1.2 Governance and Social Responsibility

7/28/2019 1.2 Governance and Social Responsibility

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Corporate Governance: Definition

Refers to the relationship among the boardof directors, top management, andshareholders in determining the direction

and performance of the corporation.

1.2 Corporate Governance and Social Responsibility


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Corporate governance relates to complyingwith legal rules and regulations in a country

or specific jurisdiction. Corporate

governance issues address dilemmas in the

context of business growth and prosperity.

Corporate governance affects how a

company's director, shareholder,

stakeholders, regulators, suppliers andemployees' interests may be best

expressed, aligned and reconciled.



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The framework of rules and practices by which a board of

directors ensures accountability, fairness, and transparency in acompany's relationship with its all stakeholders (financiers,

customers, management, employees, government, and the

community).

The corporate governance framework consists of

(1) explicit and implicit contracts between the company and the

stakeholders for distribution of responsibilities, rights, and

rewards,

(2) procedures for reconciling the sometimes conflicting

interests of stakeholders in accordance with their duties,privileges, and roles, and

(3) procedures for proper supervision, control, and information-

flows to serve as a system of checks-and-balances.



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Corporate governance most widely used is "the

system by which companies are directed and

controlled" (Cadbury Committee, 1992). More

specifically it is the framework by which the various

stakeholder interests are balanced, or "therelationships among the management, Board of

Directors, controlling shareholders, minority

shareholders and other stakeholders".

Corporate governance also provides the structurethrough which the objectives of the company are set,

and the means of attaining those objectives and

monitoring performance are determined."



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Corporate governance consists of twoelements:

The long term relationship which has to

deal with checks and balances, incentives for

manager and communications between

management and investors;

The transactional relationship whichinvolves dealing with disclosure and authority.



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Corporate governance most widely used is "the

system by which companies are directed and

controlled" (Cadbury Committee, 1992). More

specifically it is the framework by which the various

stakeholder interests are balanced, or "therelationships among the management, Board of

Directors, controlling shareholders, minority

shareholders and other stakeholders".

Corporate governance also provides the structurethrough which the objectives of the company are set,

and the means of attaining those objectives and

monitoring performance are determined."



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Benefits of Corporate Governance

Good corporate governance ensures corporate success and

economic growth.

Strong corporate governance maintains investors

confidence, as a result of which, company can raise capital

efficiently and effectively.

It lowers the capital cost.

There is a positive impact on the share price.It provides proper inducement to the owners as well as

managers to achieve objectives that are in interests of the

shareholders and the organization.

Good corporate governance also minimizes wastages,corruption, risks and mismanagement.

It helps in brand formation and development.

It ensures organization in managed in a manner that fits the

best interests of all.


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The obligation of an organization's

management towards the welfare and

interests of the society in which it

operatesThe principle that companies should

contribute to the welfare of society

and not be solely devoted tomaximizing profits.

Social responsibility: Definition


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A companys sense of responsibility towardsthe community and environment (both

ecological and social) in which it operates.

Companies express this citizenship(1) through their waste and pollution

reduction processes,

(2) by contributing educational and social

programs, and

(3) by earning adequate returns on the

employed resources.

Social responsibility: Definition


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1.2.1 Stakeholders analysis

Stakeholders Stakeholders are those groups without

whose support the organization would cease to

exist.

A stakeholder is a person who holds the stake (an

interest or concern in something) or stakes in a

bet.

Any group or individual who can affect or isaffected by, the achievement of a corporations

purpose.


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12

Stakeholders

Are all those individuals, groups andentities

who can affect, and are affected by, the

strategic outcomes achieved and who have

enforceable claims on a firms performance.

Stakeholder claims are enforced by their

ability to withhold essential participation.


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Stakeholders

Individuals and groups with a

multitude of interests,

expectations, and demands as

to what business should

provide to society


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Origins of the Stakeholder ConceptWhat is a stake?

An interest or a share in an undertaking and can be categorized as:

Interest Right Ownership

Legal

Moral

What is a stakeholder?

An individual who possesses a stake


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Who Are Business Stakeholders?

Government Employees

Business

Community

Consumers

Owners


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Evolution and Development of the

Stakeholder Concept

Views of the Firm

Production Managerial Stakeholder


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Production and Managerial Views


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Primary and Secondary Stakeholders

Primary stakeholders are those stakeholders that

have a direct stake in the organization and its success

Secondary stakeholders are those that have a public

or special interest stake in the organization


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Core, Strategic, and Environmental Stakeholders

Core stakeholders are essential to the survival of the

firm Strategic stakeholders are vital to the organization

and the threats and opportunities the organization

faces

Environmental stakeholders are all others in the

organization's environment


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Legitimacy refers to the perceived validity of the

stakeholders claim to a stake

Power refers to the ability or capacity of a

stakeholder to produce an effect

Urgency refers to the degree to which thestakeholders claim demands immediate

attention

Legitimacy, Power, Urgency:

A Typology of Stakeholder Attributes


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Process of Stakeholder analysis

Identification of key stakeholders

Assessment of their valves and interests

Analysis of how their interests may affect orbe affected by a product, project, change in

resource conditions, etc.


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Why stakeholder analysis?

Among the major reasons:

Empirically to discover existing patterns of

interaction,

Analytically to improve interactions,

As a management tool in policy-making, and

As a tool to predict conflict.


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Steps in Identifying Stakeholders

Step 1: Determining Influences on Mission, Vision, and

Strategy Formulation. One way to analyze the

importance and roles of the individuals who compose a

stakeholder group is to identify the people and teamswho should be consulted as strategy is developed or

who will play some part in its eventual implementation.

These are organizational stakeholders, and they include

both high-level managers and frontline workers. Capital-market stakeholders are groups that affect the

availability or cost of capitalshareholders, venture

capitalists, banks, and other financial intermediaries.


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Step 2: Determining the Effects of Key Decisions

on the Stakeholder. Step 2 in stakeholderanalysis is to determine the nature of the effect

of the firms strategic decisions on the list of

relevant stakeholders. Not all stakeholders areaffected equally by strategic decisions. Some

effects may be rather mild, and any positive or

negative effects may be secondary and of

minimal impact. At the other end of the

spectrum, some stakeholders bear the brunt of

firm decisions, good or bad.

Steps in Identifying Stakeholders.


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Step 3: Determining Stakeholders Power and Influence

over Decisions. The third step of a stakeholder analysis isto determine the degree to which a stakeholder group

can exercise power and influence over the decisions the

firm makes. Does the group have direct control over

what is decided, veto power over decisions, nuisanceinfluence, or no influence? Recognize that although the

degree to which a stakeholder is affected by firm

decisions (i.e., step 2) is sometimes highly correlated

with their power and influence over the decision, this is

often not the case.

Steps in Identifying Stakeholders.


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3-14


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Strategic, Multifiduciary, and Synthesis

Views of Stakeholders

Strategic approach considers stakeholders primarily

as factors managers should manage in pursuit of

shareholder profits

Multifiduciary approach considers stakeholders as agroup to which management has afiduciary

responsibility

Synthesis approach considers stakeholders as a

group to whom management owes an ethical, but

not a fiduciary responsibility


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Three Values of the Stakeholder Model

Descriptive

Instrumental Normative


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Stakeholder Mapping

Variables affecting stakeholders relative power and
http://www.web-books.com/eLibrary/Books/B0/B58/IMG/fwk-carpenter-fig04_009.jpg


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Variables affecting stakeholders relative power and

influenceWithin and between formal organizations For informal interest

groups and primary

stakeholders

Legal hierarchy (command and control, budget

holders)Social, economic and

political status

Authority of leadership (formal and informal,

charisma, political)Degree of organization,

consensus and

leadership in the group

Control of strategic resources for the project (e.g.

suppliers of inputs)Degree of control of

strategic resources

significant for the

project

Possession of specialist knowledge (e.g.

specialist staff)Informal influence through

links with other

stakeholders

Negotiating position (strength in relation to other

stakeholders in the project)Degree of dependence on

other stakeholders

Assessing importance


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How to do a stakeholder analysis

Resources for a stakeholder analysis?

Commission sense

Secondary sources

Newspapers, web, existing plans, etc.

Primary sources

observation interviews or focus groups

surveys


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Stakeholders of the Organization

Customers

EmployeesOwners

SuppliersUnions

Government

Strategic

Partners Society

Local

Community

Organization


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Stakeholders Concerns

StakeholderGroup

* Owners and Investors

Examples of Concerns

Financial Soundness

Consistency in meetingshareholder expectations

Sustained profitability

Average return on assetsover five-year period

Timely and accuratedisclosure of financialinformation


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Stakeholders Concerns (Ctd.)

StakeholderGroup

* Customers


* Product/service quality,innovativeness, andavailability

*responsible management ofdefective or harmfulproducts/services

*Safety records forproducts/services

*Pricing policies and practices

* Honest, accurate , andresponsible advertising.


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StakeholderGroup

* Employees


Nondiscriminatory, merit-based hiring andpromotion

Diversity of the workforce

Wage and salary levelsand equitable distribution

Availability of training and

development Workplace safety and

privacy


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StakeholderGroup

* Community


Environmental Issues

Environmental sensitivityin packaging and productdesign

Recycling efforts and useof recycled materials

Pollution prevention Global applications ofenvironmental standards


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StakeholderGroup

* Community (Ctd.)


Community Involvement Percentage of profits

designated for cashcontributions

Innovation and creativity in

philanthropic efforts Product donations Availability of facilities and

other assets for communityuse

Support for employee

volunteer efforts.


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The Stakeholder Map or Power/Interest Matrix

A B

C D

Minimaleffort

Keepinformed

Keepsatisfied Keyplayers

Low

High

POWER

LEVEL OF INTEREST

Low High


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Generic Stakeholders

Shareholders and investors

Employees and managers customers

Local communities

Suppliers and other business partners

Government and regulators

Civic institutions

Social pressure groups

Media

Academic communities

Trade bodies competitors

others


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Classification:

Three Stakeholder

Groups

K Q ti I St k h ld


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Key Questions In Stakeholder

Management

1. Who are our stakeholders?

2. What are our stakeholders stakes?

3. What opportunities and challenges do the stakes

and stakeholders present?4. What economic, legal, ethical, and philanthropic

responsibilitiesdoes our firm have?

5. What strategies or actionsshould our firm take to

best manage stakeholder challenges andopportunities?


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Management

Who are our stakeholders?

Management must identify generic stakeholder

groups and specific subgroups


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Management

What are our stakeholders stakes?

Determine the nature/legitimacy of a groups

stakes

Determine the power of a groups stakes

Determine specific groups within generic groups


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Management

What opportunities and challenges do

stakeholders present?

Opportunities are to build good productive

working relationships with the stakeholders

Challenges are representative of how the firm

handles the stakeholders

k h ld


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Management


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Key Questions In Stakeholder Management

What economic, legal, ethical, and philanthropicresponsibilities does our firm have to its stakeholders?


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Stakeholders Economic Legal Ethical Philanthropic

Owners

Customers

Employees

Community

Public at large

Social Activists

Other

Stakeholder/Responsibility Matrix

K Q i I S k h ld


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Management

What strategies or actions should our firmtake to best manage stakeholder challengesand opportunities?

Should we deal directlyor indirectlywith stakeholders? Should we take the offense or the defense in dealing with

stakeholders?

Should we accommodate, negotiate, manipulate or resiststakeholder overtures?

Should we employ a combination of the above strategiesor pursue a singular course of action?


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Stakeholder Type 4

Mixed Blessing

Strategy:

Collaborate

Stakeholder Type 3

NonsupportiveStrategy:

Defend

Stakeholder Type 1

Supportive

Strategy:

Involve

Stakeholder Type 2

MarginalStrategy:

Monitor

High

Low

Stakeholders

Potential for

Cooperation

With Organization

High Low

Stakeholders Potential for Threat to Organization

?

Types of Stakeholders


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Effective Stakeholder Management

Careful assessment of the five core questions:

Who are our stakeholders?

What are our stakeholders stakes?

What opportunities and challengesdo stakeholders present?

What economic, legal, ethical, and philanthropic

responsibilitiesdoes our firm have?

What strategies or actionsshould our firm take to best

manage stakeholder challenges and opportunities?


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Stakeholder Management Capability

Rational level Process level

Transaction level


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Stakeholder Corporation

Stakeholder inclusiveness Stakeholder symbiosis

St k h ld P


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Stakeholder Power:

Four Gates of Engagement

Awareness

Knowledge Admiration

Action


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Principles of Stakeholder Management

Acknowledge

Monitor

Listen

Communicate Adopt

Recognize

Work

Avoid

Acknowledge conflict

Principles of Stakeholder


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Principles of Stakeholder

Management

1 2 2 Corporate governance


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Used in corporations to establish order betweenthe firms owners and its top-level managers

Corporate Governance is a relationship among

stakeholders that is used to determine and control

the strategic direction and performance of

organizations

Concerned with identifying ways to ensurethat strategic decisions are made effectively

1.2.2 Corporate governance


Separation of Ownership and Managerial Control


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Basis of the modern corporation

Professional managers contract to provide

decision-making

- Risk bearing by shareholders

- Strategy development and decision-making bymanagers

- Shareholders reduce risk efficiently by holdingdiversified portfolios

Shareholders purchase stock, becoming...

Residual Claimants

Modern public corporation form leads to efficientspecialization of tasks

Separation of Ownership and Managerial Control

Agency Theory


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An agency relationship exists when:

Shareholders

(Principals)

Firm Owners

Agency Relationship

Risk Bearing Specialist

(Principal)

Managers(Agents)

Decision

Makers

which creates

Managerial Decision-Making Specialist

(Agent)Hire

Agency Theory

Agency Theory


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The Agency problem occurs when:

- The desires or goals of the principal and agentconflictand it is difficult or expensive for the principal to verify

that the agent has behaved appropriately

Solution: Principals engage in incentive-basedperformance

Example:Overdiversification because increasedproduct diversification leads to lower employment

risk for managers and greater compensation

contracts, monitoring mechanisms such as the board of

directors and enforcement mechanisms such as the

managerial labor market to mitigate the agency problem

Agency Theory

Agency Theory


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Principals may engage in monitoring behavior toassess the activities and decisions of managers

- However, dispersed shareholding makes it difficult

andand inefficient to monitor managements

behaviorFor example: Boards of Directors have a fiduciary

duty to shareholders to monitor management

- However, Boards of Directors are oftenaccused of being lax in performing this function

Agency Theory


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Governance Mechanisms


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Ownership Concentration

Boards of Directors

Executive Compensation

Market for Corporate Control

Multidivisional Organizational Structure



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Ownership Concentration

monitor management closely

time, effort and expense to monitor closely

- Large block shareholders have a strong

incentive to

- Their large stakes make it worth their while tospend

- They may also obtain Board seats which

enhancestheir ability to monitor effectively (although

financial institutions are legally forbidden from

directly holding board seats)




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Boards of Directors

- Review and ratify important decisions

- Set compensation of CEO and decide when to

replace the CEO

- Lack contact with day to day operations

- Insiders

- Related Outsiders

- Outsiders




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Recommendations for more effective

Board Governance- Increase diversity of board members

backgrounds- Strengthen internal management and

accountingcontrol systems

- Establish formal processes for evaluation of

the boards performance



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Designed to control managerial opportunism- Corporate office and Board monitor managers

- Increased managerial interest in wealth maximizati

strategic decisions

Multidivisional Organizational Structure


M-form structure does not necessarily limit corporate

- May lead to greater rather than less diversification

Broadly diversified product lines makes it difficult for

top-level managers to evaluate the strategic decision

of divisional managers

level managers self-serving actions



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Market for Corporate Control

Operates when firms face the risk of takeover

when they are operated inefficiently

The market for corporate control acts as an

important source of discipline over managerial

incompetence and waste

- Changes in regulations have made hostile takeovers difficult

- Many firms began to operate more efficiently as a result of

the threat of takeover, even though the actual incidence of hostile

takeovers was relatively small


Corporate Governance and Ethical Behavior


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Product market stakeholders (customers, suppliers

and host communities) and Organizational

stakeholders (managerial and non-managerial

employees) are also important stakeholder groups

Shareholders are one important stakeholder group,

which are served by the Board of Directors

Although controversial, some believe that

ethically responsible firms should introduce

governance mechanisms which serve all

stakeholders interests

It is important to serve the interests of multiple

stakeholder groups

Corporate Governance and Ethical Behavior


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Corporate Governance

The corporation is a mechanism established to

allow different parties to contribute capital,

expertise and labor for their mutual benefit.

Investors/Shareholders capital providers

Management expertise & labor providers for

running of company

Board of directors (BOD) elected by

shareholders to protect their interest.

Corporate governance relationship among

BOD, management, and shareholders

Corporate Governance The Role of Board of Directors


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Corporate Governance The Role of Board of Directors

BOD Typical Responsibilities

Setting corporate strategy, overall direction , mission and/orvision

Succession: Hiring, compensating and firing the CEO and topmanagement

Control: monitoring, evaluating, and/or supervising topmanagement

Reviewing and approving the use of organizational resources

Caring for stockholders interest

In legal terms, BODs are required to directthe affairsof the corporation but not to manage them (act withdue care).

Corporate Governance


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73

p

Setting corporate strategy, overall

direction,mission or vision

Hiring and firing the CEO and topmanagement

Controlling, monitoring, or supervising

top management

Reviewing and approving the use ofresources

Caring for shareholder interests

Role of Board of

Directors

The Role of Board of Directors


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The Role of Board of Directors

Role of BOD in the strategic management process

Monitor: Keep abreast of developments both outside & inside the company

Bring to managements attention developments it might haveoverlooked.

Evaluate and influence:

Examine mgts proposals, decisions, & actions.

Agree or disagree with them; give advice, offer suggestions & outlinealternatives (if any).

Initiate and determine:

Delineate a companys mission & vision; and specify strategic options

to management.

R l f th B d f Di t


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Role of the Board of Directors

Degree of involvement is dependent on extentto which it perform the three tasks:

Monitoring (LOW LEVEL OF INVOLVEMENT)

Evaluating and influencing (MEDIUM LEVEL OFINVOLVEMENT)

Initiating and determining (HIGH LEVEL OF

INVOLVEMENT)

BOD involvement is a continuum

1.2.3 Corporate Governance: The Role of Top


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p p

Management

Top management function is usuallyperformed by CEO in coordination with

Chief Operating Officer (COO) or President

Chief Financial Officer (CFO)

Chief Information Officer (CIO)

Executive Vice Presidents (VPs) and VPs of

divisions & functional areas

Chief HR Officer (CHRO)


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The Role of Top Management Top management is primarily responsible for the

strategic management of the firm

Responsible for every decision & action of everyorganizational employee

Responsible for providing effective strategicleadership

Strategic leadership is the ability to anticipate,envision, maintain flexibility, think strategically, and

work with others in an organization to initiate changesthat will create a viable and valuable future for theorganization

The Role of Top Management


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The CEO, must perform two functions crucial to

the SM of corporations: Provide executive leadership

Articulate a strategic vision for the firm

Present a role for other to identify with and follow (e.g.,behavior, attitude, values, etc)

Communicate high performance standards & show

confidence in followers abilities to meet these standards

Manage the strategic planning process Evaluate division/units to make sure they fit together

into an overall corporate plan

h l f


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The whole top managements strategicleadership responsibilities involves

Determining the firms mission, vision, andobjectives

Exploiting & maintaining the firms resources, corecompetencies & capabilities

Creating & sustaining a strong organizational culture

Emphasizing ethical decision & practices

Establishing appropriately balance organizationalcontrol

The Role of Other Strategic Managers and


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Organizational Employees

Strategic Planners Identify & analyze company-wide strategic issues &

suggest corporate strategic initiatives to top

management

Work as facilitators with divisions/units to guide

then through the strategic planning process



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Organizational Employees

Strategic Managers (Middle- & Lower-level

managers) & Supervisors Direct their workers in the strategy

implementation process (i.e., putting the

strategies into action at various functional areas) Strategy evaluation

Other Employees

Strategy evaluation through open bookmanagement

Sharing of firms books or F/S with employees to seeimplications of their work

1.2.4 Social Responsibilities of Strategic Decision Makers


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p g

What is Corporate Social Responsibility?

Lack of consensus

The definition is subject to the

economic, cultural and legal contextsThe meanings differ depending on theplayers

CSR: globalization, sustainability andgovernance

Levels of CSR


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Social Obligation Meet minimum

regulations, do what is required bylaw, no more

Social Responsibility Go beyondwhat is required by law, mitigate

negative effects

Social Responsiveness Proactiveapproach, promote positive change

Levels of CSR: Example in Labor Markets


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Levels of CSR: Example in Labor Markets

Social

Obligation

Social

Responsibility

Social

Responsive

Comply with wage

and working time

laws, minimum

benefits

Provide added

labour benefits

Improve quality of

work life

CSR Different areas involved


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CSR Different areas involved

It directly influences the managementof people in the company

Good practices in the labor field willallow companies to hire and retaintalent and to guarantee the excellence

of the services provided on theproducts manufactured

Thinking about Future Business Responsibilities


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Thinking about Future Business Responsibilities

Demonstrate a commitment to societys values and

contribute to societys social, environmental andeconomic goals through action

Protect society from the negative impacts of company

operations, products and services

Share benefits of company activities with key

stakeholdersDemonstrate that the company can make more profit

by doing the right thing.

C t S i l R ibilit


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Corporate Social Responsibility

The concept of social responsibility Proposes that a private firm has

responsibilities to society that extend beyond

making a profit Obligation of firm decision makers to make

decisions & act in ways that recognize the

interrelatedness ofbusiness & society.

It recognizes the existence of various

stakeholders and firms deal with them

Wh t i C t S i l R ibilit ?


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Some attempts to define it:

Responsible companies perceive thecurrent environment globalization,

social demands, transparency,broadening of markets, environmentalchallenges, etc. as an opportunity to

underscore their role in society, theirpotential for leadership in sustainabledevelopment.



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The impact of a companys action on society

Requires a manager to consider his acts interms of a whole social system and holdshim responsible for the effects of his acts at

all levels in that system

Business has an obligation to society whichextends beyond economic and legal duties

Described as one of the most importantsocial movements of our time

Areas of Social Responsibility


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Responsibility

Towards

Customers Social

Responsibility

Responsibility

Towards

Investors

ResponsibilityTowards

Environment

Responsibility

Towards

Employees

Areas of Social Responsibility

S i l R ibilit


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Social Responsibility

A businesss collective code of ethics towards its

stakeholders

the environment

its customers

its employees its investors

its suppliers

its community



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Two Views of who are firms responsible to?(1) Traditional View (Milton Friedman)

There is one and only one social responsibility ofbusiness to use its resources and engage in

activities designed to increase its profits so long as itstays within the rules of the game, which is to say,engages in open and free competition withoutdeception or fraud

(M. Friedman, The Social Responsibility ofBusiness is to Increase Profits, New YorkTimes, (September 13, 1970: pp. 126-127)

T Vi f Wh Fi R ibl t


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Two Views of Who Firms are Responsible to

Traditional View (continued): By taking on the burden of social cost, the

business becomes less efficient:

Prices go up to pay for increased costs; or Investment in new activities & research is

postponed

Firms are responsible to only theirshareholders

Purely economic reasoning

T o Vie s of Who Firms are Responsible to


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(2) Modern View (Archie Carroll)

Economic

(Must Do)Legal

(Have to Do)

Ethical

(Should Do)

Discretionary

(Might Do)

Social Responsibilities



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(2)Modern View (Archie Carroll)

Business firms have four responsibilities

(a) Economic

Produce goods & services of value tosociety so that the firm may repay its

creditors and stockholders

(b) Legal Defined by governments in laws that

management is expected to obey



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Modern View (Continued)

(c) Ethical

Follow generally held beliefs about how one should act in

society

Work with employees & community in planning for layoffs,though no laws requiring this

Many people expect firms to do these things

(d) Discretionary

Purely voluntary obligations a firm assumes Philanthropic contributions, training hard-core unemployed,

providing day-care centers, etc.

Many people do not expect firms to do these things



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The company must act responsibly, and criteria for social responsibility must be

adopted to contribute toward consolidating better companies not only in socialterms that is, companies which are more useful to society but better companiesin purely economic terms that is, better quality, more efficient, more competitivecompanies

An inevitably broad concept of which we can say that it includes voluntary actions bycompanies aimed at dealing with workers, consumers, or investors or shareholders

concerns: in short, the concerns of all citizens.

An inevitably broad concept of which we can say that it includes voluntary actions bycompanies aimed at dealing with workers, consumers, or investors or shareholdersconcerns: in short, the concerns of all citizens.


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Managerial Ethics and


Ethics is the discipline dealing with what is good and bad


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and with the moral duty and obligations. Ethical

behaviour is that which conforms to accepted standards

of conduct. Ethical reasoning involves sorting out the

principles that help determine what is ethical when faced

with an ethical dilemma. An ethical dilemma is a

situation or problem facing an individual that involves

complex and often conflicting principles of ethical

behaviour.

Bliosi, Wendy (2005) Management and Organisational Behaviour, pp.493

McGraw Hill

Definition of terms


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Ethics is the discipline dealing with what is

good and bad and with the moral duty andobligations.

Ethical behavior is that which conforms to

accepted standards of conduct. Ethical

reasoning involves sorting out the principles

that help determine what is ethical when faced

with an ethical dilemma.

An ethical dilemma is a situation or problemfacing an individual that involves complex and

often conflicting principles of ethical behavior.Source: Bliosi, Wendy (2005) Management and Organizational Behavior, pp.493 McGraw Hill

Definition of terms


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Definition of terms

Business ethics are essentially formal and

informal values, morals, and principles thatpeople use to govern their decision making

process in the workplace. These ethics are the

basis on which professionals make theirdecisions. However, business ethics may differ or

vary from any given company to the next, which

is why there are often some "gray areas."

Additionally, different people hold different

ideals to be their ethical standards. (Ryan

Weaver)

Definition of terms


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Definition of terms

Business ethics (also corporate ethics) is aform ofapplied ethics or professional ethics

that examines ethical principles and moral or

ethical problems that arise in a businessenvironment. It applies to all aspects of

business conduct and is relevant to the

conduct of individuals and entireorganizations.

Definition of terms
http://en.wikipedia.org/wiki/Applied_ethicshttp://en.wikipedia.org/wiki/Professional_ethicshttp://en.wikipedia.org/wiki/Professional_ethicshttp://en.wikipedia.org/wiki/Applied_ethics


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Definition of terms

Business ethics is the study of how personal

moral norms apply to the activities and goals

of commercial enterprise. It is not a separate

moral standard, but the study of how businesscontext poses its own unique problems for the

moral person who acts as an agent of this

system.

Source: Nash, Laura (1993) Good Intentions Aside, Harvard Business Scholl Press

Definition of terms'What is the most important is that management realise that it must consider


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'What is the most important is that management realise that it must consider

the impact of every business policy and business action upon society. It has

to consider whether the action is likely to promote the public good, to

advance the basic beliefs of of society, to contribute to its stability, strengthand harmony.'Source: Peter Drucker, The Practice Of Management 1955, p.342

The success of managementhas greatly changed

managements meaning. Its success has made managementthe general, the pervasive function, and the distinct

organization of our society of organizations. As such,

management inevitably has become affected with the public

interest.

To work out what this means for management theory and

management practice will constitute the management

problems of the next fifty years.'Source: Peter Drucker, The Frontiers of Management 1986, pp.192-193

Major Influences on Business Practices


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BUSINESS

PRACTICES

Political InfluencesLegal

Influences

Competitive

Influences

Ethical Influences

Source: Samuel, Certo & Peter (1991) Paul, Strategic Management,pp.230, McGraw-Hill


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Three prime considerations in developing


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business ethics:

extent of ethical considerations

their cost and

the recipient of the responsibility

Numerous differences between organisations over

what should be covered under ethics, reflecting

fundamentally different approaches to doing business.

Three Domains of Human Action


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Three Domains of Human Action

Domain ofCodified Law

(Legal Standard)

Domain ofEthics

(Social Standard)

Domain ofFree Choice

(Personal Standard)

Amount of

Explicit Control

High Low

Ethics


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The code of moral principles and values that govern

the behaviors of a person or group with respect towhat is right or wrong.

Codified LawValues and standards that are written into the legal

system.

Free Choice


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Free Choice

Behavior about which law has no say and forwhich an individual or organization enjoys

complete freedom

Example: An individual's choice of a marriagepartner or religion.

Ethics


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Obedience is to norms and standards levied by self

and/or others. These are unenforceable in a legalsense, but are often powerful.

Ethical DilemmaWhen all choices have been deemed undesirable

because of potentially negative ethicalconsequences, making it difficult to distinguishright from wrong. (The choices also haveattractive attributes.)

Common Ethical Dilemmas


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Common Ethical Dilemmas

Honesty in advertising and in communicationswith superiors, clients, and government.

Problems relating to special gifts,

entertainment, and kickbacks.Overlooking wrong doings of others

DEALING WITH AN ETHICAL DILEMMA


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while the law defines what is legal and what is not, moral rights and wrongsmay not be so clear. When faced with an ethical dilemma a series of four

questions one can ask to make an ethical decision. (Ryan Weaver)

Is my decision a truthful one?

Is my decision fair to everyone affected?

Will it build goodwill for the organization?

Is the decision beneficial to all parties who have a vested interest in theoutcome?

If all of the above questions can truthfully be answered "yes" then it is safe toassume the decision in question is an ethical one. It is also important toconsider ideals, obligations, and consequences when making ethical decisions.

IDEALS- values you believe in or stand for OBLIGATIONS- responsibilities you have to everyone involved

CONSEQUENCES- beneficial or harmful results of your action

Approaches to Corporate

S i l R ibili


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ObstructionistDefensiveAccommodative - Proactive

Lowest Level of


Highest Level of


Ethical Behaviour of managers


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Ethical Behaviour of managers

Ethics

standards or moral values that dictate what isright and wrong

culturally based

formed upon societys expectations vary by person, and by situation

Everyone develops their own

code of ethics

Influences on Ethical Behaviour


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Influences on Ethical Behaviour

Family Experiences

Personal Code ofEthics

Peer

Group

Managerial Ethics


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Managerial Ethics

Ethical behaviour conforms to individual beliefs and social

norms

Behaviour toward employees

Firing, hiring, wages, privacy, etc.

Some decisions not illegal,

but still unethical

Behaviour toward the organization

Conflict of interest, confidentiality, honesty

Behaviour toward other economic agents Customers, competitors, shareholders, suppliers, unions

Assessing Ethical Behaviour


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Assessing Ethical Behaviour

Gather the relevant

factualinformation

Analyze the facts to

determine the most

appropriate moral

values

Make an ethicaljudgment based on the

rightness or wrongness

of the proposed activity

or policy

1.2.5 Ethical Decision Making:

A i E hi l B h i


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Assessing Ethical Behavior

Utility - optimize

Rights individual rights

Justice - fair

Caring responsibilities to others

newspaper test

Company Practices & Business Ethics


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p y

Firms are adopting written codes of ethics to

guide employee decisions

Top management support is essential

Ethics Programs educating employees

Written Codes of Ethics


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Written Codes of Ethics

Increase public confidence in a firm or industry

Help stem the tide of government regulation

Improve internal operations by providing consistent

standards of both ethical and legal conduct Help managers respond to problems that arise as a result of

unethical or illegal behavior

Core Principles and Organizational Values


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Core Principles

Organizational Values

UnchangingOrganizational ObjectivesChanged Infrequently

Strategies and Practices

Revised Frequently

Business Ethics


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Misleading advertising

Misleading labeling Harm to the environment

Insider trading

Dumping flawed products on foreign markets

Poor product or service safety

Padding expense accounts

Business practices always considered unethical

Ethical decision making: Who are the

Stakeholders of Firms?


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Stakeholders of Firms? Stakeholders are individuals, groups or institutions who

have a stake in or are significantly influenced by anorganizations decisions and actions

Shareholders

Governments

Political & social action groups Employees

Customers

Communities

Suppliers

Trade Associations

Firms must consider the interests of theirstakeholders when making business decisions

Criteria for Ethical DecisionMaking


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Making

Utilitarian Approach

Individualism Approach

Moral-Rights Approach

Justice Approach

Utilitarian Approach


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pp

Moral behaviors produce the greatest goodfor the greatest number.

Individualism ApproachActs are moral when they promote the

individual's best long-term interests (e.g.,

the golden rule).

Moral-Rights Approach


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g pp

Human beings have fundamental rights(e.g., free consent, privacy, due process)

Justice ApproachStandards of equity, fairness, and

impartiality.


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Approaches that you can consider that will

help you make the right decision for you


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help you make the right decision for you.

1. Utilitarian- This approach focuses on the action that will result in thegreatest good for the greatest amount of people

2. Moral Rights- This approach focuses primarily on moral principles,regardless of what the consequences may be. There is no real grey area inthis view, it is more just right or wrong and compromising is not an option.

3. Universalism- This approach is much like the golden rule which has twoparts. First, you need to determine if an action would apply to all peoplein every situation. Next, you would determine if you would be ok withsomeone applying this action to you.

4. Cost-Benefit- This approach has you balance the cost of the action withthe benefit of the action and see what you have to give up and what yougain from this action.

Ethical decision-making is rarely easy, especially in the business workplace. There are several approaches available for analyzing all of thedifferent kinds of ethical decisions. Sometimes one approach will be moreappropriate than another. By taking time to analyze the differentpossibilities and approaches you are more likely to make a decision youbelieve.

Moral Development


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Preconventional Level = concernedwith external rewards andpunishments

Conventional Level = conform to theexpectations of peers and society

Postconventional (Principled) Level =

individuals develop a personal,internal set of standards and values.(About 20% of adults)

The Organization


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g

SystemsExplicit rules and policies

Reward system

CultureCommon Values

Traditions

Guidelines for Dealing with Ethical

Dilemmas


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Dilemmas

Is it legal?Is it right?

Is it beneficial? To whom? How much?

Is it harmful? To whom? How much?


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Situations that prompt ethical issues


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1. You hear word from a co-worker that she istired of the manager being overly- assertivein situations where it is not needed; basicallythe manager's position has "gone to his

head". The co-worker has claimed she isgoing to sue the company for the treatmentshe has been receiving, so what do you do?



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2. You are working for a company and there has been

evidence insider theft. There are only two people,the manager and the cashier, have access to the cashdrawer where the theft has been taking place, andthe evidence is pointing to the manager. The catch isthat you have been friends with the manager for

quite some time, long before you both beganworking for the company. He obviously denies theclaims, but there is evidence proving that the cashiercouldn't have been stealing the money. What do youdo?



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3. You are working two positions for a company and the

job has begun to be far too strenuous for you toendure. The company has decided to find areplacement for one of the positions you are workingto take some of the load off of you. One candidatethat appears to be the one the company will choose

has admitted only to you that she has recentlybecome pregnant. Obviously you are reluctant to letthe company hire her because she will be onmaternity leave after the child is born and you willhave to work both positions again until anotherreplacement is found. The company has decided thatshe is the best candidate for the position, so what doyou do?

HOW TO RESIST REQUESTS TO ACT

UNETHICALLY


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UNETHICALLY

Recognize Unethical Requests and Bosses Buy Time

Find a Mentor & Peer Support Group

Find Win-Win Solutions Work Within the Firm to Stop the Unethical

Act

Prepare to Lose Your Job (Last resort b/c itsdifficult to make change effectively from theoutside.)

Guidelines for Dealing with Ethical

Dilemmas (cont )


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Dilemmas (cont.)

Would you be willing to allow everyone to dowhat you are considering?

Would you like your family to know?

Would you like your decision printed in the

newspaper?

Have you consulted others who are objective

and knowledgeable?



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An Organization taking actions that contributeto society

Being a good corporate citizen.


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Organizational Stakeholders


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Owners, InvestorsEmployees

Suppliers

Customers

Government

Society

4 Views of Responsibilities of


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Business1- Economic

Responsibilities:

The only Social

Responsibility = Profit-Maximizing.

2- LegalResponsibilities:

Social Responsibility =

Obeying the Law (aswell as making a profit)

3- Ethical Responsibilities


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3 Ethical Responsibilities

To be ethical, an organization should seek ahigher standard than merely obeying the law:

e.g., Act with equity, fairness, and impartiality

e.g., Respect the rights of individualse.g., Act for the common good

4 Discretionary Responsibilities


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4 - Discretionary Responsibilities

Purely voluntary, not mandated by economics,law, or ethics

Goes beyond what society expects

This is true Social Responsibility

Social Responsibility Levels


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Level of Concern---Likely Behavior

Discretionary-------------------Proaction

Ethical-------------------AccommodationLegal------------------Defensive Behavior

Economic-------------Anything for profit

Why Social Responsibility?


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Self-defense - If business is not proactive, thepublic or government will press for moreregulation

Obligation - Business exists due to beingsanctioned by society - owes debt to society

Self-interest - S.R. good for business in long run

Arguments Against Social

Responsibility


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Responsibility

Social expenditures amount to theft of businessowners equity.

Business lacks the ability to pursue social goals.

Business would gain too much power if involvedin the social domain. (Social issues should beleft to those accountable to the voters.)

Ethical Leadership By Example


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Senior managers must be strongly committedto ethical conduct.

Code of Ethics


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A formalstatement of the company's valuesconcerning ethics and social issues.

Principle-based:

Designed to:

Enable the employee tomake ethical decisions

based on appropriate

values

e.g., treat people fairly ordont be dishonest

Policy-based:

Outline how to act in specific

ethical situations(reducing the need forthinking or shared values):

Conflicts of interest

Proprietary information

Political giftsEqual opportunities

Organizational Structures to

Promote Ethics


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Promote Ethics

Ethics committee = group appointed to monitorcompany ethics

Hot lines- employees can report questionable

behavior, possible fraud, waste, or abuse( i.e.,Blow the Whistle)

Ethics training programs

Whistle-Blowing


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Definition:The disclosure by an

employee of illegal,

immoral, or

illegitimate practicesby the organization.

Guidelines:Be sure you are right (keepaccurate records)

Try to resolve the situation in-house first

Consult an attorney beforecontacting the media, etc.

Realize you could be fired

Dont expect to profit

financially

1.2 Governance and Social Responsibility

Documents

Transcript of 1.2 Governance and Social Responsibility