May 17, 2013 TUAN BUI 129107147]

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TUAN BUI BA business management

3BM150 Module Title: Business Ethics Assignment Title: First Attempt/Re-sit/Deferred/Extension granted

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I [Tuan Bui] declare that I am the sole author of this assignment and the work is a result of my own investigations, except where otherwise stated. All references have been duly cited

May 17, 2013 TUAN BUI 129107147]

Contents
I. II. The importance of business ethics and their impacts on the organization ............................. 4 Environmental analysis for HSBC to explore its practice in business ethics and analyses

the impacts on its stakeholders: ........................................................................................................ 6 III.Challenges posed by business ethics to both the selected organisation and its stakeholders. ... 10 IV. Recommendations to HSBC management as to how they should improve the

organizations current business approach: ...................................................................................... 12 BIBIOGRAPHY: ............................................................................................................................ 13

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I.

The importance of business ethics and their impacts on the organization

This part of the report will discuss about the importance of business ethics and illustrate the effect of business ethics on businesses. To gain comprehension about these two mentioned aspects, the first thing that should be mentioned is the definition of business ethics. In the definition of Andrew Crane and Dirk Matten (2010), business ethics is the study of business situations, activities and decisions in which there are concerns about the right and wrong issues. In detail, the authors explained the issues of right or wrong are morally right and wrong and they stated that the field of business ethics comprises of not only commercial businesses (Andrew Crane and Dick Matten, 2010, pp5). Therefore the issues of business ethics also include of other organizations such as non-profit organizations (NGOs), government organizations, charities, et cetera. It is also claimed in the book that there are differences between the terms ethics and morality. Authors agreed that morality is concerned with issues that are relevant with culture of an individual or a community such as norms, values and beliefs. On the other hand, ethics, according to authors, are the study of how morality is applied in a given situation where the issue of right or wrong is determined by the ethical theories- which are specific rules and principles (Crane and Matten, 2010, pp8). According to Visser et al (2007 cited in Michael Blowfield and Alan Murray, 2011, pp15), business ethics is a sub-set of corporate responsibility offering a crucial analytical tool for understanding, conceptualizing and legitimizing whether the actions and behavior of companies is morally right or wrong. This definition seems to have familiarity with the given definition of Crane and Matten (2010). Blowfield and Murray also stated that business ethics concerned with both of individual level and institution level. This idea is supported by Johnson and his colleagues when they determined that business ethics exits at two levels of macro level and individual level-actions and behaviors (Johnson, Scholes and Whittington, 2008, pp145). The next thing to be discussed is the importance of business ethics. Crane and Matten (2010) has stated out seven reasons of why business ethics is important. Among those reasons, it can be said that the most noticeable reason is the increase of business influence on the society. The authors gave the evidences by citing the finding that 75% residents of more than 20 leading economic nations believe that large corporations had too much influence on governments decisions (Czywinski, 2008 cited in Crane and Matten, 2010). Businesses also provide several

May 17, 2013 TUAN BUI 129107147] contributions to the society such as providing jobs, products and services, paying taxes and so on. Whether those contributions are positive or negative to the contemporary society is a question that concerning with the role of business with the rise of ethical issues. Therefore, authors believed that business ethics will give more comprehension about that issue and suggest how we might address this situation (Crane and Matten, 2010, pp9). Since businesses now are in the situations of internationalization and globalization, ethical violations could happen across countries and sectors (Crane and Matten, 2010). That is the reason why with the comprehension of business ethics, different stakeholders of the organization including managers or different parties and individuals could make easier decisions of how to deal with those violations problems. The authors also suggested that business ethics can provide us with the ability to access the benefits and problems associated with different ways of managing ethics in organizations. There are also rising in demand of different stakeholders in terms of understanding and practicing business ethics. Collins (2009, pp10) showed the findings of a survey in 2007 within American which stated that 94% of Americans believe that it is critical or important to work for an ethical companies. In terms of the influences that business ethics has on the organization, several authors had done research in order to answer the question whether business ethics pays. Webley and Moore (2003 cited in Fisher and Lovell, 2005) had shown their findings for the questions about the impact of business ethics on organizations. Their researchs objects are the organizations with and without the code of conduct. In terms of companys rating, they found out that the companies with code of conduct had better ratings for the one who did not in terms of SERM (Social-Ethical Risk Management) rating and Britains Most Admired Companies (Webley and More, 2003 cited in Fisher and Lovell, 2005, pp11). Denis Collins (2009) stated that there are several competitive advantages for ethical organizations. The competitive advantages that he found out comprises of better relationship within different stakeholders that will help companies attract and retain them. According to the author, companies who are ethical and trustworthy also earn goodwill with other stakeholders like community and government as well. Additionally, one of the most worth-mentioning competitive advantages is that with the uses of business ethics, companies can achieve greater efficiency in decision making based on more reliable information from stakeholders (Collins, 2009, pp8).

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II.

Environmental analysis for HSBC to explore its practice in business ethics and analyses the impacts on its stakeholders:

HSBC Plc. will be the organization that is chosen in order to carry out the environmental analysis- mainly stakeholder analysis to explore whether it recognises, values and manages business ethics effectively and analyse the impact on its stakeholders. In order to find out whether HSBC recognizes, values and manages business ethics effectively, this report will examine the practice of HSBC in reality as well as in the code of conduct that they has established. For further comprehension of how effective HSBC is in terms of business ethics practices, it is crucial to scrutinize its practices toward specific stakeholders. This report will focus on some key stakeholders of HSBC such as the managers, customers, shareholders, employees, government and civil society. In the case of HSBC, the organization also set up its own values that connected with customers, communities, regulators and each other. These values including of two statements in which HSBC commits to: Building connection, being aware of external issues, collaborating across boundaries and Caring about individuals and their progress, showing respect, being supportive and responsive (HSBC,2013). The company is also aware of the community in which it is operating with the set-up of sustainability strategies. It is stated in HSBC website that the success of HSBC including of providing customers with needed products and services, understanding and managing its impact on society and environment as well as investing in the future of its employees and the communities in general (HSBC, 2013). The group chairman of HSBC- Douglas Flint stated: we have responsibilities not only toward our customers, employees and shareholders but also to the countries and communities in which we operate (HSBC, 2012). This report will examine the practice of how effectiveness those sustainability strategies are in practical with the information given by HSBC as well as from other sources. The first stakeholder that the report will discuss is shareholder of HSBC. In terms of shareholders, it is one of the main stakeholders of HSBC Plc. with the total population of 220,000 shareholders from London, Hong Kong, New York, Paris and Bermuda Stock Exchange (HSBC, 2012). For its shareholders, HSBC set the shareholder communication policy as a guideline for any practice with shareholders based on HSBCs values. Within this policy, HSBC stated out different issues in communicating with its shareholders in which there are guidelines of how HSBC should communicate with the shareholders via different communicating channels

May 17, 2013 TUAN BUI 129107147] such as websites, annual reports including of financial and sustainability reports, annual general meetings (AGM) and so on. It is said in the policy that shareholders are encouraged to attend the AGM in the United Kingdom or the Informal Meeting of Shareholders (IMS) held in Hong Kong (HSBC, May 2012). In practice, HSBC ran a program of 906 senior executive meetings with representatives of institutional shareholders in 27 countries and territories, according to HSBC Sustainability Report 2011 (HSBC, 2012). It is also can be seen how HSBC issues the importance of its shareholders with the plan to bump up its first three interim dividends for next year by 11 per cent to 10 cents a share (Harry Wilson, 2013). The next stakeholder to be discussed is the managers of HSBC Plc. Managers are the key employees of HSBC including of the Board of Directors and the Senior Managers. For this stakeholder, HSBC Plc. sets out the governance practices where the obligations for Senior Financial Officers (including of the Group Chairman, Group Chief Executive, Group Finance Director and Group Chief Accounting Officer) require the financial officers to engage in honest and ethical conduct and to take such measures as appropriate to assure that HSBC complies with all applicable governmental laws, rules and regulations (HSBC, 2013). The governance practices also give recommendations for its senior financial officer to avoid conflicts of interest and should report promptly to the Chairman of Group Audit Committee any violations that she or he is aware (HSBC, 2013). Employee is one of the key stakeholders that are worth mentioned also. According to Marketline (2012), the total numbers of HSBCs employees are 298,000. HSBC designed the HSBC Employee Handbook which provides terms and conditions of employment, guidance on the standards of conduct that are expected of the employees as well as the main benefits that employees can get for working in HSBC. In this handbook, there is a specific section which is called the code of business ethics and responsible behaviour (section 2-the code). The section includes of several principles that HSBC expects form any employee which consists of three main principles- integrity, fidelity and self-respect (HSBC, 2008). Moreover, this section also includes of corporate values that the company subscribes and also the core standards of behaviour for its employees. It can be seen that those principles are stated clearly for the purpose of inform promptly and fully for the employees about the comprehension of the codes of ethics. In practice, HSBC also values its employees via the employee engagement. It is reported that 81 per cent of its workforce participated in the annual Global People Survey which is designed to give employees the opportunity to feed back their priorities and concerns and in identify

May 17, 2013 TUAN BUI 129107147] actions to improve their engagement. The example actions, according to HSBC Sustainability Report 2011, includes of job sharing, encouraging better work-life balance or part-time working programmes, et cetera (HSBC, 2012). The report also stated that there are a rise in the percentage point of employee engagement which made up to 69 per cent in 2011, which leads to seven percentage higher that the external global average. There might be some issues that the employees should concern in this year since HSBC announced to eliminate 30,000 jobs by 2013 to improve efficiency as a part of global cost-cutting plan for sustainable successes (HSBC, 2012). Sparkes (2012) indicated the UK reduction numbers will be 2,217 employees after having 950 new positions. In its report, HSBC stated that the company regrets with the employee loses however also said that it is curial to remain competitive for long-term successes. It also committed to investigate in faster growing segment in order to create new and sustainable jobs (HSBC, 2012). In terms of customers, HSBC serves about 89 million customers in 85 countries and territories (Marketline, 2013). According to HSBC, the company engages with its customers through wide variety of channels including both written and electronic communications as well as client events, customer panels and one-to-one meetings (HSBC, 2012). As a multinational organization, HSBC understands that it is important to meet the expectation of customers for long-term business. In addition, as a business, HSBC also has the responsibilities to access the environmental and social impacts that is lending and investment can have. HSBC is a large corporation with 4 main business activities including: Commercial Banking, Global Banking and Markets, Private Banking, Retail Banking and Wealth Management. Each of its business also has its own management for the long-term sustainability. For instance, about the Retail Banking and Wealth Management (RBWM), its main object is to meet the daily customers needs in the major markets of UK, Hong Kong, France, the US, Mexico, Brazil and Turkey. The main activities of RBWM includes of helping people meet their long-terms ambitions. For example, in 2011, new mortgage lending in Brazil grew by 85 per cent. RBWM also widen access for helping customers. In UK, RBWM established the UK Management Team to support customers before they go into arrears, helping customers to avoid the stress of missed payments, for instance. It is said that the team has helped over 70,000 people since it was set up (HSBC, 2012). About the global private banking, the main activities in terms of sustainability of HSBC is to sustain wealth for future generations, social finance, Islamic finance, responsible investment

May 17, 2013 TUAN BUI 129107147] and preventing crime (HSBC, 2012). About the community as a stakeholder, the total community investment in 2011 of HSBC was US$m 115.7 ranges from education programs, environmental programs and engagement to customers, people and communities (HSBC, 2012). It can be said that with the comprehension of sustainability and ethics practices, HSBC had set up several principles and ethics code with the involvement of as much as stakeholders as they can for the purpose of become trustworthy and sustainability. However, in practice, HSBC also has several scandals that related to the violations of business ethics. They had several scandals that involve with customers. For instance, HSBC lost thousands of customers details in 2009 and was fined 3 million pounds for that (Moore, 2009). Moreover, the Financial Services Authority (FSA) found HSBC was guilty of mis-sold complicated financial contracts to hundreds of small-to-medium enterprises (Brinded, 2012). One of the biggest scandals of HSBC is the scandal in the United State that involved with criminals. According to BBC (2012), US Senates report showed that HSBC was failed to stop criminals using the bank for money-laundering. The main findings of this 300-page report showed that HSBC Mexico had high-profile clients in drug trafficking and the HSBC US failed to properly monitor transfers between the two banks. Moreover, it is said in the report that HSBC US carried out transactions with Iran- a country that was prevented to do business by the US laws, during the period from 2001 to 2007. The banks also found guilty including with violations in the Middle East whilst its branch was doing business with Al Rajhi Bank- which had the owners had links to financial organization associated with terrorism. That last finding is that HSBC cleared large amounts of travelers checks without proper anti-money laundering controls, despite evidence of suspicious activity (BBC, 2012). Due to those scandals, HSBC had to pay 1.9bn US dollars for penalties (BBC, December 2012). The firm responded with the sorry of chief executive Stuart Gulliver and admitted that the complex structure makes it difficult to control the money-laundering structure (Roland, 2013). For fixing the scandal, the bank also appointed a new director of financial crime compliance- a newly position (Werdigier, 2012). The scandals also have effects on various stakeholders. For instance, due to the penalties payment, HSBC had to decrease the bonuses of employees. In detail, bonuses across the bank decreased $4.2bn to $3.7bn (Wilson, 2013). The CEO was also been forced to forfeit 1.3 million of his bonus (Salmon, 2012). HSBC was also criticized by activists of still having hug bonuses after those scandals. More (2013) quoted the saying of activists that: it is beyond belief that in a year marked by dodgy dealings, 200 of

May 17, 2013 TUAN BUI 129107147] HSBCs top brass are celebrating bonuses greater than many people earn in lifetime. With such of those critics and scandals, it can be said that HSBC still had problems in terms of business ethics management even when they had aware of the importance of business ethics. It can concluded that HSBC still has challenges in terms of how to manage business ethics effectively both in the view of the company and from the view of its stakeholders. The next part of this report will discuss about those implied challenges that the firm can have.

III.

Challenges posed by business ethics to both the selected organisation and its stakeholders.

In the circumstance of HSBC Plc., the brand has recognised the importance of business ethics has set out several principles and conduct codes for its different stakeholders. The evidences for that can be found in its values as well as their sustainability report. However there are still problems that it faces in reality. The report will point out some of the possible challenges that come from others researches. The first issue that can be pointed out is the uses of shareholder theory or stakeholder theory of the company, or in a broader context- the corporate governance. Definition of corporate governance is that corporate governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organization (Jacoby, 2005, cited in Johnson, Scholes and Whittington, 2008). By the means of the one who was held accountable of the managers, the authors said that it is argued that corporations need to be more accountable to wider social interest, not only to the owners and managers of the corporation only (Johnson, Scholes and Whittington, 2008, pp133). According to Sun (2002 cited in Nwanji and Howell, n.d), the issue of corporate governance has centered on whether shareholder-ship or stakeholder-ship was best for corporations and society and which one should the corporation follow to. There are different frameworks in term of corporate governance globally. In the case of HSBC, it can be believed that the firm is using the AngloAmerican model. The Anglo-American model, according to Crane and Matten (2010, pp241), is the model which focuses on the stock market as a central element of the system of governance. Also according to the authors, the goals of ownership in the Anglo-American model are the shareholder value and short-term profits, which also results to shareholders is the key stakeholders in the model (Crane and Matten, 2010, pp242). However, the shareholder-ship governance model has the problem where several authors stated: this created the agency

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May 17, 2013 TUAN BUI 129107147] problem where managers push short-term policies that lead to their own interests against the long-term profits objectives of the shareholders (Manne, 1965; Friedman, 1970; Jenson and Meckling, 1976 cited in Nwanji and Howell, n.d). The agency relation between shareholder (principal) and manager (agent) can create dilemmas which are the conflict of interests or informational asymmetry (Shankman, 1999 cited in Crane and Matten, 2010, pp240). Conflict of interests of the agent is to seek remuneration, power, esteem, et cetera. In order to achieve their interests, manager can go against the will of shareholder- seeking profit or rising in share price. The principle has only limited knowledge and insight into the actions and goals of the agentswhich is called informational asymmetry. The example given by authors is about the Porsche shareholder when they are happy with the profitability of the company however had limited insight into the actual running and the risks associated with it (Johnson and Scholes 2002: 33240 cited in Crane and Matten 2010: pp240). In terms of the stakeholder-ship approach, it is also have criticism from different authors cited in Nwanji and Howell. Stenberg (2004 cited in Nwanji and Howell, n.d, pp7) claimed that since each stakeholder has own interest, the manager can become unaccountably for their actions. Authors also suggested that the reason why firms to follow stakeholder theory might be that the stakeholders interest meet with directors own interest, therefore can lead to opportunistic directors could more easily act in their interests (Phillip, 2003; Marcoux, 2000; Stenberg, 2004 cited in Nwanji and Howell, n.d). The journal gave the example in 2003 while total revenues of worlds largest corporations- about 500 groups of CEOs, are 14.9 trillion US dollars while millions of workers after contributing to such achievements lost their jobs and continue to suffer in the name of maximising shareholders value. It is also suited with the criticism of the activists for HSBC that given above of Moore (2013). There is another suggestion of why sustainability cannot make into reality, which is the suggestion where stakeholders perceptions are differ from corporate reality (Peloza, Loock, Cerruti and Muyot, 2012). The authors, in their article, try to find out the answers by examine stakeholders perception of the sustainability activities of firms, and compare that perception with the reality of a firms investment in sustainability. The findings of why does perception not meet reality can be due to the communication problems within the company. It is said that due to the message delivery was caused problem by noise can distract the audience from the original message, which can cause to the different in perception and reality.

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IV.

Recommendations to HSBC management as to how they should improve the organizations current business approach:

As a large multinational organization, it is hard to change its approach in their corporate governance. However to improve the current business approach of the firms, it is still some appropriate recommendations will be given in this report. Since it is stated that a firm cannot maximise value if ignores the interest of its stakeholders (Jansen, 2001 cited in Nwanji and Howell, n.d.), it is crucial for HSBC to carefully plan their actions regarding the effects and consequences that might occur for the environment and society as well, not only for the economy. The recommendation is that HSBC should have the approach in business ethics include of both deontological approach and teleological approach. The former is the approach that states the duty for business ethics is basic moral category, independent from the consequences of the actions (Nwanji and Howell, n.d.). The latter is the approach where the firm will examine the consequences to find out the actions are moral or not (Beu et al 2003 cited in Nwanji and Howell, n.d.). HSBC should take into account that how such shareholder value can affect the local and global communities hence have more internal controls and actions in order to follow ethical codes that they set. According to Peloza, Loock, Cerruti and Muyot (2012), to deal with the problems that stakeholders perception can differ from the sustainability performance of the firm, they have several suggestions in terms of having more effective delivery of sustainability messages. With different issues that can occur to distract the sustainability messages, the journal stated out each recommendation related with each issues. For instance, dealing with the negative category bias, the recommendation is to align benefits of sustainability with individual stakeholder groups interest. Another example is the issues related with the conflict between sustainability and brand positioning, the suggestion is that to integrate sustainability message into positioning (Peloza, Loock, Cerruti and Muyot, 2012, pp89-90). The authors of the article also gave suggestions for the firm in macro level such as HSBC. There are two of those recommendations that could be used for HSBC. The first is responsibility is taken for the impact of internal operations, as well as those of associated entities such as supply chain partners. That is the reason why HSBC should have more control in terms of their supply chains after the scandals involving with dealing business with criminal-related bank. A suggestion for that is to form alliances between banks or other sectors to foster the progress on targeted sustainability issues. The second suggestion that worth to be mentioned is that firm should

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May 17, 2013 TUAN BUI 129107147] understand that sustainability is more than reporting. For large corporations, it is important to integrate sustainability themes into their brand and customers value propositions for better success.

BIBIOGRAPHY:

BBC News (2012) HSBC money laundering report: Key findings [Internet], December 2012. Available from: http://www.bbc.co.uk/news/business-18880269 [Accessed 15 May 2013]. BBC News (2012) HSBC to pay $1.9bn in US money laundering penalties [Internet], December 2012. Available from: http://www.bbc.co.uk/news/business-20673466 [Accessed 14 May 2013]. Brinded, L. (2012) Libor fixing scandal: HSBC fix six rate probes as CEO admits banks failure. IBTimes [Internet], July 2012. Available from: http://www.ibtimes.co.uk/articles/368151/20120730/hsbc-libor-fixing-scandal-euribor-moneylaundering.htm [Accessed 14 May 2013]. Collins, D. (2009). Essentials of business ethics: creating an organization of high integrity and
superior performance. John Wiley & Sons Inc, pp8-10.

Crane, A. and Matten, D., 2010. Business Ethics. 3rd ed. Oxford: Oxford University Press. Fisher, C. and Lovell, A., 2005. Business Ethics and Values. Harlow: Pearson Education, pp11. HSBC (2013) Obligations of senior financial officers [Internet] Available from: http://www.hsbc.com/investor-relations/governance/obligations-of-senior-financial-officers [Accessed 15 May 2013]. HSBC (2013) Our values [Internet] Available from: http://www.hsbc.com/citizenship/our-values [Accessed 14 May 2013]. HSBC (2013) Sustainability [Internet] Available from: http://www.hsbc.com/citizenship/sustainability [Accessed 14 May 2013].

HSBC, 2012. Sustainability report 2011, London: Corporate Sustainability, HSBC. Johnson, G., Sholes, K., Whittington, R. (2008). Exploring corporate strategy. 8th ed. Harlow: Prentice Hall.

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May 17, 2013 TUAN BUI 129107147] Moore, J. (2009) HSBC hit with big fine after losing thousands of customers details. The Independent [Internet], July 2009. Available from: http://www.independent.co.uk/news/business/news/hsbc-hit-with-big-fine-after-losingthousands-of-customers-details-1757497.html [Accessed 15 May 2013]. Moore, J. (2013) Outrage as HSBC hand 2m bonus to Chief Stuart Gulliver after fine in US. The Independent [Internet], March 2013. Available from: http://www.independent.co.uk/news/business/news/outrage-as-hsbc-hands-2m-bonus-to-chiefstuart-gulliver-after-fine-in-us-8518814.html?origin=internalSearch [Accessed 15 May 2013]. Nwanji, T., Howell, K (n.d.) The Stakeholder Theory in the Modern Global Business Environment. International Journal of Applied Institutional Governance, 1 (1). Peloza, J., Moritz, L., Cerruti, J., Muyot, M. (2012) Sustainability: How stakeholder perception differ from corporate reality. California Management Review, 55 (1). Roland, D. (2013) HSBC Chief admits complexity exposed the bank to crime. The Telegraph [Internet], Feb 2013. Available from: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9852625/HSBC-chiefadmits-complexity-exposed-the-bank-to-crime.html [Accessed 15 May 2013]. Sparkes, M. (2012) HSBC to cut 3,167 jobs across the UK. The Telegraph [Internet], April 2012. Available from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9228306/HSBC-to-cut-3167jobs-across-the-UK.html [Accessed 15 May 2013]. Werdigier, J. (2012) HSBC names head of financial crime compliance. The New York Times [Internet], December 2012. Available from: http://dealbook.nytimes.com/2012/12/10/hsbcnames-head-of-financial-crime-compliance/ [Accessed 15 May 2013].

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