHRACTERECTICS
ORGNIZATIONAL
CULTURE
ISSUEINTENSIT
Y
STRUCTURAL CHARECTERIS
TICS OF ORGANIZATIO
N
STAGES OFMORAL
DEVELOPMENT
ETHICAL DILEMA
ETHICAL / UNETHICAL BEHAVIOUR
What causes unethical behaviour
• Stress
• Confusion
• Pressure to perform at expected levels
• Competition within the industry
• No knowledge
Some of the Unethical Business practices are :
Cutting corners on quality Covering up incidents Abusing or lying Lying customers Stealing from the company Taking credits from co-workers ideas/work Taking or giving bribe
Unethical business practices (contd)
Government corruption Financial scandals Product safety discrimination Sexual harassment Firing an employee for whistle blowing Divulging confidential information
“What’s in it for me to be ethical?”
-A more accurate perception of the world around you, follow your conscience.
-Have the courage to do what is right and do try new things even when it is hard or costly.
-Don’t loose heart if you fail or don’t get what you want
-A stronger personality, and greater likelihood of being happy in life
CONSIDER CONSEQUENCES• IS IT ETHICAL ?
• IS IT LEGAL ?
• IS IT OK ?
• IS IT RIGHT ?
Is it fair ?
Does it hurt anyone ?
Have I been honest with those affected?
Can my conscience live with this decision ?
CONCLUSION
In the last few years we have seen a drastic change in society as well as in all facets of the business world. The consumer, today, is more aware of his rights and his requirements. He demands the best quality at the regular prices. Companies today need to incorporate a strong or responsible culture to face the instance reaction of the consumer.
Today’s market calls for stringent business ethics to be imposed in the corporate world.
Government and regulation :
Globalization weakens governments and increases the corporate responsibility for jobs, welfare, maintenance of ethical standards, etc.
• Triple bottom line (TBL)TBL is a term coined by John Elkington, his view is that it represents the idea that business does not have just one single goal-namely adding economic value-but that it has an extended goal set which necessitates adding environmental and social value too.
1. Environmental perspectives: • the basic principles of sustainability in the environmental
perspective concern the effective management of physical resources so that they are conserved for the future. All bio-systems are regarded as having finite resources and finite capacity, and hence sustainable human activity must operate at a level that does not threaten the health of those systems.
• Non-renewable resources such as oil, steel and coal, as well as the production of damaging environmental pollutants like greenhouse gases.
2. Economic perspectives:
-Economic growth assessed the limits imposed by the carrying capacity of the earth.-Continued growth in population, industrial activity, resource use, and pollution could mean that standards of living would decline, led to the emergence of sustainability as a way of thinking about ensuring that future generations would not be disadvantaged by the activities and choices of the present generation.
-Economic sustainability would include the company’s attitude towards and impacts upon the economic framework-paying bribes could be regarded as economically unsustainable –undermine the long term functioning of markets. Corporations which attempt to avoid paying corporate taxes through accounting tricks.
3. Social perspectives -Creating social justice-A more just and equitable world, whether between rich consumers in the west and poor workers in developing countries, between the urban rich and the rural poor, or between men and women, remains the central concern in the social perspective on sustainability
Carroll’s four-part model of corporate social responsibility
a) Economic: Companies have shareholders who demand a reasonable return on their investments, they have employees who want safe and fairly paid jobs, they have customers who demand good-quality products at a fair price.
b) Legal : The legal responsibility of corporation demands that business abide by the law and play by the rules of the game. Laws are the codification of society’s moral views. The satisfaction of legal responsibilities is required of all corporations seeking to be socially responsible.
a) Economic: Companies have shareholders who demand a reasonable return on their investments, they have employees who want safe and fairly paid jobs, they have customers who demand good-quality products at a fair price.
b) Legal : The legal responsibility of corporation demands that business abide by the law and play by the rules of the game. Laws are the codification of society’s moral views. The satisfaction of legal responsibilities is required of all corporations seeking to be socially responsible.
CSR and strategy: corporate social responsivenessCorporate social responsiveness refers to the capacity of a corporation to respond to social pressures 4 ‘philosophies’ or strategies of social responsiveness Reaction: C denies any responsibility for social issues, for ex by claiming that they are the responsibility of government, or by arguing that the C is not to blame.Defence: C admits responsibility but fights it, doing the very least that seems to be required. C may adopt an approach based mainly on superficial public relations rather than positive action; Accommodation: C accepts responsibility and does what is demanded of it by relevant groups.Proaction: C seeks to go beyond industry norms and anticipates future expectations by doing more than is expected
