Eth cop

Ethics in Business

Dr I G Chowdhury

Managerial Ethics

• Ethics is a mindset.• Ethical issues are not always black and white, mostly grey.

• Mindset to delve in such fuzzy issues require mental preparation, from the early stages of mental development.

• This is where the business schools – the caterers to the human resource needs of business, interface with the business houses.

• Where are we now?• What needs to be done?

How

• Ethics was not a part of business curriculum until the beginning of this century.

• Back in the early 1980s a philanthropist John Shad made a donation of $30 million to Harvard University to launch a program on ethics1

• This had to wait until 2004 before a meaningful program could be framed.

• External events that triggered this fulfillment include events such as corporate raiding in the Wall Street (Ivan Boesky, greed is good).

Context of EthicsBackground

• Over the last 30 years population has nearly doubled & economy trebled – lot of economic activity through business.

Year World GDP($ trillion)

World Population(billion)

Bangladesh GDP($ billion)

1980 18 4.5 18

2006 48 6.5 61

2009 58 7 89

Rise & Rise of BusinessChronology

• 1981 Ronald Regan (Government is the problem not solution)• 1983 Thatcher • 1980 Rise of Japan rises (The age of discontinuity)• 1990 The golden age (The Roaring ninties, Stieglitz)

• 1999 Repeal of Glass-Steigall Act• 2000 Irrational exuberance (greed is good )

Chronology

• 2001 Enron• 2007 Northern Rock

• 2008 Lehman Brothers• 2009 GM (what is good for GM is good for America)

• 2010 Greece• 2011 Portugal

Ethical Issuesgrey, and not so grey

• Statement of corporate profit - fabrication

• Corporate debts - concealment

• Brokerage firms – insider trading, collusion

• Working conditions – discrimination, safety

• Environmental discharge – harmful, conservation

• Marketing policies – deception, ambitious

• Payments of various forms - unauthorized, greasing

Managerial EthicsDilemma

• In the merging of two firms it is found that some of the positions in one are duplicated in others.

• Is it right to fire or demote executive holding those duplicate problems, many of whom have served their respective firms for years?

Dilemma

• A manufacturer that has grown rapidly in an expanding market was helped greatly during that growth by wholesale distributors that introduced its products to retail stores. Now the market has got large enough to make direct distribution from the factory to the store in truckload lots much less expensive.

• Is it right to change the distribution channel?

Dilemma

• Jack Welsh used to categorize his workforce in three groups; A (good), B (average) and C (poor).

• If someone stayed in group C for two consecutive terms of assessment he/she was asked to leave.

Moral PrincipleVariants

• Right, Just, Fair are moral terms. They express a judgment about our behavior toward other people that is felt to be morally correct.

• But the problem is, it is not always possible not to harm others when something is done, such as building a new factory, closing a factory, changing an existing technology.

• Benefit to one group can result in harms to others, but is that a zero-sum game?.

Variants

• A business must choose between alternatives.• How?

• Several approaches exist; • Utilitarian Principle maximizes the total benefit

in almost arithmetic style i.e. + for just/fair/right, - for unjust/unfair/wrong etc. Sum of the total is the deciding factor.

Variants

• But how do you equate happiness of one person against misery of another, gain of one person against deprivation of another (building a dam dislocating the local inhabitants).

• Amartya Sen’s the idea of justice delves further into these issues (never take any action in which the least among us will be harmed in any way).

Moral Dilemma

• Moral problems pose managerial dilemmas. They represent a conflict between an organization financial performance and its social performance.

• The nature of these problems is open to interpretations, but most would agree that they include protecting loyal employees, producing safe products and preserving the environmental features.

Moral & EthicsCrossroad

• Moral problems in business are complex and difficult to resolve. They involve individuals and groups associate with the firm who are going to be hurt or harmed in ways outside their own control, while others will be benefitted.

• A distinction between the terms moral and ethics is helpful. Then we shall see how they relate to business activity.

Crossroad

• Moral relate to individuals.• Ethics relate to society. • What is ethical is not necessarily moral. • For example, consider a criminal

defense lawyer.

Crossroad

• Though the lawyer’s personal moral code likely finds murder immoral and reprehensible, ethics demand the accused client be defended, even when the lawyer knows the party is guilty and that a freed defendant would potentially lead to more crime.

Crossroad

• Legal ethics must override personal morals for the greater good of upholding a justice system in which the accused are given a fair trial and the prosecution must prove guilt beyond a reasonable doubt.

• Similarly, abortion is legal and therefore medically ethical, while many people find it personally immoral

Crossroad

• Morals define personal character, while ethics stress a social system in which those morals are applied.

• Ethics point to standards or codes of behavior expected by the group to which the individual belongs. This could be national ethics, social ethics, company ethics, professional ethics, or even family ethics.

Crossroad

• While a person’s moral code is usually unchanging, the ethics he or she practices can be other-dependent.

• Moral has a religious tone.

• Ethics is religion independent

Moral

• Moral rules are subjective, may be very different in different countries or even in the same country at different points of time.

• Moral standards by which people judge behavior with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions

Ethical ViolationsCompilation

• Ethics are often summed up in what is considered the golden rule—do unto others as you would have them do unto you.

• Here are some ethical issues that the corporations deal with on a regular basis;

– Corporate Social Responsibility

– Corporate Governance.

– Political contributions .

Compilation

– Misleading financial analysis

– Insider trading, securities fraud

– Executive compensation

– Bribery, kickbacks

– Discrimination issues such as gender, race, religion, disabilities

Compilation

– Issues surrounding the representation of employees and the democratization of the workplace: union

– Issues affecting the privacy of the employer: Issues affecting the privacy of the employee: workplace surveillance, drug testing

– Whistle-blowing

– Issues relating to the fairness of the employment contract and the balance of power between employer and employee: employment law.

Compilation

– Ethical relations between the company and the environment: pollution, environmental ethics

– Ethical problems arising out of new technologies: genetically modified food

– Product testing ethics: use of economically disadvantaged groups as test objects.

Compilation

– Patent infringement, copyright infringement,.

– Ethical issues arising out of international business transactions; e.g. bioprospecting and biopiracy in the pharmaceutical industry

Ethics

– Globalization

– Varying global standards e.g. the use of child labor.

– Multinationals taking advantage of international differences, such as outsourcing production (e.g. clothes) and services (e.g. call centres) to low-wage countries

Corporate Ethics

• In the current context it is not enough for a corporation to do business by doing no harm.

• A proactive role would be doing well by doing good.

• How? • Who decides

• These are the current issues of business today.

Leadership

H Egoistic

Self-Interest M Utilitarian

Low Altruism

Low M High

Concern for others `

Ethical FailuresConsequences

• Failure of banks such as BCCI (1991) and Baring Bank (1995), then the dotcom crash (1995-2000), then bankruptcy of Enron (2001) and WorldCom (2002), then the auditing firm Arthur Andersen (2002).

• Even food giants such as McDonald are on the defense for creating an obese nation fed on junk foods.

• The crunch of 2007 is an outcome of the irrational exuberance through aggressive instruments of finance.

• The world economy is yet to recover.

DownslideWhy

• As the corporate world searches for a new direction a look back on the early days of deregulation may shed a light.

• Prior to 1979, the UK possessed one of the largest public enterprise sectors in Europe. Between 1979 and 1995 in excess of 50 billions of state assets (excluding proceeds from the sale of government owned housing) have been sold to the private sector and the share of employment accounted for by publicly-owned industries has fell from 7.2 per cent to under 2 per cent.

Social Contract

• As the public sector had lost much of its strength it was difficult to honour the welfare commitment of the earlier days of social contract.

• A new social contract was necessary. A new corporate role was envisaged, ethics became a force. In came issues such as CSR and Governance.

• The new equation of corporate performance would have to include elements other than profit.

Do no harmpreserve the planet

• We would need more than 3 planet Earth to support the human population if all of us had the same standard living as the people in the United States of America….. Our Ecological Footprint: Reducing Human Impact on the Earth, 1996, Mathis Wackernagel and William Rees

• Unfortunately, we still we have one planet to support us all.

Do no harmTriple Bottom Line

• The realization has led to our rethinking on how we live, what we do.

• Triple bottom line (Profit, People, Planet) accounting requires an attention to all elements of living beyond profit.

• Keep the earth as you found it, for the posterity. Do well by doing good.

• In addition there is greed of individuals and corporations that at times cross the tipping point. Leveraging is a requirement for success in business (debt is good, it tightens the company). But how much, when do we stop. Using resources from nature from water to agriculture to fuel is a requirement. But how to balance).

Ethics in the News March-April 2011

• Ratan Tata and Anil Ambani being questioned (India)

• Rajat Gupta being quizzed by the SEC in relation to insider trading by Rajagoplan

• Investment bankers bonus (UK)

• Share market scam (Bangladesh

Recent News

• Google facing anti-trust suit over digital books, infringement of privacy

• David Sokol puts Warren Buffet under question

• Auditor fined by SEC over Sattyam reporting of profit

• What is our road map?

Q. #1

• A company has an order from a business/customer for product but there is a lead time for making the product and delivering. In the mean time but later, a bigger and more important customer puts in an order for the same product and needs delivery immediately. Should the bigger favored customer be put ahead of the first order that came in?

What is ethical?

Q. #2

• A company has had a good profitable business year and wants to hand out special bonuses to management. Should the amount of money bonus given be based on the individuals’ efforts or based on popularity or favoritism to upper management?

• What is ethical?

Q. #3

• Relocating hazardous industry to poorer countries. Some breathe relatively unclean air. So what is wrong i