1.

2 Corporate Governance and Social Responsibility

Corporate Governance: Definition

Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.

Corporate Governance: Definition

Corporate governance relates to complying with 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 and employees' interests may be best expressed, aligned and reconciled.

Corporate Governance: Definition

The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company'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 informationflows to serve as a system of checks-and-balances.

Corporate Governance: Definition

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 "the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders". Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

Corporate Governance: Definition

Corporate governance consists of two elements: The long term relationship which has to deal with checks and balances, incentives for manager and communications between management and investors;

The transactional relationship which involves dealing with disclosure and authority.

Corporate Governance: Definition

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 "the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders". Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

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.

Social responsibility: Definition

The obligation of an organization's management towards the welfare and interests of the society in which it operates The principle that companies should contribute to the welfare of society and not be solely devoted to maximizing profits.

Social responsibility: Definition A companys sense of responsibility towards the 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.

Corporate Social responsibility: Definition

Corporate social responsibility (CSR) is known by many names, including corporate sustainability, corporate citizenship, corporate conscience, responsible business, and/or corporate social performance. Corporate social responsibility involves self-regulation for the purpose of operating within a set of non-economic social values: Human resources and child labor Fair trade principles Environmental sustainability Human health and wellbeing Financial ethics To put it in simple terms, corporate social responsibility is about business management that results in an overall positive impact on the world at large.

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 is affected by, the achievement of a corporations purpose.

Stakeholders
Are all those individuals, groups and entities 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.

12

Stakeholders

Individuals and groups with a multitude of interests, expectations, and demands as to what business should provide to society

Origins of the Stakeholder Concept

What 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

Who Are Business Stakeholders?

Government Employees

Business

Community

Owners

Consumers

Who Are Business Stakeholders?

Evolution and Development of the Stakeholder Concept Views of the Firm

Production

Managerial

Stakeholder

Who Are Business Stakeholders?

Production and Managerial Views

Who Are Business Stakeholders?

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

Who Are Business Stakeholders?

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

Who Are Business Stakeholders?

Legitimacy, Power, Urgency: A Typology of Stakeholder Attributes
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 the stakeholders claim demands immediate attention

Stakeholder analysis
Who matters, how much
Customers, suppliers, owners, workers, community groups, government At core, strategic, or environmental levels

What matters, why and when

What is at stake for the stakeholders? Why do they care? When and how might they act? What is at stake for the firm? What are the likely impacts on the firm? Why? When?

Response options
Cooperate, compete, coopt, cut out...

Process of Stakeholder analysis

Identification of key stakeholders Assessment of their valves and interests Analysis of how their interests may affect or be affected by a product, project, change in resource conditions, etc.

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.

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 teams who 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. Capitalmarket stakeholders are groups that affect the availability or cost of capitalshareholders, venture capitalists, banks, and other financial intermediaries.

Steps in Identifying Stakeholders. Step 2: Determining the Effects of Key Decisions on the Stakeholder. Step 2 in stakeholder analysis is to determine the nature of the effect of the firms strategic decisions on the list of relevant stakeholders. Not all stakeholders are affected 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.

Step 3: Determining Stakeholders Power and Influence over Decisions. The third step of a stakeholder analysis is to 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, nuisance influence, 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.

Who Are Business Stakeholders?

3-14

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 a group to which management has a fiduciary responsibility Synthesis approach considers stakeholders as a group to whom management owes an ethical, but not a fiduciary responsibility

Three Values of the Stakeholder Model

Descriptive Instrumental Normative

Stakeholder Mapping

Variables affecting stakeholders relative power and influence

Within and between formal organizations For informal groups and stakeholders interest primary and

Legal hierarchy (command and control, budget holders) Authority of leadership (formal and informal, charisma, political) Control of strategic resources for the project (e.g. suppliers of inputs)

Social, economic political status

Degree of organization, consensus and leadership in the group Degree of control of strategic resources significant for the project Informal influence through links with other stakeholders Degree of dependence on other stakeholders Assessing importance

Possession of specialist knowledge (e.g. specialist staff) Negotiating position (strength in relation to other stakeholders in the project)

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

Stakeholders of the Organization

Customers

Owners

Employees

Unions

Suppliers

Organization Government Strategic Partners Local Community Society

Stakeholders Concerns
Stakeholder Group
* Owners and Investors

Examples of Concerns
Financial Soundness Consistency in meeting shareholder expectations Sustained profitability Average return on assets over five-year period Timely and accurate disclosure of financial information

Stakeholders Concerns (Ctd.)

Stakeholder Group
* Customers
Examples of Concerns * Product/service quality, innovativeness, and availability *responsible management of defective or harmful products/services *Safety records for products/services *Pricing policies and practices * Honest, accurate , and responsible advertising.

Stakeholders Concerns (Ctd.)

Stakeholder Group * Employees

Examples of Concerns
Nondiscriminatory, meritbased hiring and promotion Diversity of the workforce Wage and salary levels and equitable distribution Availability of training and development Workplace safety and privacy

Stakeholders Concerns (Ctd.)

Stakeholder Group
* Community

Examples of Concerns
Environmental Issues Environmental sensitivity in packaging and product design Recycling efforts and use of recycled materials Pollution prevention Global applications of environmental standards

Stakeholders Concerns (Ctd.)

Stakeholder Group * Community (Ctd.)
Examples of Concerns Community Involvement Percentage of profits designated for cash contributions Innovation and creativity in philanthropic efforts Product donations Availability of facilities and other assets for community use Support for employee volunteer efforts.

The Stakeholder Map or Power/Interest Matrix

LEVEL OF INTEREST
Low High

A Low

Minimal effort
POWER
C High

Keep informed

Keep satisfied

Key players

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

Classification: Three Stakeholder Groups

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 responsibilities does our firm have? 5. What strategies or actions should our firm take to best manage stakeholder challenges and opportunities?

Key Questions In Stakeholder Management

Who are our stakeholders?
Management must identify generic stakeholder groups and specific subgroups

Key Questions In Stakeholder 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

Key Questions In Stakeholder 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

Key Questions In Stakeholder Management

Key Questions In Stakeholder Management

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

Key Questions In Stakeholder Management

Stakeholder/Responsibility Matrix

Stakeholders Owners Customers Employees

Economic

Legal Ethical

Philanthropic

Community
Public at large Social Activists Other

Key Questions In Stakeholder Management

What strategies or actions should our firm take to best manage stakeholder challenges and opportunities?
Should we deal directly or indirectly with stakeholders? Should we take the offense or the defense in dealing with stakeholders? Should we accommodate, negotiate, manipulate or resist stakeholder overtures? Should we employ a combination of the above strategies or pursue a singular course of action?

Key Questions In Stakeholder Management

Types of Stakeholders Stakeholders Potential for Threat to Organization High Low Stakeholder Type 4 Mixed Blessing Strategy: Collaborate Stakeholder Type 3 Nonsupportive Strategy: Defend ? Stakeholder Type 1 Supportive Strategy: Involve Stakeholder Type 2 Marginal Strategy: Monitor

High Stakeholders Potential for Cooperation With Organization Low

Effective Stakeholder Management

Careful assessment of the five core questions: Who are our stakeholders? What are our stakeholders stakes? What opportunities and challenges do stakeholders present? What economic, legal, ethical, and philanthropic responsibilities does our firm have?

What strategies or actions should our firm take to best manage stakeholder challenges and opportunities?

Effective Stakeholder Management

Stakeholder Management Capability
Rational level Process level Transaction level

Effective Stakeholder Management

Stakeholder Corporation
Stakeholder inclusiveness Stakeholder symbiosis

Stakeholder Power: Four Gates of Engagement

Awareness Knowledge Admiration Action

Principles of Stakeholder Management

Acknowledge Monitor Listen Communicate Adopt Recognize Work Avoid Acknowledge conflict

Principles of Stakeholder Management

1.2.2 Corporate governance Corporate Governance: Definition 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 ensure that strategic decisions are made effectively

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

Separation of Ownership and Managerial Control Basis of the modern corporation Shareholders purchase stock, becoming...

Residual Claimants - Shareholders reduce risk efficiently by holding diversified portfolios

Professional managers contract to provide decision-making Modern public corporation form leads to efficient specialization of tasks - Risk bearing by shareholders - Strategy development and decision-making by managers

Agency Theory
An agency relationship exists when:

Agency Relationship Shareholders (Principals) Firm Owners

Risk Bearing Specialist (Principal)

Hire

Managerial DecisionMaking Specialist (Agent)

Managers (Agents) Decision Makers

which creates

Agency Theory The Agency problem occurs when: - The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Example: Overdiversification because increased product diversification leads to lower employment risk for managers and greater compensation Solution: Principals engage in incentive-based performance 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 Principals may engage in monitoring behavior to assess the activities and decisions of managers - However, dispersed shareholding makes it difficult and inefficient to monitor managements and behavior For example: Boards of Directors have a fiduciary duty to shareholders to monitor management - However, Boards of Directors are often accused of being lax in performing this function

Corporate governance
Effective corporate governance is also of interest to nations. As stated by one scholar, Every country wants the firms that operate within its borders to flourish and grow in such ways as to provide employment, wealth, and satisfaction, not only to improve standards of living materially but also to enhance social cohesion.

Governance Mechanisms

Ownership Concentration Boards of Directors

Executive Compensation
Multidivisional Organizational Structure Market for Corporate Control

Governance Mechanisms

Ownership Concentration
- Large block shareholders have a strong incentive to monitor management closely - Their large stakes make it worth their while to spend time, effort and expense to monitor closely - They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)

Governance Mechanisms

Boards of Directors
- Insiders - Related Outsiders - Outsiders - Review and ratify important decisions - Set compensation of CEO and decide when to replace the CEO - Lack contact with day to day operations

Governance Mechanisms

Recommendations for more effective Board Governance

- Increase diversity of board members backgrounds - Strengthen internal management and accounting control systems - Establish formal processes for evaluation of the boards performance

Governance Mechanisms

Executive Compensation
Salary, Bonuses, Long term incentive compensation

- Executive decisions are complex and non-routine - Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes - In addition, stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their contro Incentive systems do not guarantee that managers make the right decisions, but they do increase the likelihood that managers will do the things for which they are rewarded

Governance Mechanisms

Multidivisional Organizational Structure

Designed to control managerial opportunism - Corporate office and Board monitor managers strategic decisions - Increased managerial interest in wealth maximizatio

M-form structure does not necessarily limit corporatelevel managers self-serving actions - 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

Governance Mechanisms

Market for Corporate Control

Operates when firms face the risk of takeover when they are operated inefficiently
- 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

- Changes in regulations have made hostile takeovers difficult

The market for corporate control acts as an important source of discipline over managerial incompetence and waste

Corporate Governance and Ethical Behavior

It is important to serve the interests of multiple stakeholder groups

Shareholders are one important stakeholder group, which are served by the Board of Directors Product market stakeholders (customers, suppliers and host communities) and Organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups

Although controversial, some believe that ethically responsible firms should introduce governance mechanisms which serve all stakeholders interests

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

BOD Typical Responsibilities
Setting corporate strategy, overall direction , mission and/or vision Succession: Hiring, compensating and firing the CEO and top management Control: monitoring, evaluating, and/or supervising top management Reviewing and approving the use of organizational resources Caring for stockholders interest

In legal terms, BODs are required to direct the affairs of the corporation but not to manage them (act with due care).

Corporate Governance
Setting corporate strategy, overall direction, mission or vision Hiring and firing the CEO and top management
Role of Board of Directors

Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests

73

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 have overlooked. Evaluate and influence: Examine mgts proposals, decisions, & actions. Agree or disagree with them; give advice, offer suggestions & outline alternatives (if any). Initiate and determine: Delineate a companys mission & vision; and specify strategic options to management.

Role of the Board of Directors Degree of involvement is dependent on extent to which it perform the three tasks:
Monitoring (LOW LEVEL OF INVOLVEMENT) Evaluating and influencing (MEDIUM LEVEL OF INVOLVEMENT) Initiating and determining (HIGH LEVEL OF INVOLVEMENT)

BOD involvement is a continuum

1.2.3 Corporate Governance: The Role of Top Management

Top management function is usually performed 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)

The Role of Top Management

Top management is primarily responsible for the strategic management of the firm
Responsible for every decision & action of every organizational employee Responsible for providing effective strategic leadership Strategic leadership is the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in an organization to initiate changes that will create a viable and valuable future for the organization

The Role of Top Management

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

The Role of Top Management

The whole top managements strategic leadership responsibilities involves
Determining the firms mission, vision, and objectives Exploiting & maintaining the firms resources, core competencies & capabilities Creating & sustaining a strong organizational culture Emphasizing ethical decision & practices Establishing appropriately balance organizational control

The Role of Other Strategic Managers and 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

The Role of Other Strategic Managers and 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 book management
Sharing of firms books or F/S with employees to see implications of their work

1.2.4 Social Responsibilities of Strategic Decision Makers

What is Corporate Social Responsibility? Lack of consensus The definition is subject to the economic, cultural and legal contexts The meanings differ depending on the players CSR: globalization, sustainability and governance

Levels of CSR
Social Obligation Meet minimum regulations, do what is required by law, no more Social Responsibility Go beyond what is required by law, mitigate negative effects Social Responsiveness Proactive approach, promote positive change

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

It directly influences the management of people in the company Good practices in the labor field will allow companies to hire and retain talent and to guarantee the excellence of the services provided on the products manufactured

Thinking about Future Business Responsibilities

Demonstrate a commitment to societys values and contribute to societys social, environmental and economic goals through action
Protect society from the negative impacts of company operations, products and services Share benefits of company activities with key stakeholders Demonstrate that the company can make more profit by doing the right thing.

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 of business & society. It recognizes the existence of various stakeholders and firms deal with them

What is Corporate Social Responsibility?

Some attempts to define it: Responsible companies perceive the current environment globalization, social demands, transparency, broadening of markets, environmental challenges, etc. as an opportunity to underscore their role in society, their potential for leadership in sustainable development.

What is Corporate Social Responsibility?

The impact of a companys action on society Requires a manager to consider his acts in terms of a whole social system and holds him responsible for the effects of his acts at all levels in that system Business has an obligation to society which extends beyond economic and legal duties Described as one of the most important social movements of our time

Areas of Social Responsibility

Responsibility Towards Environment

Responsibility Towards Customers

Social Responsibility

Responsibility Towards Employees

Responsibility Towards Investors

Social Responsibility
A businesss collective code of ethics towards its stakeholders
the environment its customers its employees its investors its suppliers its community

Corporate Social Responsibility

Two Views of who are firms responsible to? (1) Traditional View (Milton Friedman)
There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud

(M. Friedman, The Social Responsibility of Business is to Increase Profits, New York Times, (September 13, 1970: pp. 126-127)

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 their shareholders

Purely economic reasoning

Two Views of Who Firms are Responsible to

(2) Modern View (Archie Carroll)
Social Responsibilities

Economic (Must Do)

Legal (Have to Do)

Ethical (Should Do)

Discretionary (Might Do)

Two Views of Who Firms are Responsible to

(2)Modern View (Archie Carroll)

Business firms have four responsibilities (a) Economic
Produce goods & services of value to society so that the firm may repay its creditors and stockholders

(b) Legal
Defined by governments in laws that management is expected to obey

Two Views of Who Firms are Responsible to 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

What is Corporate Social Responsibility?

The company must act responsibly, and criteria for social responsibility must be adopted to contribute toward consolidating better companies not only in social terms that is, companies which are more useful to society but better companies in purely economic terms that is, better quality, more efficient, more competitive companies An inevitably broad concept of which we can say that it includes voluntary actions by companies 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 by companies aimed at dealing with workers, consumers, or investors or shareholders concerns: in short, the concerns of all citizens.

Managerial Ethics and Social Responsibility

Ethics is the discipline dealing with what is good and bad 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
Ethics is the discipline dealing with what is good and bad and with the moral duty and obligations. 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 problem facing 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
Business ethics are essentially formal and informal values, morals, and principles that people use to govern their decision making process in the workplace. These ethics are the basis on which professionals make their decisions. 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
Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.

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 business context 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 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, strength and harmony.'
Source: Peter Drucker, The Practice Of Management 1955, p.342

The success of managementhas greatly changed managements meaning. Its success has made management the 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

Legal Influences

Political Influences

BUSINESS PRACTICES
Competitive Influences Ethical Influences

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

Reasons for considering the ethical conduct of organisations:

To some extent, inescapable, e.g. legal limits on conduct Some areas may be important: e.g. green issues Part of the professionalisation of business, e.g. treatment of workers Self-interest, e.g. bad publicity as a result of incorrect behaviour

Three prime considerations in developing 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

Domain of Codified Law

Domain of Ethics

Domain of Free Choice

(Legal Standard)

(Social Standard)

(Personal Standard)

Amount of Explicit Control High Low

Ethics
The code of moral principles and values that govern the behaviors of a person or group with respect to what is right or wrong.

Codified Law
Values and standards that are written into the legal system.

Free Choice
Behavior about which law has no say and for which an individual or organization enjoys complete freedom Example: An individual's choice of a marriage partner or religion.

Ethics
Obedience is to norms and standards levied by self and/or others. These are unenforceable in a legal sense, but are often powerful.

Ethical Dilemma
When all choices have been deemed undesirable because of potentially negative ethical consequences, making it difficult to distinguish right from wrong. (The choices also have attractive attributes.)

Common Ethical Dilemmas

Honesty in advertising and in communications with superiors, clients, and government. Problems relating to special gifts, entertainment, and kickbacks. Overlooking wrong doings of others

DEALING WITH AN ETHICAL DILEMMA

while the law defines what is legal and what is not, moral rights and wrongs may 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 the outcome?

If all of the above questions can truthfully be answered "yes" then it is safe to assume the decision in question is an ethical one. It is also important to consider 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 Social Responsibility

Lowest Level of
Social Responsibility

Obstructionist Defensive Accommodative - Proactive

Highest Level of Social Responsibility

Ethical Behaviour of managers

Ethics
standards or moral values that dictate what is right 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

Family
Personal Code of Ethics

Experiences

Peer Group

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

Gather the relevant factual information Make an ethical judgment based on the rightness or wrongness of the proposed activity or policy

Analyze the facts to determine the most appropriate moral values

1.2.5 Ethical Decision Making: Assessing Ethical Behavior

Utility - optimize Rights individual rights Justice - fair Caring responsibilities to others

newspaper test

Company Practices & Business Ethics

Firms are adopting written codes of ethics to guide employee decisions Top management support is essential Ethics Programs educating employees

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

Organizational Objectives Changed Infrequently

Core Principles Organizational Values Unchanging

Strategies and Practices Revised Frequently

Business Ethics
Business practices always considered unethical
Misleading advertising Misleading labeling Harm to the environment Insider trading Dumping flawed products on foreign markets Poor product or service safety Padding expense accounts

Ethical decision making: Who are the Stakeholders of Firms?

Stakeholders are individuals, groups or institutions who have a stake in or are significantly influenced by an organizations decisions and actions
Shareholders Governments Political & social action groups Employees Customers Communities Suppliers Trade Associations

Firms must consider the interests of their stakeholders when making business decisions

Criteria for Ethical Decision Making

Utilitarian Approach Individualism Approach Moral-Rights Approach Justice Approach

Utilitarian Approach
Moral behaviors produce the greatest good for the greatest number.

Individualism Approach
Acts are moral when they promote the individual's best long-term interests (e.g., the golden rule).

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

Justice Approach
Standards of equity, fairness, and impartiality.

Factors Affecting Ethical Choices

The Manager
Level or stage of moral development Learned Ethics

The Organization
Systems Culture

Approaches that you can consider that will help you make the right decision for you.
1. Utilitarian- This approach focuses on the action that will result in the greatest 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 in this 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 two parts. First, you need to determine if an action would apply to all people in every situation. Next, you would determine if you would be ok with someone applying this action to you. 4. Cost-Benefit- This approach has you balance the cost of the action with the benefit of the action and see what you have to give up and what you gain from this action.

Ethical decision-making is rarely easy, especially in the business work place. There are several approaches available for analyzing all of the different kinds of ethical decisions. Sometimes one approach will be more appropriate than another. By taking time to analyze the different possibilities and approaches you are more likely to make a decision you believe.

Moral Development
Preconventional Level = concerned with external rewards and punishments Conventional Level = conform to the expectations of peers and society Postconventional (Principled) Level = individuals develop a personal, internal set of standards and values. (About 20% of adults)

The Organization
Systems
Explicit rules and policies Reward system

Culture
Common Values Traditions

Guidelines for Dealing with Ethical Dilemmas

Is it legal? Is it right? Is it beneficial? To whom? How much? Is it harmful? To whom? How much?

Ethics and corporate social responsibility

Situations that prompt ethical issues

1. You hear word from a co-worker that she is tired of the manager being overly- assertive in situations where it is not needed; basically the manager's position has "gone to his head". The co-worker has claimed she is going to sue the company for the treatment she has been receiving, so what do you do?

Situations that prompt ethical issues

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 cash drawer where the theft has been taking place, and the evidence is pointing to the manager. The catch is that you have been friends with the manager for quite some time, long before you both began working for the company. He obviously denies the claims, but there is evidence proving that the cashier couldn't have been stealing the money. What do you do?

Situations that prompt ethical issues

3. You are working two positions for a company and the job has begun to be far too strenuous for you to endure. The company has decided to find a replacement for one of the positions you are working to take some of the load off of you. One candidate that appears to be the one the company will choose has admitted only to you that she has recently become pregnant. Obviously you are reluctant to let the company hire her because she will be on maternity leave after the child is born and you will have to work both positions again until another replacement is found. The company has decided that she is the best candidate for the position, so what do you do?

HOW TO RESIST REQUESTS TO ACT 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 its difficult to make change effectively from the outside.)

Guidelines for Dealing with Ethical Dilemmas (cont.)

Would you be willing to allow everyone to do what 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?

Social Responsibility
An Organization taking actions that contribute to society Being a good corporate citizen.

Stakeholder Model
The belief that a business should be operated for the benefit of all who are concerned with it (all stakeholders not just the owners). The foundation of Social Responsibility.

Organizational Stakeholders
Owners, Investors Employees Suppliers Customers Government Society

4 Views of Responsibilities of Business 1- Economic 2- Legal

Responsibilities:
The only Social Responsibility = ProfitMaximizing.

Responsibilities:
Social Responsibility = Obeying the Law (as well as making a profit)

3- Ethical Responsibilities
To be ethical, an organization should seek a higher standard than merely obeying the law:
e.g., Act with equity, fairness, and impartiality e.g., Respect the rights of individuals e.g., Act for the common good

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

Level of Concern---Likely Behavior Discretionary-------------------Proaction Ethical-------------------Accommodation Legal------------------Defensive Behavior Economic-------------Anything for profit

Why Social Responsibility?

Self-defense - If business is not proactive, the public or government will press for more regulation Obligation - Business exists due to being sanctioned by society - owes debt to society Self-interest - S.R. good for business in long run

Arguments Against Social Responsibility

Social expenditures amount to theft of business owners equity. Business lacks the ability to pursue social goals. Business would gain too much power if involved in the social domain. (Social issues should be left to those accountable to the voters.)

Ethical Leadership By Example

Senior managers must be strongly committed to ethical conduct.

Code of Ethics
A formal statement of the company's values concerning ethics and social issues.

Principle-based:
Designed to:
Enable the employee to make ethical decisions based on appropriate values e.g., treat people fairly or dont be dishonest

Policy-based:
Outline how to act in specific ethical situations (reducing the need for thinking or shared values):
Conflicts of interest Proprietary information Political gifts Equal opportunities

Organizational Structures to Promote Ethics

Ethics committee = group appointed to monitor company ethics Hot lines- employees can report questionable behavior, possible fraud, waste, or abuse( i.e., Blow the Whistle) Ethics training programs

Whistle-Blowing
Definition:
The disclosure by an employee of illegal, immoral, or illegitimate practices by the organization.

Guidelines:
Be sure you are right (keep accurate records) Try to resolve the situation inhouse first Consult an attorney before contacting the media, etc. Realize you could be fired Dont expect to profit financially