BUSINESS ETHICS AND

CORPORATE GOVERNANCE

AN OVERVIEW

OF BUSINESS ETHICS

The senses say, “myself first”. Ethics says, “I must hold myself last.” - Swami Vivekananda.

What is Ethics?

• Ethics is a “system of moral principles, rules and conduct”.

• Emerged from Latin word ‘Ethicus’ or Greek word ‘Ethicos’.

• The Latin and the Greek words originated from ‘Ethos’ meaning character.

Definition of Ethics• Ethics is a field of social science of systematic knowledge of

human moral behaviour and conduct

• Ethics is a branch of philosophy that deals with values as they relate to human conduct.

• Ethics differentiates what is right and what is wrong in human conduct.

The moralist

My life view is superior

Other views are inferior

I have the answers

I need no other authority

The ethicist

My life view is based on reflection

I evaluate life views

I have questions

I respect other views

Difference between morals and ethics

Business Ethics

• Business ethics is the application of ethical principles and methods of analysis to business.

• Business ethics are divided in two types: Overt Covert

Objectives of Ethics

• Personal level• Internal policy level• Societal level• Stakeholder’s level

Importance of Business Ethics

• Part of society• Expectations of public• Trust of employees• Image• Costs• Pride of best companies• Overall benefit

Sources of Ethics

• Genetic inheritance• Religion• The legal system• Philosophical system• Code of conduct• Cultural Experience

Development of Business Ethics

• Manu and Inheritance• Aristotle on Virtue• Mauryan Accountability• Akbar and Operational Framework• The British Period

Arguments For and Against Business Ethics

Arguments Against Business Ethics

• Some people object to the entire notion that ethical standards should be brought into business organizations.

• They make three general objections.– First, they argue that the pursuit of profit in

perfectly competitive free markets will by itself ensure that the members of a society are served in the most socially beneficial ways.

Arguments Against Business Ethics

– Second, they claim that employees, as "loyal agents," are obligated to serve their employers single-mindedly, in whatever ways will advance the employer's self-interest.

• Agents should obey “Law of Agency”.

Arguments Against Business Ethics

– Third, they say that obeying the law is sufficient for businesses and that business ethics is essentially, nothing more than obeying the law.

Arguments For Ethics

• One argument points out that since ethics should govern all human activity, there is no reason to exempt business activity from ethical scrutiny.

• Another more developed argument points out that no activity, business included, could be carried out in an ethical vacuum.

Arguments For Ethics(contd.,)

• One interesting argument actually claims that ethical considerations are consistent with business activities such as the pursuit of profit. Indeed, the argument claims that ethical companies are more profitable than other companies

ARGUMENTS FOR AND AGAINST CORPORATE SOCIAL RESPONSIBILITY

Arguments for:1. Business is unavoidably involved in social issues.2. Business has the resources to tackle today’s complex

societal problems.3. A better society means a better environment for doing

business.4. Corporate social action will prevent government

intervention.

ARGUMENTS FOR AND AGAINST CORPORATE SOCIAL RESPONSIBILITY

(continued)

Arguments against:1. Profit maximization ensures the efficient use of society’s

resources.2. As an economic institution, business lacks the ability to

pursue social goals.3. Business already has enough power.4. Because managers are not elected, they are not directly

accountable to the people.

Ethical Dimension...

• Behaviors and activities that are expected or prohibited by organizational members, the community, and society (not codified into law)

• Standards, norms, or expectations that reflect the concern of major stakeholders

Social Responsibility...

• An organization’s obligation to maximize its positive impact on stakeholders and to minimize its negative impact

• Includes legal, ethical, economic, and philanthropic (discretionary) dimensions

Business Ethics & Social Responsibility

A Timeline of Ethical and Socially Responsible Concerns

The classical economists such as Adam Smith considered economics a branch of ethics. Business activity would grind to a halt without trust, fair dealings, and honest communication.

In his 1995 book, Trust: The Social Virtues and the Creation of Prosperity, Francis Fukuyama writes: "One of the most important lessons we can learn from an examination of economic life is that a nation’s well being as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society." Joseph Stiglitz clarified the market adjustment in which poorly informed agents extract information from the better informed, unemployment and credit rationing.

Economic Responsibilities...

• How resources for the production of goods and services are distributed within the social system?

• Do you think consumers favor socially responsible companies or are they most enamored with companies that maximize profits?

• Michael Spence- how firms may use dividends to signal their profitability to agents in the stock market.

Economic Responsibilities

• Protective tariffs compared to a blockade. – In war, a country blockades a foreign country so

it can’t import commodities from world markets for military purposes or for the people.

• In peacetime, domestic producers and bought-off legislators do to their own country what enemies would do in wartime.

• They eliminate the possibility of buying desirable world-market goods, stopping foreign products at the nation’s ports.

Economic Responsibilities(contd.,)

• Unethical– for what it does to our own nation, and– for what it does to other nations, which have• worked hard to develop good products for

the buyer • and a living for our trade partners (laborers

and managers) abroad.

Laws and Regulatory Issues

• Established by the government to set minimum standards for acceptable behavior

• Laws are passed because society does not always trust business to act in its best interest

Laws Protecting Consumers

• Require business to provide accurate information about products and services and to follow safety standards

• FTC’s Bureau of Consumer Protection

Laws Promoting Equity and Safety

• Laws promoting equity in the workplace protect the rights of minorities, women, older persons, and persons with disabilities

• Affirmative action programs

Laws Protecting the Environment

• Environmental Protection Agency (EPA)• Many environmental laws have resulted in

the elimination or modification of goods and services

Business Ethics Disputes

• Generally resolved through lawsuits• Most laws affecting business fall into one of

five categories:– Laws regulating competition– Laws protecting consumers– Laws promoting equity and safety– Laws protecting the environment– Laws that encourage ethical conduct

Ethics, Economics, and Law

Ethics in Accountancy

• All the business transactions need to be correctly recorded in the books of accounts.

• Passing entries for rectification of errors.• Preparing a trial balance.• Preparing trading and P/L account to show the

net results of the business.• Preparing balance sheet showing the financial

position of the business.

Competitive Issues

As the speed of comparable tangible assets acquisition accelerates and the pace of imitation quickens, firms that want to sustain distinctive global competitive advantages need to protect, exploit and enhance their unique intangible assets, particularly integrity (building firms of integrity is the hidden logic of business ethics).

Competitive Issues

• “Behavior that is trusting, trustworthy, and cooperative, not opportunistic, will give the firm a competitive advantage.”

• Sustainable global competitive advantage occurs when a company implements a value-creating strategy which other companies are unable to imitate.

• For example, a company with superior business leadership skills in enhancing integrity capacity increases its reputation capital with multiple stakeholders and positions itself for competitive advantage…

Competitive Issues

Competitive Issues

Business ethics as competitive advantage involves effective building of relationships with a company’s stakeholders based on its integrity that maintains such relationships.

Businesses CSR Activities• Philanthropy– give money or time or in kind to charity– Integrative philanthropy—select beneficiaries aligned with

company interests• Philanthropy will not enhance corporate reputation if

a company – fails to live up to its philanthropic image or – if consumers perceive philanthropy to be manipulative

Philanthropic Issues

• Involves business’s contribution to the local community and society

• Quality of life issues• Philanthropic issues• Strategic philanthropy– Home Depot– Microsoft, Hewlett Packard, IBM– Avon

Perceptions of Corruptness...

• Least Corrupt:– Denmark– Finland– Sweden– New Zealand– Iceland– Canada– Singapore– Netherlands– Norway– Switzerland

• Most Corrupt:– Cameroon– Paraguay– Honduras– Tanzania– Nigeria– Indonesia– Colombia– Venezuela– Ecuador– Russia

Factors Influencing Organizational Ethical Behavior...

Ethical Issue Intensity + Individual Factors + Corporate Culture (including significant others and opportunity) = Ethical or Unethical Behavior

Ethical Issue Intensity...

• Your perception of the relevance or importance of an ethical issue (reflects individual and work group sensitivity)

• Influenced by organizational use of rewards and punishment, codes and values of corporate culture

Developing Moral Judgment

Framework for Understanding the Ethical Decision Making Process in Business

• Ethical-Issue Intensity• Individual Factors• Organizational Factors• Opportunity• Business Ethics Evaluations and Intentions

Framework for Understanding the Ethical Decision Making Process in Business

Ethical Issue Intensity• Ethical issue intensity is the perceived relevance or

importance of an ethical issue to the individual, work group, and/or organization– Reflects the ethical sensitivity of the individual or work

group– Triggers the ethical decision process

• Moral Intensity relates to a person’s perception of social pressure and the harm the decision will have on others

Individual Factors• People often base their decisions regarding ethical issues

on their own values and principles of right or wrong • Research on gender and ethical decision making women

are generally more ethical than males – Education, Nationality, and Age are other individual

factors• Locus of control relates to individual differences in

relation to a generalized belief about how one is affected by internal versus external events or reinforcements – Can be external or internal

Organizational Factors

• Corporate culture is a set of values, norms, and artifacts that members (employees) of an organization share

• Those who have influence in a work group (e.g. managers, coworkers, subordinates) are referred to as significant others

• Obedience to authority helps to explain why many employees simply follow the directives of a superior

Source: Digital Vision

Opportunity

• Describes the conditions in an organization that limit/permit ethical/unethical behavior

• Relates to individuals’ immediate job context– Where they work, with whom they work,

and the nature of the work • Opportunities for misconduct can be

reduced by establishing formal codes, policies, and enforced rules

Source: Triangle Images

Using the Framework to Improve Ethical Decisions

• It is impossible to objectively determine right and wrong• Having a thorough knowledge about how ethical

decisions are made will not solve ethical problems – Business ethics involves value judgments and

collective agreement about acceptable patterns of behavior

• Ethical decision making in business does not rely strictly on the personal values and morals of individuals– Organizations take on a culture of their own, which

have a significant influence on business ethics

Corporate Governance

• An important issue: the earnings of business.

• Corporations have not been permitted to function without public oversight since the early 1900s.

• A congressional wave of corporate regulatory legislation.

• Corporate governance pertains to – the use of resources, – investments and – leadership selection and oversight.

• An integrity approach to business can yield strengthened competitiveness: it facilitates the delivery of quality products in an honest, reliable way. This approach can enhance work life by making the workplace more fun and challenging. It can improve relationships with stakeholders and can instill a more positive mindset that fosters creativity and innovations among the stakeholders.

• The purpose of ethics is to enhance our lives and our relationships both inside and outside of the organization.

To Conclude