Business Ethics, Corporate Governance and CSR

Business Ethics, Corporate Governance and CSR

Metropolia Business School International Project Week (IPW) 2013

Dr Denise DollimoreUniversity 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.

Learning Outcomes

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)

Business Ethics

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

Ethical Values, Issues and Choices

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’

Some business practices always considered unethical and often illegal

Business Ethics ...

Free Choice Law Ethics

A personal responsibility?

Legal Standard Social Standard Personal Standard

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?

Ethical Dilemma What would you do?

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 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

Why is Business Ethics Important?

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 IssuesCEO / 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 managementAdherence to legal prescriptionsConsideration of stakeholder interestsAdvancement 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 GovernanceThe Growth of Modern CorporationsThe ‘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 & ResponsibilitiesBusinessWeek’s ‘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 & CSRThe 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 organization’s objectives

Edward Freeman (1984)

eg., shareholders, customers, suppliers, employees, government, local community, media…

Socially obstructive Prioritising short-term shareholder interestsAvoids highly regulated business locations, lobby to change lawsSocially obligativePrioritising longer-term shareholder interestsComply with laws Socially responsiveBalancing multiple stakeholder obligationsPay attention to pressure groups, use CSR to build competitive advantage Socially contributiveSeeking to shape societyPromoting sustainability and locally led economic development

Ethical Stances of Organizations

The Pyramid of CSR Archie Carroll (1991)

Evaluating Corporate Responsibility

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

Organisations and Ethical Choice

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 &

responsibilityJury is still out – you decide!

List of References 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