VII.

Models of Corporate Governance

Anglo-US Model

The Anglo-US model is based on a system of individual or institutional shareholders that are outsiders of
the corporation. The other key players that make up the three sides of the corporate governance
triangle in the Anglo-US model are management and the board of directors. This model is designed to
separate the control and ownership of any corporation. Therefore the board of most companies
contains both insiders (executive directors) and outsiders (non-executive or independent directors).
Traditionally, though, one person holds the position of CEO and chairman of the board of directors. This
concentration of power has led many companies to include more outside directors now. The Anglo-US
system relies on effective communication between shareholders, management and the board with
important decisions being put to the vote of the shareholders.

Japanese Model

The Japanese model involves a high level of ownership by banks and other affiliated companies and
" keiretsu," industrial groups linked by trading relationships and cross-shareholding. The key
players in the Japanese system are the bank, the keiretsu (both major inside shareholders),
management and the government. Outside shareholders have little or no voice and there are few truly
independent or outside directors. The board of directors is usually made up entirely of insiders, often
the heads of the different divisions of the company. However, remaining on the board of directors is
conditional on the company, continuing profits, therefore the bank or keiretsu may remove directors
and appoint its own candidates if a company's profits continue to fall. Government is also
traditionally influential in the management of corporations through policy and regulations.

German Model

As in Japan, banks hold long-term stakes in corporations and their representatives serve on boards.
However they serve on boards continuously, not just during times of financial difficulty as in Japan. In
the German model, there is a two-tiered board system consisting of a management board and a
supervisory board. The management board is made up of inside executives of the company and the
supervisory board is made up of outsiders such as labor representatives and shareholder
representatives. The two boards are completely separate, and the size of the supervisory board is set by
law and cannot be changed by the shareholders. Also in the German model, there are voting right
restrictions on the shareholders. They can only vote a certain share percentage regardless of their share
ownership.

VIII.

What Are Psychological Traps and Why Do They Exist?

Psychological traps are the root causes of unethical behavior.

Psychological traps are similar to fish traps. A fish trap is comprised of a wire cage with an entrance
shaped like a large funnel that narrows toward the inside of the cage; the design of the funnel directs
the fish to swim into the trap. In the same way, an individual or organization is encouraged to move in a
certain (unethical) direction once a psychological trap is present. Later, the action turns out to be
disastrous and there are usually no simple means of reversing course.[1]

Because they are psychological in nature, some of these traps distort perceptions of right and wrong so
that one actually believes his or her unethical behavior is right. If people are not aware of these traps,
they can act as illusions or webs of deception. Once the traps are identified, however, they lose much of
their power to ensnare, and people can more easily circumvent them just as voyagers who know the
location of quicksand can navigate around it. When danger is clearly identified, one can prepare for it
and avoid it.

Depending on their context, traps may be benign and can even exert a positive influence on our lives.
For example, empathy is often considered the cornerstone of good ethics but in some circumstances,
this personality trait can actually overpower our sense of fairness. This is because traps can incite tunnel
vision; the pull to act on them is so strong that people can become blinded to other behavioral options.
Individuals that we respect and admire even whole companies can descend rapidly down the path of
corruption.

Traps exist because at any given moment in time people experience impulses that motivate them to act.
These impulses are reactions to internal or external stimuli. Sometimes, a stimulus is so powerful or
triggers such automatic behavior that the individual acts without recognizing that other options exist. At
other times, he or she is aware of other choices, but the stimulus’ impact overrides these potential
actions.

The essential question the authors posed was: What prompts the individual or organization to begin to
move in an ill-fated direction? The diverse traps presented in this article provide descriptions of
different internal or external stimuli that compel people to begin this movement toward disaster. In
addition, the article introduces three main categories of traps: Primary, Personality, and Defensive.

Primary Traps

Primary traps are predominantly comprised of external stimuli. They are the main traps that impel
people to move in a certain direction without regard for ethical principles. “Obedience to Authority” is a
clear example of a primary trap. Children are primed to obey their parents their survival depends upon it
and in school, this conditioning continues. Students automatically know that they must show deference
to their teachers. Consequently, later in life, when the boss orders an employee to do something, many
people quickly obey without thinking.

If a person of authority orders a subordinate to do something unethical, the compelling need to obey
authority serves as such a powerful external stimulus that the individual will likely obey the order
without being aware of its opposition to his or her own ethical principles. At other times, the
subordinate might be aware that the order is unethical; nonetheless, the impulse to obey is so strong
that it overrides his or her judgment.

Personality Traps

Personality traps consist exclusively of internal stimuli in the form of various personality traits that can
make people more vulnerable to wrongdoing. An example of a personality trap is the “Need for
Closure,” that is, “the desire for a definite answer on some topic, any answer, as opposed to confusion
and ambiguity.”[2] It is the tendency to jump on the first opinion that comes to mind, rather than
tolerating a state of uncertainty and taking the time to consider a problem or judgment from many
different angles.

The need for closure is augmented under work conditions that make processing information more
difficult, namely time pressure, fatigue, and excessive background noise. When such conditions exist, it
is more difficult to tolerate a state of confusion and ambiguity.

While the need for closure is influenced by situational factors, it is also a personality trait some people
are more able to tolerate states of ambiguity than others. Arie Kruglanski has developed a “Need for
Closure Scale” to measure this personality dimension those with a high tendency towards the trait are
more apt to endorse items on the scale, such as “I usually make important decisions quickly and
confidently,” “I do not usually consult many different opinions before forming my own view,” “When I’m
confused about an important issue, I feel very upset,” or “It’s annoying to listen to someone who cannot
seem to make up his or her mind.”[3] Kruglanski and his colleagues have established that those who
score high on the scale are more prone to stay with established impressions in the face of contradictory
evidence.[4]

So, what does this mean in the real world? Let us say that a CEO has a high need for closure. Based on
the CEO’s previous encounters with the CFO, he respects and likes him; however, the CFO has not been
with his company long. One day over lunch, the CEO learns from a colleague that the CFO has accepted
a bribe. “Impossible,” says the CEO. “He is not like that. He would not do such a thing!” Because of the
CEO’s high need for closure, he stays with his established impressions and does not even consider the
possibility that the CFO has acted illegally.

Within an organization, if coworkers ignore, justify, or condone unethical behavior, this supports the
view of the transgressor that he or she did not do anything wrong or, if they did, that it is not that big a
deal. Coworkers with a high need for closure can potentially cling to established impressions and, in so
doing, discount unethical behavior.

Defensive Traps
Defensive traps are a very different category. Although some of them can, at times, be counted as
primary traps, defensive traps are basically attempts to find easy ways to reverse course after a
transgression has been committed. For the most part, defensive traps are maneuvers that are reactions
to two internal stimuli: guilt and shame. Guilt and especially shame are very painful emotions because
they call into question the positive view that people have of themselves.

Defensive traps are insidious because they are often very successful at annihilating or at least
minimizing guilt and shame. They help people deny their transgressions, thus setting them up for
repeated unethical behavior. An example of a defensive trap is the “False Consensus Effect.”

Consider this example: Thomas Gabor, professor of criminology at the University of Ottawa, interviewed
employees that had illegally stolen equipment and materials from their jobs. A common rationalization
was exemplified by the following employee’s statement: “We are as good as management. They commit
employee theft. Everybody does it. If I don’t take it, someone else will.”[5]

Psychologists call this type of rationalization the “False Consensus Effect.” When people do something
unethical, they appease their guilt by falsely assuming that it is something everyone does, and thereby
minimize their transgressions “It’s not that bad; it’s something that happens all the time!” The insidious
thing about the false consensus effect (as with most other traps) is that the person actually believes his
or her own self-deception.

Gina Agostinelli conducted an interesting experiment at the University of New Mexico that validated the
false consensus effect.[6] Two-hundred-and-thirty-five subjects participated in her study, and these
subjects were randomly assigned to either two conditions: a failure condition or a neutral condition.
Agostinelli administered a test that was described as a “decision-making problem that many career
centers use to help companies hire employees…a valid indicator of future job success that measured
general problem-solving abilities under time pressure.”

Following the test, subjects relegated to the failure condition were given false feedback: “Your score is
poor and indicates that you are not good at solving problems under time pressure and cannot make
important decisions efficiently.” Subjects in the neutral condition were given no feedback. All subjects
were then given a questionnaire that asked them to estimate how well the general public would do on
the problem-solving test.

The magnitude of the false consensus effect was impressive. In the neutral condition, 40 percent of
subjects estimated that the public would be successful with the problem-solving test. In the failure
condition, subjects estimated that only 15 percent of the public would be successful! Subjects who
“failed” the test estimated that a large number of people would also fail the test, as in “If I fail, most
people would.”

Executive Tactics
How can a company create a corporate culture in which psychological traps are less likely to nudge
managers and employees toward unethical behavior? Let us focus on the three traps that were used as
examples: “Obedience to Authority,” “Need for Closure,” and the “False Consensus Effect.”

Obedience to Authority

When trying to keep the trap of obedience to authority at bay, the most important thing an executive
can do is to hire a psychologist to be part of his or her ethics and compliance team. Psychology can
explain the nature of traps and often help structure the proper approach to avoiding or remediating
them.

Joseph Badaracco, an ethics professor at Harvard Business School, conducted 30 extensive interviews
with recent MBA graduates who had faced ethical dilemmas in the business world.[7] Many of the
Harvard managers interviewed in Badaracco’s study confronted the trap of obedience to authority they
had been overtly told to act unethically by their bosses. One manager was instructed “to make up data
to support a new product introduction.” When he objected, his boss cut him off and said, “Just do it.”

When ordered to act unethically, these entry-level managers experienced intense anxiety. If they did not
obey, they worried that they would lose their boss’ support, which was crucial to being perceived as “a
candidate for the fast track and a team player.” Ultimately, employees worried about destroying their
careers and losing their jobs.[8]

The crucial problem these managers faced was the intense anxiety that resulted from the obedience to
authority trap. Emotions can bring people to their knees, and many of the traps incite powerful
emotions that pull a person toward wrongdoing. The managers were able to cope with their anxiety by
reassuring themselves that they were still young and their careers were just beginning. They told
themselves that they could always find work in another company if being ethical resulted in the loss of
their jobs. For the most part, the managers were able to resolve their dilemmas because of this
flexibility.

The managers acknowledged, however, that had they been older, with families and invested status in
the company, finding new employment would have been a much less likely option. So, what about
middle managers who do not have this flexibility, who have spent years climbing the corporate ladder
and have a family to support. What do they do when intense anxiety hits?

If middle managers are in a company that has a psychologist as part of its ethics team, the psychologist
can help them cope with their anxiety when confronted with the trap of obedience to authority, as
psychologists are well trained to mitigate intense anxiety.
Need for Closure

Psychological traps are insidious because they are often invisible. Managers with a high need for closure,
for instance, are usually neither aware of having such a trait nor that it might lead them to disregard the
unethical behavior of their coworkers. If managers know that they have a high need for closure and are
aware of its implications, they are more likely to avoid being trapped.

To contend with the need for closure, the most important thing an executive can do is to have a
psychologist administer the “Need for Closure Scale” so that managers and employees are aware of
whether they have a personality trait that might incline them to act unethically.

False Consensus Effect

This trap is easily identifiable it basically sounds like: “What I (or we) did is not bad; it’s something that
everybody does.” Once the company is aware of the false consensus effect, it is a signal that a
transgression has already been committed. In such cases, established reporting and disciplinary
procedures that are usually part of the company’s code of business conduct and ethics should come into
play.

Conclusion

Because there are more traps than the three outlined in this article, there will likely be more than three
tactics developed to deal with these traps. Nonetheless, the authors have identified the following tactics
as universally important:

1. Employ a psychologist to help coworkers contend with the strong emotions incited by traps;
2. Ensure that the psychologist tests coworkers to make them aware of potential personality traps;
and
3. Recognize defensive traps as signs that transgressions have already been committed.

It should also be noted that one’s behavior can be affected by more than one trap simultaneously.
Developing tactics to manage traps is an ongoing challenge, especially as more traps are discovered. But
the fact that traps accurately define the root causes of unethical behavior will make this task easier and
the solutions more effective and efficient.

IX.

Corporate Social Responsibility: a business philosophy which stresses the need for firms to behave as
good corporate citizens, not merely obeying the law but conducting their production and marketing
activities in a manner which avoids causing environmental pollution or exhausting finite world
resources. Some businesses have begun to behave in a more socially responsible manner, partly because
their managers want to do so, and partly because of fear of environmentalist and consumer pressure
groups and the media, and concern for their public image. It is argued that socially responsible
behaviour can pay off in the long run, even where it involves some short-term sacrifice of profit.

A. The Benefits of Business Ethics

The acceptability of behavior in business is determined by customers, competitors, government

regulators, interest groups, and the public, as well as each individual’s personal moral principles and
values (Ferrel, Fraedrich and Ferrell, 2005).

Today, in the contemporary business environment full of changes and competitors, each company
meets numerous obstacles if their business plan is not based on business ethics. Business ethics relates
to an individual’s or a work group’s decisions that society evaluates as right or wrong (Ferrel, Fraedrich
and Ferrell, 2005). Aleksi� (2007) defines business ethics as a system of basic values and rules of
individual, organizational and social behavior associated with business and business goals (Aleksi�,
2007). Business ethics is also defined as ethical judgment in business situations and activities. The
importance of business ethics in the first place is the fact that customers and consumers consciously and
subconsciously perceive businesses as ethical or not ethical. This fact is more than enough for
companies’ to start with ethical business.

Business ethics has become one of the key factors differentiating successful from unsuccessful
companies. Doing business ethically means to work according to the letter of the law, perform duties on
time and put consumers and customers as priorities. To apply business ethics means thinking about
others, thinking about the future. Companies with business ethics had previously developed long-term
plans and goals. Business ethics gives a sense of security and opportunity for future development. It
must be emphasized that business ethics is essential in every business situation, with no exceptions
(Bazerman, Messick and Stewart, 2006). Ethical companies will abnegate short-term profit to have a
long-term positive image in the eyes of the public. By operating in this way, the company creates a
positive climate, growing confidence and the possibility of constant progress. These kinds of companies
have a great advantage over the non-ethical ones.

Business ethics is one of the types of means of differentiation because there are only a small number of
companies which fully applies and uses its many benefits. Among numerous reasons Ferrel, Fraedrich
and Ferrell (2005 p. 31) point out these for a strong commitment to ethical values:

1. Ethical companies have been shown to be more profitable.

2. Making ethical choices results in lower stress for corporate managers and other employees.
3. Our reputation, good or bad, endures.

4. Ethical behavior enhances leadership.

5. The alternative to voluntary ethical behavior is a demanding and costly regulation.

An ethical codex in organizations, which is interpreted as the foundation of business ethics, is

also extremely important (Jelšenjak and Krka�, 2016). Business ethics is becoming increasingly
important in companies because it allows them to efficiently respond to needs of all stakeholders –
customers, employees, shareholders and society as a whole. Today, a growing number of companies
focus on the adoption of ethical values and ethical standards as a fundamental component of business
ethics. The business world is so complex that companies need to constantly show potential clients,
investors and partners that the organization is a moral subject who cares and takes into consideration
the whole society and has a kind of social mission.

B. The Importance of Ethics in Human

Resources
Paying attention to business ethics is an important part of any business owner or manager's job. The
human resources function deals with a variety of ethical challenges; being the department that deals
directly with people employed by a company, HR includes numerous ethical pitfalls that can damage a
company's reputation or financial sustainability if not handled properly. Understanding the importance
of ethics in human resources is crucial for any business owner, whether in a local startup or a
multinational powerhouse.

Legal Considerations

Breaches of ethics in human resources can lead companies into a world of legal trouble, in both the civil
and criminal arenas. Breaches of ethics in the HR department are more likely to be reported by victims
to the Better Business Bureau, the Equal Employment Opportunity Commission or other regulatory
agencies than those committed in other areas, such as product development or accounting. Companies
with comprehensive ethics programs in place can avoid costly trouble regarding discrimination and
hostile-work-environment issues, resulting in lower costs for litigation and out-of-court settlements.

Company Reputation

In the business world, legal trouble can introduce additional challenges to employers, as news outlets
and ethics watchdog organizations spread the word about companies' misdeeds. Discrimination issues,
sexual harassment and unfair employment policies can land companies on the front page of consumer
or business-focused publications, damaging a company's reputation among consumers, potential
strategic partners and potential future employees.

Gaining a reputation as an ethical employer can help to attract the top talent in your industry from a
wider area, as employees seek to find the most beneficial employment relationships they can. The
opposite holds true, as well; if job applicants see your company as an unethical employer, the most
skilled, experienced, creative and productive applicants are likely to put their resumes in elsewhere.

Employee Loyalty

Treating employees ethically can garner long-term employee trust and loyalty, which conveys a range of
distinct benefits to employers. Loyal employees gain more experience working with their employers,
allowing them to master production processes and more fully understand the inner workings of the firm.
This can increase employees' productivity and efficiency over time in addition to keeping recruiting and
training costs under control.

Sellers of consumer goods can gain marketing advantages from loyal employees, as well. Loyal
employees often act as champions for a company's products, purchasing goods from their employer and
spreading positive word-of-mouth advertising to friends, family and acquaintances over the years.

Promoting Ethics

A solid reputation as an ethical employer does not happen on its own. Savvy, ethics-conscious business
owners put comprehensive ethics programs in place to display a firm commitment to ethics in every
area of business, including human resources. Put HR ethics policies in place regarding discrimination,
sexual harassment and the treatment of employees, and put each of your managers and supervisors
through ethics training programs to make sure they are fully aware of your expectations. Most
importantly, lead by example in your organization to create a culture of mutual respect and dignity,
where ethical decision-making is valued and rewarded.

C.Risk Management

Role of Ethics and Responsibility in Risk Management

Ethics are important in any professional field. Your moral compass guides your decisions and conduct,
and in the Risk Management field, can impact everyone associated with the company (employees,
leadership, stakeholders, shareholders, etc.). As a professional in the Risk Management field, one
analyzes and attempts to quantify the potential for losses. Then, he/she takes action or inaction
depending on the analysis. Thus, ethical behavior from Risk Management professionals are a vital
component of a business. Ethics in business, also known as corporate ethics, examines ethical principles
and moral or ethical problems that arise in a business environment.

It is important to differentiate between 'feelings', 'laws', 'social norms' and 'ethics'. Many times, people
tend to equate ethics with their feelings. However, being ethical is not always a matter of following
one's feelings. A person following his or her feelings may shy away from doing what is right. In fact,
feelings frequently deviate from what is ethical. Furthermore, being ethical is also not always the same
as following the law. The law often incorporates ethical standards to which most citizens subscribe. But
laws, like feelings, can deviate from what is ethical. One example is America's own pre-Civil War slavery
laws that are grotesquely obvious examples of laws that deviate from what is actually ethical. Finally,
being ethical is not the same as doing "whatever society accepts." In any society, most people accept
standards that are, in fact, ethical. But standards of behavior in society can deviate from what is ethical.
An entire society can become ethically corrupt. Nazi Germany is a good example of a morally corrupt
society.

What, then, is ethics? First, ethics refers to standards of right and wrong that prescribe what humans
ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues.
Ethical standards include standards relating to rights, such as the right to life, the right to freedom from
injury, and the right to privacy. Such standards are adequate standards of ethics because they are
supported by consistent and well-founded reasons.

Secondly, ethics refers to the study and development of one's ethical standards. As mentioned above,
feelings, laws, and social norms can deviate from what is ethical. So it is necessary to constantly examine
one's standards to ensure that they are reasonable and well-founded. Ethics also means, then, the
continuous effort of studying our own moral beliefs and our moral conduct, and striving to ensure that
we, and the organizations we help to shape, live up to standards that are reasonable and solidly-based.

The Newspaper Test of Ethics

When you are faced with an ethical dilemma, think about how your actions would look on the front
page of the newspaper. Would you choose this action if you had known it would be reported in full for
everyone to see? There are many versions of this test, but it all comes down to the question whether we
feel obligated to shroud our actions, to hide them from the view of our boss, our family, our friends.

C. Brand Differentiation

Ethics and Brand Value: Strategic Differentiation. “A discussion of how brand and business ethics
interact … the ability to generate 'brand' value and reputation by high standards of business integrity
and social responsibility.” “The system or code of morals of a particular person, religion, group or
profession.”