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Business Ethics, Corporate

Governance and CSR

Business Ethics

An oxymoron! bringing together of two


contradictory concepts (Collins 1994)

Principles of conduct within organizations that guide


decision making and behavior (David 2008)
Good business ethics is a prerequisite for good
strategic management

The study of business situations, activities, and


decisions where issues of right and wrong are
addressed (Crane & Matten 2004)

Ethical Values, Issues and


Choices
Ethical values: shared beliefs about right and wrong,
good and bad
Govern the behaviour of a person or a group
Ethical issues: problems or dilemmas which present a
conflict of values
Pay a living wage or personal financial gain
Ethical choices: decisions about which option to take
in response to a dilemma
Difficult decisions, because each option has its own
drawbacks

Some business practices always


considered unethical and often
illegal
Misleading advertising
Misleading labeling
Poor product or service safety
Harming the environment
Insider trading
Padding expense accounts
Dumping flawed products on foreign markets

But in many other cases, the law is unclear and


all choices have elements of both right and
wrong

Business Ethics ...

Law

Legal Standard

Ethics

Social Standard

Free
Choice

Personal Standard

A personal responsibility?

Ethical Dilemma
What would you do?

You are a strategic analyst at a successful hotel enterprise that


has been generating substantial excess cash flow.
Your CEO instructed you to analyse the competitive structure of
closely related industries to find one the company could enter,
using its cash reserve to build up a substantial position.
Your analysis suggests that the highest profit opportunities are
to be found in the gambling industry. You realise that it might
be possible to add casinos to several of your existing hotels,
lowering entry costs into this industry.
However, you personally have strong moral objections to
gambling
Should your own personal beliefs influence your
recommendations to the CEO?

Criteria for Ethical Decision


Making
Utilitarian approach moral behavior produces
the greatest good for the greatest number
Individualism approach acts are moral when
they promote the individuals best long-term
interests
Moral rights approach moral decisions are
those that best maintain the rights of those
affected, including free consent, life and safety
Justice approach decisions must be based on
standards of equity, fairness, and impartiality;
(esp. important in HR managment)

Why is Business Ethics


Important?

Companies experience social blowback when


stakeholders perceive that they have breached
their deal with society

Good business ethics is a prerequisite for good


strategic management

The Emergence of Corporate Social Responsibility

Companies have responded to increasing


expectations by advocating what is now a common
term in business: Corporate Social Responsibility
(CSR)

Most large companies now feature CSR reports,


managers, departments, and the subject is
increasingly promoted as a core area of
management - next to marketing & accounting
Crane, Matten & Spence (2008)

Who determines a good business ethics


or CSR Agenda?

Government: the law makers?


Business ethics begins where the law ends
The strategists: CEO, CSO, CFO, managers
Core values, beliefs embedded in organization
Business code of ethics (Banking, Media, Food Industry)
Board of Directors
Corporate Governance
Duties & Responsibilities
Stakeholders
Consumers/pressure groups/local community/Media

Who is Responsible for Ethics / CSR?

Leadership & Management


Issues
CEO / Strategists
Code of business ethics:
Provides basis on which policies can be devised to
guide daily behavior and decisions in the workplace
CEO & Management responsible for implementation

Who else is responsible for Ethics / CSR?

Governance Issues
Board of Directors Roles & Responsibilities
Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
Is being ethical good for business?
Is it possible to be both profitable and responsible?

Corporate Governance
Definitions

The way in which organizations are


directed and controlled
Cadbury
(1992)

The process by which corporations are


made responsive to the rights and wishes
of stakeholders
Demb and Neubauer
(1992)

Corporate Governance
The Growth of Modern Corporations
The Agency Problem
The agency problem arises because of the
separation between ownership of an
organization and its control
The agency problem is inherent in the
relationship between the providers of
capital, referred to as the principal, and
those who employ that capital, referred to
as the agent.

Corporate Governance
(Jensen & Meckling 1976)

The Agency Problem


Agency problems occur because no contract, however
precisely drawn, can possibly take account of every
conceivable action that an agent may engage in
How do you ensure that the agent will always act in
the best interest of the principal?
Agency costs occur where there is a divergence
between these interests
Hence original purpose of Board of Directors
How are such issues
addressed?

Directors Roles & Responsibilities


BusinessWeeks Principles of Good Governance

No more than 2 directors are current or former


company executives
No directors do business with the company
Each director owns a large equity stake in the
company
At least one outside director with extensive
experience
Each director attends at least 75% of all meetings
Board is frugal on executive pay, diligent in CEO
succession, and prompt to act when trouble arises
CEO is not also the chairperson of the board
Shareholders have considerable power and
information to
choose & replace directors

Corporate Governance &


CSR?
The Purpose of Corporations?
To maximise shareholder value
In a free enterprise, private property system, a
corporate executive is an employee of the owners of the
business. He has direct responsibility to his employers.
That responsibility is to conduct the business in
accordance with their desires, which generally will be to
make as much money as possible
Milton Friedman (1970)

Corporate Governance & CSR


The Debate

The Purpose of Corporations?


To meet the needs of stakeholders
Stakeholders are individuals or groups that affect or are
affected by the achievement of an organizations
objectives
Edward Freeman (1984)
eg., shareholders, customers, suppliers, employees,
government, local community, media

Ethical Stances of Organizations


Socially obstructive
Prioritising short-term shareholder interests
Avoids highly regulated business locations, lobby to change laws

Socially obligative
Prioritising longer-term shareholder interests
Comply with laws

Socially responsive
Balancing multiple stakeholder obligations
Pay attention to pressure groups, use CSR to build competitive
advantage

Socially contributive
Seeking to shape society
Promoting sustainability and locally led economic development

Evaluating Corporate Responsibility

The Pyramid of CSR


Archie Carroll (1991)

Organisations and Ethical


Choice
Key question
Should a business prioritise shareholder value or
stakeholder needs?

Shareholders own the business


Primarily for financial gain

Stakeholders are affected by the decisions and operational


activities of the business
Financial, non-financial and personal benefits
The social contract between business and society
is constantly evolving... (Waddock 2010)

The CSR Debate moves


on

The early message doing well by doing good


CSR imposes political functions of govt on corporate
executives
CSR has failed to create the good society expecting too
much from business
Close adherence to CSR agenda leads to falling profits
Difficulty in allocating rights responsibilities and enforcing
them who decides?
Stakeholder theory the way forward CA through building
superior relationships.
Good CSR manages the paradox of profitability &
responsibility
Jury is still out you decide!

THANK YOU