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Dr Denise Dollimore

University of Hertfordshire, UK
Following this session students should be able to:

Define business ethics and describe the factors that shape a


manager’s ethical decision making.

Describe the principles of good Corporate Governance

Define corporate social responsibility and explain how to


evaluate it along economic, legal, ethical, and discretionary
criteria.
 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: 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’
Free
Law Ethics
Choice

Legal Standard Social Standard Personal Standard

A personal responsibility?
 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?
 Utilitarian approach – moral behavior produces the
greatest good for the greatest number
 Individualism approach – acts are moral when they
promote the individual’s 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)
 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
 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)
 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?
 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)
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’.
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?
 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
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)
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 organization’s objectives

Edward Freeman (1984)

eg., shareholders, customers, suppliers, employees,


government, local community, media…
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
The Pyramid of CSR
Archie Carroll (1991)
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 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!


 Cadbury. 1992, Corporate Governance and Chairmanship. Oxford.
 Carroll, A.B. 1991 The Pyramid of corporate social responsibility: toward the
moral management of organizational stakeholders. Business Horizons, July-
Aug: 39-48.
 Demb and Neubauer. 1992, ‘The Corporate Board: Confronting the
Paradoxes’. Long Range Planning, Vol 25, Issue 3, June, pp. 9–20.
 David, F. 2008, Strategic Management Concepts and Cases Pearson
International Edition.
 Freeman, E. 1984, Strategic Management: A Stakeholder Approach. Boston:
Pitman.
 Friedman, M. 1970, ‘The Social Responsibility of Business is to increase its
Profits’. New York Times Magazine, 13 September.
 Jensen and Meckling, 1976, Theory of the Firm: Managerial Behaviour,
Agency Costs and Ownership Structure. Journal of Financial
Economics.3:305-60
 Waddock, S. (2010) ‘The Social Contract of Business in Society’ in Aras and
Crowther eds. A Handbook of Corporate Governance and Social
Responsibility 2010 pp. 69-82