Business Ethics & Corporate Governance BU

Model 1: An Overview of Business Ethics

1. DEFINITION OF ETHICS: Derived from Greek work Ethos which refers to the character & sentiments of the society. a) Concise Oxford Dictionary: Ethics is:

Relating to morals Treating moral questions Morally correct Honourable

b) Ethics is:

The study of morals and moral choices. Focus on standards The rules and codes of conduct that govern The behaviour of individuals and groups. Is concerned with human character and conduct. It relates to the social rules that influence people to be honest in dealing with other people.

c) Philosopher Epicures says Ethics

Deals with things to be sought Deals with things to be avoided Deals with chief ways of life

d) R.Wayne Mondy says: Ethics is the discipline dealing with

What is good and bad What is right and wrong in human conduct Moral duty and obligation.

e) Ethics is that branch of philosophy which is concerned with:

Rightness and wrongness Goodness and badness of human conduct Providing the basis for deciding that a particular action is morally good or bad

f) Shea defines, Ethics as:

Principles of conduct governing an individual or a profession The Standards of behaviour

g) Brian Harvey says

Ethics stands for a practice As well as a reflection of that practices It is a conscious appeal to norms and values which we are obliged to discharge It is a methodical and systematic elaboration of the norms and values we appeal in our daily activities.

h) Ethics is:

About norms and values of a certain seriousness About standards and ideals Ones that people cannot easily neglect without harming others. Where a significant number of people do not look at disdainfully. Is keeping your promises. Respecting sentiments of beings. Distributing benefits and burdens in a fair and equitable way.

i) Ethics is a diagnostic tool

That establishes moral standards & norms of behaviours That prescribes and makes judgements on moral behaviours That expresses opinions and attitudes about human conduct

j) Ethics is:

A study of what is good and right to the people A basic question as to how a man should act When such actions have a direct or indirect effect on others.

2. DEFINITIONS OF BUSINESS ETHICS: a) Business ethics are:

Moral principles and standards that define right and wrong behaviour in the world of business. What constitutes right and wrong behaviour in business is determined by public interest groups, business organisation.

b) John Donaldson defines business ethics are:

Is the systematic study of moral/ethical matters pertaining to business or industry? Actual standards, values, beliefs or practices for handling of business.

c) Business ethics are the application of general ethical rules to business behaviours. d) Business ethics are rules of business conduct, by which the proprietary of business activities may be judged. It also relates to the behaviours of mangers. 2

3. NATURE OF BUSINESS ETHICS: a) b ) Most ethical questions could be of two types: overt & covert, eg: bribery, theft, sabotage, collusion

Ethical issues commonly occur in management. These issues are far beyond the usual problems of bribery, collusion

and theft. They have far reaching and critical effects on the business. Some of them are: corporate acquisition, mergers, capital investments, marketing policies, etc.

c)

Ethics demands that a manager be honest not only within himself but in the society too. Success of business is reflected by his ethical qualities. Ethical dilemmas may sometimes occur: revenues, cost, profits, corporate social responsibilities, etc.

d )

The characteristics needed for an ethical decision making are shown in the model below:

morally correct

Righteousness

Equitable

just & equal

Justice Justice is not only done and also seen to have been done Proper Appropriate & acceptable

Characteristics needed for a decision to be ethical

Goodness Highest good for all concerned

Honesty Honesty & integrity

e)

Ethics is Unstructured Does not have a standard format Does not have a standard framework Abstract in concept Does not have a universal concept. A model indicating the relations between ethics, moral standards and value systems is shown as below:

Ethics

Moral Standards

Value System of people

Different ethical practices by different people f)

Peoples background

Ethical decisions should express some obligations to others. If the decisions affect only the self, it is not an ethical decision. Ethical decisions should be good for the larger society.

4. CHARACTERISTIC OF BUSINESS ETHICS:

Ethical decisions differ with the individual perspective of different persons. Ethical decisions are not limited to a particular situation; it affects a wide range of associated situations. The ramifications are widespread. Most ethical decisions involve a trade-off between costs incurred and benefits received roles of profits and responsibilities and costs and benefits should be clearly spelt. The consequences of most ethical decisions are not clear and dilemmas exist and persist. Every person is individually responsible for the ethical or unethical decision or action he takes. Ethical decisions are voluntary human actions, choices many times are of free will and sometimes guided by the government principles.

5. NEED FOR BUSINESS ETHICS: a) Business operates within the society:

Business is a part of subsystem of

society. Businesss functioning must contribute to the welfare of the society. To survive, develop and excel, business must earn social sanction of the society where exists and functions. Without earning social sanctions:

SOCIETY

Business cannot get loyal customers. Can not operate in the market place. It will soon collapse and die. When business grows larger:

Business

The public takes more interest in it. Leads to greater impact on the community Managers are turned to public opinion and they take a positive attitude to it. They seek and maintain a proper image of the company. b) Business survives on ethical means:

Irrespective of size, business survives on ethical means. Social concern a must to survive long Otherwise, business leads to its own doom Unethical actions shortens the life of business.

c) Corporate citizenship and business:

Business needs to function as responsible corporate citizens of the country. Business creates wealth to the country Avoid narrower goals and mentality Avoid motives

d) Expectations of public: Due to its dominance of economy in society, all stakeholders have an eye on the culture and behaviour of the business organisation. Public expects a high level of ethical behaviour from

Doing the right thing, do not harm, be good to all are the expectations of the general public.

e) Trust of employees:

High level of morale and productivity through

Equality of treatment of all employees. Encouraging good team work and culture with ethical practices. With quality of work life

f) Image:

Ethical organisation commands trust and respect of all its stakeholders. Organisation to build an ethical image of itself. With ethical good image all stakeholders stand to gain.

g) Costs:

The following costs to companies:

Deterioration of relationships. Damage to reputation. Reduction of employee productivity. Unethical practices.

An uncaring employer will find it difficult to employ good professionals

h) Pride of best companies:

Command respect from public and Govt. Fortune magazine publication, also Business India Have a brand value and accepted as leaders in industry.

i) Overall benefit: Ethical behaviour gives a win-win situation to all. Government encourages such companies. Integrity and ethical practices pervades in the company and increases organisational effectiveness

6. HISTORY, SOURCE & DEVELOPMENT OF BUSINESS ETHICS:

Ethics is a natural market consequence Six primary sources of ethics identified by George and John Steven a) b) c) d) e) f) Genetic inheritance Religion The Legal system The philosophical system Code of conduct The cultural experience

a) Genetic Inheritance:

Socio-biologists have lots of evidence. People inherit lot of traits from forefathers. Natural traits ingrained in the minds of people. Traits like courage, co-operation, goodness, sympathy, generosity and the like come to a man from inheritance.

b) Religion:

Religion provides ethical principles and standards to all humans. The religious beliefs of what is right and what is wrong have come to us from generation to generation. These are ingrained and etched in our minds Every man or woman follow his/her own religion as a matter of fundamental right. All religions and great religious leaders have emphasized the basic ethical commands of good and peaceful life of human beings. All resources created by god and existing in the earth are for common benefit of the entire humanity. Religious morality is a strong force in shaping ethical levels of a man and more so in business. Religious books lay down ethical standards and divine commands. Religion:

Binds people together. It brings a sense of belonging to a tradition. It sets values that are handed down to the generation.

The Golden Rule

Is a act in a way you would expect others to act towards you Do unto others as you would have them to unto you 7

The Ten commandments are the earliest recorded codes of conduct as found in the Bible; they are: Honour your father and your mother, that you may have a long life in the land which the Lord, your god, is giving you You shall not kill You shall not commit adultery You shall not steal You shall not bear false witness against your neighbours. You shall not: Covet your neighbours house. Your neighbours wife Nor his male or female slave Nor his ox or ass Nor anything else that belongs to him

c) Philosophical System:

The philosophical base of the society we live in add to the thinking and decision making processes as follows:

Some philosophers say Others like Indian thinkers Modern business thinkers Some other thinkers

- act good - thriftiness & ahimsa or harm - hard work and efficiency - helping others

none

The different philosophical inputs have a strong bearing on business decision making process.

d) The Legal System:

The law serves to educate us about the ethical course in life. The law should not be treated as a vehicle for expressing all of societys ethical preferences. Laws are defined as

A consistent set of universal rules. That are widely published Generally accepted & Usually enforced

Laws are based on society rules of what is acceptable and what is not These rules

Are made as laws by the authority 8

For the proper regulation of a community or a society For correct conduct in life.

Legal system roughly shows the ethical standards of a society. The laws represent:

An ever-changing approximation of current perception. Or an idea of what is right and what is wrong.

Laws are vehicles for expressing ethical preference of a society.

e) Codes of Conduct:

Company Codes:

Each company draws its own ethical codes. What is right? What is proper? When to draw the lines? What is misconduct in a company? Highly generalized and brief.

Company Operating Policies: How company operates their codes or rule book. Contains ethical dimensions. Expresses policies on gifts, complaints, hiring, etc. Serves as a guide to conduct. Serves as a shield for employees against unethical advances of outsiders.

Codes of ethics/Industry Principles: Companys written or unwritten ethical practices. A growing expression of the business communitys sincere concern about ethics. Many professional and Industry Associations have developed their own code of ethics.

f) Cultural Experience:

Customs, beliefs and standards Transmitted from generation to generation Acts as guide to businessman in decision making Individual values are shaped by the society where we grow and live in.

7. ARGUMENTS FOR AND AGAINST BUSINESS ETHICS:

Business ethics is the process of rationally evaluating our moral standards and applying them to business solutions. Many people have raised objections to the very idea of applying moral standards to business activities. Some are in favour of bringing ethics into business. a) 3 Objectives for bringing ethics into business: a1) In a perfectly competitive free market, the pursuit of profit will ensure that members of the society are served in the most socially beneficial ways.

To be profitable, each firm has to produce only what the society This should be done by the most efficient usage of the available

want.

resource. Society will benefit the most, if managers do not impose their own values on a business.

Instead, devote themselves to the single minded pursuit of profit.

Thereby, devote themselves to produce efficiently what the members of society value/desire/require.

Some questionable assumptions for the above are: Industries not perfectly competitive. Lack of competition makes inefficient production. Steps to increase production many injure society. Output could be biased towards affluent society which poor strata is forgotten.

a2)

The business managers should single mindedly pursue the interests of their firms and should ignore ethical considerations.

This is embodied in Alex C Michaels Loyal Agent Agreement The manager has a duty to serve employer as the employer would want to be served. An employer would want to be served in whatever ways will advance his self interests. As a loyal agent of employer, the manager has a duty to serve his employer in whatever ways will advance the employers self-interest. 10

a3)

Another objection is that: To be ethical it is enough for business people merely obey the law. Business ethics is essentially, obeying the law. It is wrong, however, to see law and ethics as identical. Some laws require behaviour that is the same as the behaviour required by our moral standards: eg: laws on murder, rape, theft, fraud, etc. In such cases, law and morality coincide. And the obligations to be moral.

Law and morality do not always coincide Some laws have nothing to do with morality since they do not involve serious matters. Eg: parking laws, dress codes, etc.

a4)

Some other laws may even violate our moral standards. They are actually contrary to our morality. Eg.: civil war, slavery rules; slaves treated as properties; Nazi Germany; Saudi Arabian business discriminating women and Jews.

So then, ethics is not simply following the law. This does not mean that ethics has nothing to do with following the law Our moral standards are sometimes incorporated into the law when we feel that a moral standard should be enforced by the pressures of a legal system. In contrast, laws are sometimes criticized and eliminated when it becomes clear that they blatantly violate our moral standards. Egs. Law on bribery, discrimination, slavery. Therefore, morality has shaped and influenced many of the laws we have. Even ethicists agree that all citizens have a moral obligation to obey the law so long as the law does not require clearly unjust behaviour. This means, it is immoral to break the law. Ironically, the obligation to obey the law can create terrible conflicts when the law requires something that the business person believes is immoral.

a5)

In such cases: 11

A person will be faced with a conflict. Between the obligation to obey the law And the obligations to obey his conscious

b) Points/suggestions for adopting ethics in business: b1)

Ethics should be brought into business Because: Ethics should govern all voluntary human activities. Since business is a voluntary human activity, ethics should also govern business.

Same standards of ethics applied to voluntary human activities should also be applied to business.

b2)

Business activity like any other human activity, can not exist unless the people involved in the business and its surrounding community adhere to some minimal standards of ethics.

Business is a co-operative activity whose very existence requires ethical behaviour.

No business can exist entirely without ethics.

The pursuit of business at least a minimal adherence to ethics on the part of those involved in the business. b3) All business requires a stable society in which to carry on their business dealings.

The stability of any society requires that its members adhere to some minimal standards of ethics.

In a society without ethics: Distrust and unrestrained self interest would create a war of every man against every man In such a society life would become nasty, brutish and short. Lying, theft, cheating, distrust, self-interest becomes universal. Business activities break down; Societies torn by strife, conflict, distrust and civil war. So, then, business can not survive without ethics. It is in the best interests of business, we promote ethical behaviour 12

among members as well as in the society. b4) Ethical considerations are consistent with business pursuits, in particular with the pursuit of profit.

Many examples exist where a history good ethics has existed side by side with a history of profitable operations, eg. Merck, Tatas, Infosys

b5)

Pursuit of profits side by side with the pursuit of ethics does not always demonstrate that ethics is consistent with pursuit of profits.

Many chance factors affect profitability. recessions, weather, interest rates, consumer tastes, etc.

Eg. Overcapacity,

b6)

Many difficulties are involved in trying to study whether ethical companies are more profitable or not.

The results have been mixed.

Several studies have found a positive relationship between socially responsible behaviour and profitability.

No studies have found a negative correlation. Ethical companies do provide a higher return.

By and large ethics does not distract from profits and seem to contribute to profits. b7)

dilemmas.

The story of Prisoners Dilemma is a good illustration of the If both parties co-operate, they will both gain some benefits. If both choose not to co-operate, neither gets the benefit.

8. ETHICS AS A DIMENSION OF SOCIAL RESPONSIBILITY: a) Steps of social responsibility: The Pyramid of corporate social responsibility: Philanthropic

Giving back to

society Ethical Following standards of acceptable behaviour as judged by stakeholders

Legal

Abiding by all laws and government regulations

Economic

Maximizing stakeholder wealth and/or value 13

The concepts of ethics and social responsibility are often used interchangeably, although each has a distinct meaning. CSR is an organisations obligation to maximize its positive impact on stakeholders. And to minimize its negative impact. Social responsibility can be viewed as a contract with society. Business ethics involves carefully thought out rules or heuristics of business conduct that guide decision making.

b) Corporate Citizenship: Is often used to express the extent to which businesses strategically meet the economic, legal, ethical and philanthropic responsibilities placed on them by their various stakeholders.

It includes the activities and organisational processes adopted by businesses to meet their social responsibilities.

A firs commitment to corporate citizenship indicates a strategic focus on fulfilling the social responsibilities its stakeholders expect of it.

Corporate citizenship involves: Acting on the firms commitment to the corporate citizenship philosophy. Measuring the extent of which it follows through. By actually implementing citizenship initiatives.

c) Economic Issues:

Is one of social responsibility issues. A foundation of all business activities.

Companies that fail to respond to these issues cannot survive for the long term.

The economy is affected by the way companies relate to the stakeholders.

When economic downturns or poor decisions lead companies to lay off employees, it creates an unsavoury ripple affect among all stakeholders. Economic responsibilities require finding a balance between societys demand for social responsibility and investors desire for profits.

When people talk about the economy, they generally mean cyclical conditions such as inflation, recession and employment rates.

As well as how these conditions affect their ability to obtain the resources they need or desire.

Inflation refers to an increase in the overall level of prices over an extended time.

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Recession is characterized by rising unemployment, falling prices, restriction of credit, low output and investment and many bankruptcies.

The economy then is in a constant flux.

These business cycles influence the quality of life and the decisions of both consumers and companies.

Occasionally, these decisions can harm stakeholders.

Consumers who believe that prices will continue to rise are likely to borrow more.

Which in turn increases the demand for credit and raises interest rates?

Unless the government steps into manipulate the money supply, this situation can result in a spiral of rising prices. However, if improperly managed, this effect may lead to a recession in which too many jobs are lost and economic growth stagnates.

Unemployment, low wages and continued recession can harm the welfare of citizens.

The economy is also driven by supply It is the amount of goods available at a given price at any time. And demand how many consumers desire the available goods. These two concepts are the building blocks of economics.

When a company uses deception or manipulates a products supply and demand, stakeholders can be harmed. An organisations sense of economic responsibility is especially significant for employees, because it raises such issues as job opportunities, workplace diversity job safety, health and employee privacy.

The companies should not have the right of termination during the economic downturn.

Termination results in unemployment and a drain on the economy as well as the personal hardships and sufferings for the unemployed.

d) Competitive Issues: The issues and impact of competition on businesss social responsibility are due to:

Rivalry among businesses/customers Rivalry for profits.

When businesses compete unfairly legal and social responsibility issues can occur.

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Intense competition sometimes makes managers feel that their companys survival is threatened.

Managers, in such situations, begin to see unacceptable alternatives as acceptable ones.

They, then, begin engaging in questionable practices to ensure the survival of their organisations.

Size frequently gives some companies an advantage over others due to economics of scale.

Some companies competitive strategies may focus on weakening or destroying a competitor, which can harm competition and ultimately reduce consumer choice.

Some other anticompetitive strategies include.

Sustained price cuts Discriminatory pricing Price wars, etc.

US antitrust laws control the strategies that enhance consumer welfare from those that reduce it.

However, it is difficult to determine whether a companys pricing policy is to weaken or destroy a competitor.

Intense competition may also lead companies to resort to corporate espionage.

Espionage may be carried out by outsiders or by employees, executives, programmers, network or computer auditors, engineers or janitors who have access to most of the facilities.

Hacking is one of the methods. Social engineering is yet another method.

Whacking or eves dropping on wired and wireless networks is yet another one. Dumpster diving which is perfectly legal. Once trash is discarded onto a public street or alley, it is considered as a fair game.

e) Legal and regulatory issues: Laws and regulations are established by governments to set minimum standards for responsible behaviour.

These standards are societys codification of what is right and wrong.

Laws regulating business conduct are passed because certain stakeholders believe that business can not be trusted to do what is right in certain are as like 16

Consumer safety. Environmental protection.

Many laws have been passed by legislatures and courts and they keep on upgrading depending upon the need.

Laws are categorized as Civil laws defines the rights and duties of individuals, businesses and organisations. Criminal laws prohibits specific actions, such as fraud, theft, etc., and also imposes punishments for breaking the law.

The role of laws is not so much to distinguish what is ethical or unethical. But to determine the appropriateness of specific activities or situations.

In other words, laws establish the ground rules for responsible business activities. Most of the laws and regulations that govern business activities fall into one of the 5 groups.

Regulation of competition Protection of customers Promotion of equity and safety Protection of the natural environment, and Incentives to encourage organisational compliance programs to deter misconduct

e1)

Laws Regulating Competition:

Laws have been passed to Present the establishment of monopolies. Inequitable pricing practices Other practices that reduce or restrict competition among business. These laws are sometimes called precompetitive legislation

Since they were enacted to encourage competition and prevent activities that restrain trade. e2) Laws Protecting Consumers:

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Laws that protect consumers require business to provide accurate information about products and services.

And to follow safety standards. The first consumer protection law was passed in 1906 at USA. The role of this law is to protect consumers against. Unfair, deceptive or fraudulent practices. The bureau enforces a variety of consumer protection laws.

e3)

Laws Promoting Equity and Safety Laws promoting equity in the work place were passed in USA during 1960s and 1970s

Means to protect: The rights of minorities Women Older persons Persons with disabilities Safety of all workers

Most important Civil Rights Act prohibits discrimination in employment on the basis of

Race Sex Religion Colour National origin Equal Employment Opportunities Commission (EEOC) helps: Business design affirmative action programs. Increases job opportunities for women and minorities Identifies where women and minorities are under employed. Establishes specific hiring and promotion goals. Fixes target dates for meeting those goals. 18

The Equal Pay Act Addresses more specific employment practices. Mandates equal work must receive equal pay for men and women. Wages differences attributed to seniority, performance and The American Disabilities Act of 1990.

qualifications

Prohibits discrimination against people with disabilities.

Occupational Safety & Health Act of 1970 mandates that employers provide safe and healthy working conditions for all workers.

e4)

Laws Protecting the Environments: Environmental protection laws have been enacted largely in response to concerns over businesss impact on the environment.

Environmental Protection Agency (EPA) was created in 1970 in

USA. EPA coordinates environmental agencies involved in enforcing the nations environmental laws.

The major area of environmental concern relate to air, water and

land pollution. Large corporations are encouraged to establish pollution control mechanisms and other policies favourable to the environments.

A number of laws have been enacted in USA: Clean - Established air quality standards; requires approved state plans for the implementation of the standards. - Established broad policy goals for all federal agencies; created the council on Environmental Quality as a monitoring agency. - Provides financial resources to the states to protect coastal zones from over 19

Air Act, 1970 Nation al Environmental Policy Act, 1970

Coasta l Zone Management Act,

1972 Federa l Water Pollution Control Act, 1972 Noise Pollution Control Act, 1972

population. - Designed to prevent, reduce or eliminate water pollution. - Designed to control the noise emission of certain manufactured items. - Requires testing and restricts use of certain chemical substances, to protect human health and the environment.

Toxic Substances Control Act, 1976

e5)

Laws that Encourage Ethical Conduct: Ethical standards are defined by companys code of conduct.

Violations of the law usually begin when business people stretch the limits of ethical standards. And then choose to engage in schemes that knowingly or unwittingly violate the law.

Recent years, new laws and regulations have been passed to discourage such decisions.

And further, foster programs designed to improve business ethics and social responsibility

The most important of these are:

Federal Sentencing Guidelines for organisations, and The Sarbanes Oxley Act

i) The Federal Sentencing Guidelines for Organisations (FSGO) 1991, USA:

US Congress passed the FSGO in 1991.

To create an incentive for organisations to develop and implement programs designed to foster ethical and legal compliance.

Developed by US Sentencing Commission. 20

Overall, the philosophy is that legal violations can be prevented through organisational values and a commitment to ethical conduct.

The commission formulated 7 steps that companies must implement to demonstrate due diligence.

1. A firm must develop and disseminate a code of conduct that communicates required standards and identifies key risk areas for the organisation. 2. High ranking personnel of the organisation who are known to abide by the legal and ethical standards o the industry, must have oversight (a supervisory role) over the program. 3. No one with a known inclination to engage in misconduct should be put in a position of authority. 4. A communication system for disseminating standards and procedures (ethics training) must also be put in place. 5. Organisational communication should include a way for employees to report misconduct without fearing retaliation, such as an anonymous, toll-free hotline or an ombudsman monitoring and auditing systems designed to detect misconduct are also required. 6. If misconduct is detected, then the firm must take appropriate and fair disciplinary action. Individuals both directly and indirectly responsible for the offense should be disciplined. The sanctions should be appropriate for the offense.

7.

After the misconduct has been discovered, the organisation must take steps to prevent similar offenses in the future. This usually involves making modifications to the ethical compliance program, additional employee training and issuing communication about specific types of misconduct.

Government expects these 7 steps for compliance program to undergo continuous improvement and refinement.

ii)

The Sarbanes Oxley Act 2002; USA: Supported by both Republicans & Democrats after accounting fraud of Enron, world com, etc.

Made as a response to widespread corporate accounting scandals. Establishes a oversight of corporate accounting practices. Makes fraudulent financial reporting a criminal offense. Strengthens penalties for corporate fraud. The law requires corporations to: 21

Establish codes of ethics for financial reporting. Develop greater transparency in financial reporting to investors and stakeholders.

Major Provisions of Sarbanes Oxley Act: 1. Requires the establishment of a public company accounting oversight board in-charge of regulations administered by the Security and Exchange Commission. Requires CEO & CFOs to certify that their companies financial statements are true and without misleading statements. Requires that corporate board of directors audit committees consist of independent members who have no material interests in the company. Prohibits corporations from making or offering loans to officers and board members. Requires codes of ethics for senior financial officers; code must be registered with the SEC. Prohibits accounting firms from providing both auditing and consulting services to the same client without the approval of the client firms audit committee. Requires company attorneys to report wrongdoing to top managers and, if necessary, to the board of directors, if managers and directors fail to respond to reports of wrongdoing, the attorney should stop representing the company. Mandates Whistle blower protection for persons who disclose wrongdoing to authorities. Requires financial securities analysts to certify recommendations are based on objective reports. that their

2. 3.

4. 5. 6.

7.

8. 9.

10. Requires mutual fund managers to disclose how they vote shareholder proxies, giving investors information about how their shares influence decisions. 11. Establishes a ten-year penalty for mail/wire fraud. 12. Prohibits the two senior auditors from working on a corporations account for more than five years; other auditors are prohibited from working on an account for more than seven years. In other words, accounting firms must rotate individual auditors from one account to another from time to time. Benefits of the Sarbanes Oxley Act:

iii)

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1. Greater accountability of top managers and boards of directors to employees, investors, communities and society. 2. Renewed investors confidence. 3. Clear explanations by CEOs as to why their compensation packages is in the best interests of the company; the loss of some traditional senior management perks, such as company loans; greater disclosure by executives about their own stock trades. 4. Greater protection of employee retirement plans. 5. Improved information from stock analysts and rating agencies. 6. Greater penalties for and accountability of senior managers, auditors, and board members.

f) Philanthropic Issues:

Philanthropic issues are other dimensions of social responsibility It relates to businesss contribution to the local community and Philanthropy provides four major benefits to society: 1 . It improves the quality of life It helps to make places and communities where People want to do business. Raise families happily Enjoy life Improving the quality of life in a community makes it easier to attract and retain employees and customers.

society.

2 . 3 . 4 .

Philanthropy reduces governments involvement. It provides help to people who have legitimate needs.

Philanthropy develops staff leadership skills. Many firms accept that community service improves leadership skills and improves skills of employees.

Philanthropy builds staff morale. Employees who volunteer feel better about themselves, their 23

company & their community. Higher morale improves a firms bottom line. g) Quality of Life Issues: People want much more than just the bare necessities shelter, clothing and food to sustain life.

Food must not only provide the nutrients necessary for life and good health, but also be conveniently available.

Consumers want their food free from toxic chemicals and they want produces to avoid polluting the natural environment or harming endangered wildlife.

The public also wants sophisticated medical services that prolong life and make it more enjoyable.

Additionally, people want communication systems that permit them to talk to anywhere in the world and disseminate information rapidly.

Consumers also want rapid, convenient and efficient transportation to take them wherever and whenever they want to go.

They also want clean air. People want a high quality of life. They do not want to spend all their working hours working

They seek leisure time for recreation, entertainment and relaxation in a pleasant environment.

Quality of life is enhanced by: Leisure time Clean air Clean water Unlettered earth Conservation of wild life Conservation of natural resources Security from radiation and poisonous substances Society therefore, expects businesses to modify, their manufacturing processes to reduce pollutants and waste.

h) Strategic Philanthropy: Typing philanthropic giving to overall strategy and objectives is known as Strategic Philanthropy

SP is the Synergistic and mutually beneficial use of an organisations core competencies and resources 24

To deal with key stakeholders so as to being about organisational and societal benefits.

9. FRAMEWORK FOR UNDERSTANDING ETHICAL DECISION MAKING:

It is important to know why and how people make ethical decisions.

People make difficult decisions within an organisation in the same way they resolve difficult issues in their personal lives. In organisations, few mangers or employees have the freedom to decide ethical issues independently of workplace pressures.

The figure represents a model of decision making.

They model shows that the perceived intensity of ethical and legal issues, individual factors and organisational factors collectively influence whether a person will make an unethical decision at work. A generalized average, typical behaviour pattern within an organisation is explained below:

Ethical Issue Intensity Individual factors Personal Moral Philosophy Stage of moral development Ethical/ unethical 25

decision Organisational culture Organisational factors Co-workers and supervisors Opportunity a)

Ethical Issue Intensity: The first factor to influence the decision making process. The intensity of a particular issue is likely to vary: Overtime Among individuals And is influenced by: Values Beliefs Needs Perception of the decision maker Special characteristics of the situation The personal pressures weighing on the decision Different people perceive with varying intensity.

Unless individuals in an organisation share some common concerns about specific ethical issues, the stage is set for conflict. Ethical issue intensity, which reflects the sensitivity of the individual, workgroup or organisation, triggers the ethical decision making process.

However, individual factors are also important. Management can influence ethical issue intensity through:

Rewards and punishments Code of conduct, and Organisational values.

That is, managers can affect the perceived importance of ethical issues through positive and negative incentives.

If management fails to identify and educate employees about problem areas, these issues may not reach the critical awareness level of some employees.

New employees who lack experience in a particular industry, may have trouble, may have trouble identifying both ethical and legal issues.

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Employees therefore, have to be trained as to how the organisation wants specific ethical issues handled.

Identifying ethical issues that employees might encounter is a significant step in developing employees ability to make decisions that enhance organisational ethics.

b) Individual Factors:

Study of organisation ethics involving the role of individuals and their values is a greatest challenge. Most of us place the primary responsibilities for decisions with the individuals. But years of research has pointed out to the primary or organisational factors in determining ethics at work. However, individual factors are also important in the evaluation and resolution of ethical issues. Two significant factors in workplace integrity are an individuals personal moral philosophy and stage of moral development.

b1)

Personal Moral Philosophy: Ethical conflict occurs when people encounter situations that they cannot easily control or resolve. In such situations, people tend to base their decisions on their own principles of right or wrong. And act accordingly in their daily lives. Moral philosophies the principles or rules that individuals use to decide what is right or wrong are often cited to justify decisions or explain behaviour. People learn these principles and rules through socialization by family education.

There is no universal agreement on the correct moral philosophy to use in resolving ethical and legal issues in the work place. Research suggests that employees may apply different moral philosophies in different decision situations.

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And depending on the situation, people may even change their value structure or moral philosophy when making decisions. Individuals make decisions under pressure and may later feel their decisions were less than acceptable, but they may not be able to change the consequences of their decisions. Stage of Moral Development:

b2)

Lawrence Kohlberg proposed the reasons for change of moral philosophy by the people. Kohlberg suggested that people progress through stages in their development of moral reasoning. He said that different people make different decisions when confronted with similar ethical situations because they are at different stages of what he termed cognitive moral development. He stated that people progress through the following three stages:

The pre-conventional stage of moral development in which individuals focus on their own needs and desires. The conventional stage of moral development, in which individuals focus on group-centered values and conforming to expectations. The principled stage of moral development, in which individuals are concerned with upholding basic rights, values and rules of society.

There is some overlap among these stages. Therefore, cognitive moral development is viewed as a continuum rather than a series of discreet stages. Kohlbergs theory suggests that people may change their moral beliefs and behaviour as they gain education and experience in resolving conflicts, which in turn accelerates their moral development. Most experts agree that a persons stage of moral development and personal moral philosophy play a role in how values and actions are shaped in the workplace.

c)

Organisational Factors:

Individual must make ethical and legal decisions at work.

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They also often make such decisions in committee group meetings and through discussions with colleagues. Decisions in the workplace are guided by an organisations culture and the influence of others co-workers, supervisors and subordinates. Organisational Culture:

c1)

Organisations, like societies, have cultures that include a shared set of values, beliefs, goals, norms and ways to solve problems. As time passes, an organisation comes to be seen as a living organism with a mind and will of its own. Although most organisational cultures reinforce ethics, some organisations, like Tyco, create a culture that supports unethical decisions. If a company derives most of its profits from unethical or illegal activities, individuals who join the organisation will have a difficult time surviving unless they too participate in these activities. As an example, even though Enron had a code of ethics and was a member of the Better Business Bureau the company was divested by unethical activities and corporate scandal. Executive. Lynn Brewer: House of cards: confessions of an Enron

The ethical climate of an organisation is a significant element of organisational culture. An organisations overall culture establishes:

Establishes ideals That guides a wide range of member behaviours. The ethical climate:

Focuses specifically on issues of right and wrong of an organisation is its character or conscience. The following contribute to an organisations ethical climate: Codes of conduct and ethical policies. Top managements actions on ethical issues. The values and moral development and personal moral philosophies of co-workers, and The opportunity for misconduct.

In fact, the ethical climate actually determines whether certain issues and decisions are perceived as having an ethical component. Organisations can manage their culture and ethical climate by trying to hire employees who values match their own. 29

Some organisations hire potential employees who could be trained later to fit into their ethical climate. Ethical leadership requires understanding best practices for organisational ethical compliance and a commitment to build an ethical climate. Many a times, an organisations failure to monitor or manage its culture of preferential treatment and self-centered greed leads to destruction. The Influence of Co-workers and Supervisors:

c2)

Employees: Look for certain type of employers Are also particular about the people with whom they work. Managers and co-workers: Help people deal with unfamiliar tasks. Provide advice and information daily in both formal and informal contexts. Provide direction regarding workplace activities to be performed. Offer help in the form of discussions over lunch, tea, etc. The role of informal culture is important. It is confirmed that co-workers and supervisors have more impact on an employees daily decisions than any other factor. Group think scenarios, where people go along with group decisions even when those decisions run counter to the ethical values of the company has to be avoided. Supervisors can also have a negative effect on conduct by setting a bad example. Individuals also learn ethical or unethical conduct from close colleagues and others with whom they interact regularly.

c3)

Opportunity: Organisational culture + influence of co-workers may foster That limit or reduce misconduct, or Increase or permit misconduct. When the conditions provide: 30 conditions:

Rewards of financial gain. Recognition Promotion Good feeling of job well done.

The opportunity for unethical conduct may be encouraged or discouraged. Eg: An opportunity exists for top sales performers to be more unethical than poor sales performers.

The above can be reduced eliminated by adequately implementing ethical codes and rules.

Important conclusions that should be drawn from the framework presented above are:

Ethical decision making within an organisation does not depend solely on individuals personal values and moral philosophies. Employees do not operate in vacuum. Their decisions are strongly affected by the culture and ethical climate of the organisation in which they work.

An organisation take on an ethical climate of their own, they have a significant influence on ethics among employees and within their industry and community.

10.

FRAMEWORK FOR UNDERSTANDING ETHICAL DECISION MAKING: To remove the opportunity for employees to make unethical decision, most companies have developed formal systems of:

Accountability Oversight and 31

Control The above is known as corporate governance. Accountability refers to: How closely workplace decisions are aligned with a firms stated strategic direction. And its compliance with ethical and legal considerations. Oversight Provides a system of checks and balances That limits employees and managers opportunities to deviate from policies and strategies. And that prevent unethical and illegal activities. Control is: The process of auditing and improving Organisational decisions and actions.

A clear delineation of accountability helps employees, customers, investors, government regulators and other stakeholders understand why and how the organisation chooses and achieves its goals. Even if a company has adapted a consensus approach for decision making, there should be oversight an authority for delegating tasks, making difficult and sometimes controversial decisions, balancing power throughout the firm and maintaining ethical compliance. Governance also provides mechanisms for identifying risks and for planning for recovery when mistakes or problems occur. All the elements shown earlier in the framework for ethical decision making in business relates to corporate governance. The individual factors relate to the personal ethical decisions that interface with the corporations governance structure. Corporate governance is also a part of firms corporate culture.

The list below indicates the major corporate governance issues: Shareholders rights. Executive compensation Composition and structure of the board of directors Auditing and control Risk management 32

CEO selection and termination issues. Integrity of financial reporting Stakeholder participation and input into decisions. Compliance with corporate governance reform. Role of the CEO in board decisions. Organisational ethics programs. These issues normally involve strategic level decisions

And actions taken by boards of directors, business owners, top executives and other managers with high levels of authority and accountability. Although these people have often been relatively free from scrutiny:

Change in technology Consumer activism. Government attention Recent ethical scandals And other factors Have brought new attention to such issues as

Transparency Executive pay Risk and control Resource accountability Strategic direction Stockholder rights And other decisions made for the organisation TWO VIEWS OF CORPORATE GOVERNANCE:

10a. i)

Shareholder model of Corporate Governance:

Founded in classic economic percepts Has goal of maximizing wealth of investors and owners.

ii)

Stakeholder model of Corporate Governance:

Adopts a broader view of business Company has to satisfy stockholders Company has also to satisfy all other stakeholders The governance system should be such as to consider stakeholder welfare in tandem with other stockholders with corporate needs and interests. 10b. ELEMENTS OF CORPORATE GOVERNANCE RELATED TO ETHICAL DECISION MAKING:

Two major elements of corporate governance that relate to ethical decision making are:

The role of board of directors, and 33

Executive compensation

Role of Board of Directors: Board of Directors: Hold the ultimate responsibility for their firms success or failure. Responsible for firms ethical actions. Assume legal responsibility for the firms resources and decisions. Appoint top executive officers. Have fiduciary duty. Meaning, they have assumed a position of trust and confidence that curtails certain responsibilities including acting on the best interests of those whom they serve.

Executive Compensation:

One of the biggest issues that corporate board of directors face. How executives are compensated for their leadership organisational service and performance has become a controversial topic Many people believe that no executive is worth millions of dollars in annual salary and stock options, even if he has brought great financial return to the investors. The concern is the relationship between the highest paid executives and medium employee wage in the company. Executive compensation is a difficult but important issue for boards of directors. It also receives too much attention in the media nowadays. A recent study determined that companies which divulge more details about their corporate governance practices generate higher shareholder returns than less transparent companies.

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