Business Ethics, Corporate Governance and CSR
Metropolia Business School International Project Week (IPW) 2013
Dr Denise DollimoreUniversity of Hertfordshire, UK
Following this session students should be able to:
Define business ethics and describe the factors that shape a manager’s ethical decision making.
Describe the principles of good Corporate Governance
Define corporate social responsibility and explain how to evaluate it along economic, legal, ethical, and discretionary criteria.
Learning Outcomes
An ‘oxymoron’! – bringing together of two contradictory concepts (Collins 1994)
‘Principles of conduct within organizations that guide decision making and behavior’ (David 2008)Good business ethics is a prerequisite for good strategic management
‘The study of business situations, activities, and
decisions where issues of right and wrong are addressed’ (Crane & Matten 2004)
Business Ethics
Ethical values: shared beliefs about right and wrong, good and bad Govern the behaviour of a person or a group
Ethical issues: problems or dilemmas which present a conflict of values Pay a ‘living wage’ or personal financial gain
Ethical choices: decisions about which option to take in response to a dilemma Difficult decisions, because each option has its own
drawbacks
Ethical Values, Issues and Choices
Misleading advertising Misleading labeling Poor product or service safety Harming the environment Insider trading Padding expense accounts Dumping flawed products on foreign markets
But in many other cases, the law is unclear and all choices have elements of both ‘right’ and ‘wrong’
Some business practices always considered unethical and often illegal
Business Ethics ...
Free Choice Law Ethics
A personal responsibility?
Legal Standard Social Standard Personal Standard
You are a strategic analyst at a successful hotel enterprise that has been generating substantial excess cash flow.
Your CEO instructed you to analyse the competitive structure of closely related industries to find one the company could enter, using its cash reserve to build up a substantial position.
Your analysis suggests that the highest profit opportunities are to be found in the gambling industry. You realise that it might be possible to add casinos to several of your existing hotels, lowering entry costs into this industry.
However, you personally have strong moral objections to gambling
Should your own personal beliefs influence your recommendations to the CEO?
Ethical Dilemma What would you do?
Criteria for Ethical Decision Making Utilitarian approach – moral behavior produces
the greatest good for the greatest number Individualism approach – acts are moral when
they promote the individual’s best long-term interests
Moral rights approach – moral decisions are those that best maintain the rights of those affected, including free consent, life and safety
Justice approach – decisions must be based on standards of equity, fairness, and impartiality; (esp. important in HR managment)
Companies experience ‘social blowback’ when stakeholders perceive that they have breached their deal with society
Good business ethics is a prerequisite for good strategic management
Why is Business Ethics Important?
The Emergence of Corporate Social Responsibility
Companies have responded to increasing expectations by advocating what is now a common term in business: Corporate Social Responsibility (CSR)
Most large companies now feature CSR reports, managers, departments, and the subject is increasingly promoted as a core area of management - next to marketing & accounting
Crane, Matten & Spence (2008)
Who determines a good business ethics or CSR Agenda?
Government: the law makers? Business ethics begins where the law ends
The ‘strategists’: CEO, CSO, CFO, managers Core values, beliefs ‘embedded’ in organization Business ‘code of ethics’ (Banking, Media, Food Industry)
Board of Directors Corporate Governance Duties & Responsibilities Stakeholders Consumers/pressure groups/local community/Media
Who is Responsible for Ethics / CSR? Leadership & Management IssuesCEO / Strategists
Code of business ethics: Provides basis on which policies can be devised to
guide daily behavior and decisions in the workplace CEO & Management responsible for implementation
Who else is responsible for Ethics / CSR?
Governance Issues
Board of Directors Roles & Responsibilities Control & oversight over managementAdherence to legal prescriptionsConsideration of stakeholder interestsAdvancement of stockholder rights
Is ‘being ethical’ good for business? Is it possible to be both profitable and responsible?
Corporate Governance Definitions…
The way in which organizations are directed and controlled
Cadbury (1992) The process by which corporations are made
responsive to the rights and wishes of stakeholders
Demb and Neubauer (1992)
Corporate GovernanceThe Growth of Modern CorporationsThe ‘Agency Problem’ The agency problem arises because of the
separation between ownership of an organization and its control
The agency problem is inherent in the relationship between the providers of capital, referred to as the ‘principal’, and those who employ that capital, referred to as the ‘agent’.
Corporate Governance(Jensen & Meckling 1976)
The ‘Agency Problem’ Agency problems occur because no contract, however precisely
drawn, can possibly take account of every conceivable action that an agent may engage in
How do you ensure that the agent will always act in the best interest of the principal?
‘Agency costs’ occur where there is a divergence between these interests
Hence original purpose of Board of Directors How are such issues addressed?
Directors Roles & ResponsibilitiesBusinessWeek’s ‘Principles of Good Governance’
No more than 2 directors are current or former company executives
No directors do business with the company Each director owns a large equity stake in the
company At least one outside director with extensive
experience Each director attends at least 75% of all meetings Board is frugal on executive pay, diligent in CEO
succession, and prompt to act when trouble arises CEO is not also the chairperson of the board Shareholders have considerable power and
information to choose & replace directors
Corporate Governance & CSR?The Purpose of Corporations? To maximise shareholder value
‘In a free enterprise, private property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible…’ Milton Friedman (1970)
Corporate Governance & CSRThe Debate…
The Purpose of Corporations?To meet the needs of stakeholders
Stakeholders are individuals or groups that affect or are affected by the achievement of an organization’s objectives
Edward Freeman (1984)
eg., shareholders, customers, suppliers, employees, government, local community, media…
Socially obstructive Prioritising short-term shareholder interestsAvoids highly regulated business locations, lobby to change lawsSocially obligativePrioritising longer-term shareholder interestsComply with laws Socially responsiveBalancing multiple stakeholder obligationsPay attention to pressure groups, use CSR to build competitive advantage Socially contributiveSeeking to shape societyPromoting sustainability and locally led economic development
Ethical Stances of Organizations
The Pyramid of CSR Archie Carroll (1991)
Evaluating Corporate Responsibility
Key question… Should a business prioritise shareholder value or stakeholder needs?
Shareholders own the business Primarily for financial gain
Stakeholders are affected by the decisions and operational activities of the business Financial, non-financial and personal benefits
Organisations and Ethical Choice
The social contract between business and society is constantly evolving... (Waddock 2010)
The CSR Debate moves on… The early message ‘doing well by doing good’ CSR imposes political functions of govt on corporate
executives CSR has failed to create the good society – expecting too
much from business Close adherence to CSR agenda leads to falling profits Difficulty in allocating rights responsibilities and enforcing
them – who decides? Stakeholder theory the way forward – CA through building
superior relationships. Good CSR manages the paradox of profitability &
responsibilityJury is still out – you decide!
List of References Cadbury. 1992, Corporate Governance and Chairmanship. Oxford. Carroll, A.B. 1991 The Pyramid of corporate social responsibility: toward
the moral management of organizational stakeholders. Business Horizons, July-Aug: 39-48.
Demb and Neubauer. 1992, ‘The Corporate Board: Confronting the Paradoxes’. Long Range Planning, Vol 25, Issue 3, June, pp. 9–20.
David, F. 2008, Strategic Management Concepts and Cases Pearson International Edition.
Freeman, E. 1984, Strategic Management: A Stakeholder Approach. Boston: Pitman.
Friedman, M. 1970, ‘The Social Responsibility of Business is to increase its Profits’. New York Times Magazine, 13 September.
Jensen and Meckling, 1976, Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics.3:305-60
Waddock, S. (2010) ‘The Social Contract of Business in Society’ in Aras and Crowther eds. A Handbook of Corporate Governance and Social Responsibility 2010 pp. 69-82