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PHIL 2600

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University of Guelph
PHIL 2600
Andrew Wayne

Full Philosophy of Business PHIL*2600 Notes Chapter 1 Notes: ­ Business ethics is not an oxymoron ­ Business ethics is the study of business situations, activities, and decisions where issues of  right and wrong are addressed ­ Business ethics is different from law, this is about morality Assessing the Morality of Free Drinks Given by Bartender Ethical Dilemma = Ethics + Law = Grey Area Ethical Dilemma – situation where you must assess the morality of the situation Defining morality, ethics, and ethical theory: ­ Morality is concerned with the norms, values, and beliefs embedded in social processes  which define right and wrong for an individual or a community ­ Ethics is concerned with the study of morality and the application of reason to elucidate  specific rules and principles that determine right and wrong for a given situation These  rules and principles are called ethical theories ­ Ethics rationalizes morality – to produce ethical theory – that can be applied to any  situation  Morality (Ethics rationalizes morality)  Ethics (to produce ethical theory)  Ethical  Theory (that can be applied to any situation)  Potential Solution to Ethical Problems Why Business Ethics is important: 1. Power and influence of business in society is greater than ever before 2. Business has the potential to provide a major contribution to our societies, in terms of  producing the products and services that we want, providing employment, paying taxes,  and acting as an engine for economic development 3. Business malpractices have the potential to inflict enormous harm on individuals, on  communities, and on the environment 4. The demands being placed on business to be ethical by its various stakeholders are  constantly becoming more complex and challenging 5. Few businesspeople have received formal business ethics education or training 6. Ethical violations continue to occur in business, across countries, and across sectors 7. Business ethics can provide us with the ability to assess the benefits and problems  associated with different ways of managing ethics in organizations  8. Business ethics provide use with the knowledge that transcends the traditional framework  of business studies and confronts us with some of the most important questions faced by  society ­  Ethical fashion for ethics gir s Business Ethics in Small Companies vs. Large Companies Small Companies: Autonomy and independence with respond to responsibilities of other stakeholders, and their  informal trust­based approach to managing ethics Large Companies: Much more formalized approaches with considerably more resources available to develop  sophisticate ethics management programs •According to Scholte (2005) globalization is not: –‘internationalization’  –‘liberalization’  –‘universalization’  –‘westernization’  •Globalization is: a process which diminishes the necessity of a common and shared territorial  basis for social, economic, and political activities, processes, and relations. –‘deterritorialization’ •Cultural issues •Legal issues •Accountability issues Globalization can affect all stakeholders of the corporation •Sustainable development is development that meets the needs of the present without  compromising the ability of future generations to meet their own needs. (World Commission on  Environment and Development 1987)  •Sustainability refers to the long­term maintenance of systems according to environmental,  economic and social considerations Components of Sustainability: Economic / Social / Environmental Triple Bottom Line: •(Coined by John Elkington) •Bottom line thinking suggests sustainability as a goal •Three dimensions: –Environmental perspectives –Economic perspectives –Social perspectives PHIL 2600 Chapter 2 Summary Framing Business Ethics What is a corporation? - The corporation is by far the dominant form of business entity in the modern global economy. - although not all businesses (such as sole traders) are corporations, and many corporations (such as charities and universities) are not-for-profit businesses. Key features of a corporation - A corporation is defined in terms of legal status and the ownership of assets - legally, corporations are typically regarded as independent from those who work in them, manage them, invest in them, or receive products or services from them. - corporations are regarded as having perpetual succession, i.e. as an entity, they can survive the death of any individual investors, employees, or customers—they simply need to find new ones - the corporation itself usually owns assets - Corporations are typically regarded as ‘artificial persons’ in the eyes of the law - they have certain rights and responsibilities in society - Corporations are notionally ‘owned’ by shareholders, but exist independently of them. - shareholders are not responsible for debts or damages caused by the corporation - Managers and directors have a ‘fiduciary’ responsibility to protect the investment of shareholders - senior management is expected to hold shareholders’ investment in trust and to act in their best interests Can a corporation have social responsibilities? - Milton Friedman vigorously protested against the notion of social responsibilities for corporations in three main premises: - 1. Only human beings have a moral responsibility for their actions - corporations are not human beings, therefore they cannot assume true moral responsibility, it is the individuals who set up the coloration that are responsible - 2. It is managers’ responsibility to act solely in the interests of shareholders. - the only responsibilities of managers is to make profit if the corporation abides by legal framework that was set up by society - any other actions is seen as ‘theft’ of the shareholders’ money - 3. social issues and problems are the proper province of the state rather than corporate managers - managers should not and can not decide what is in society’s best interest, this is a job of the government Can a corporation be morally responsible for its actions? - Joel Bakan - the legal designation of the corporation makes it unable to act except in thoroughly self-interested ways- that, in effect, the corporation is an unfeeling psychopath, which is ‘by any reasonable measure hopelessly and unavoidably demented’ - Two main arguments: - 1. every organization has a corporate internal decision structure that directs corporate decisions in line with predetermined goals. - the crucial point is that corporations normally have an organized framework of decision- making that, by establishing an explicit or implicit purpose for decision, clearly transcends the individuals framework of responsibility - 2. supporting the moral dimension of corporate responsibility is the fact that all companies not only have an organized corporate internal decision structure, but furthermore manifest a set of beliefs and values that set out what is generally regarded as right or wrong in the corporation— namely the organizational culture - Therefore corporations do have some level of moral responsibility of the individuals constituting the corporation Why do corporations have social responsibilities? (reasons why corporations are morally or ethically responsible) (reasons corporations should behave ethically) - Corporations perceived as being socially responsible might be rewarded with extra and/or more satisfied customers, whilst perceived irresponsibility may result in boycotts or other undesirable consumer actions. Companies with a strong global brand, consumer pressure can be the key driver towards more responsible practice. - employees may be attracted to a corporation that is socially responsible - committing to social actions and programs may forestall legislation and ensure greater corporate independence from government - a positive contribution to society might be regarded as a long-term investment in a safer, better- educated and more equitable community. further moral arguments - corporations cause social problems, and have a responsibility to solve those they have caused and to prevent further social problems arising - as powerful social actors, corporations should use their power and resources responsibly in society - Corporations cannot escape responsibility for impacts on society whether they be positive, negative, or neutral - corporations have to take into account the interests and goals of stakeholders, as well as shareholders. What is the nature of corporate social responsibilities? - Archie Carroll’s four part model of CSR includes; economic responsibilities, legal responsibilities, ethical responsibilities, philanthropic responsibilities - Economic Responsibility - shareholders who demand a reasonable return on their investments, they have employees who want safe and fairly paid jobs, customers who demand good quality products at a fair price. Responsibility of a business is to be a properly functioning economic unit and to stay in business - Legal Responsibility - demands that businesses abide by the law and ‘play by the rules of the game’ - Ethical responsibility - oblige corporations to do what is right, just, and fair even when they are not compelled to do so by the legal framework. - Philanthropic responsibility - at the tip of the pyramid, philanthropy means ‘the love of the fellow human’ this model incorporates activities that are within the corporation’s discretion to improve the quality of life of employees, local communities, and ultimately society in general. CSR in an international context - economic responsibility, in the US is focused on the profitability of companies and the responsibility of shareholders. - France has extensive responsibility for employees; India has tradition of investment in the local community - Legal responsibility, In Europe, key enforcer of rules; elsewhere government seen with more skepticism (corrupt, interfering with liberty) - Ethical responsibility, wide range of local ethical values & preferences: expectations vary - Philanthropic responsibility, Europe tends to compel giving via legal framework; elsewhere( Asia, India, china), companies are expected to share their wealth CSR and strategy—corporate social responsiveness - Corporate social responsiveness refers to the capacity of a corporation to respond to social pressures - Archie Carroll’s 4 philosophies - Reaction - corporation denies any responsibility for social issues - Defence - corporation admits responsibility, but fights it, doing the very least that seems to be required - Accommodation - corporation accepts responsibility and does what is demanded of it by relevant groups - Pro-action - corporation seeks to go beyond industry norms and anticipates future expectations by doing more than is expected (this is what most companies claim they do) Outcomes of CSR: corporate social performance - Social policies - explicit and pronounced corporate social policies stating the company’s values, beliefs, and goals with regard to its social environment. - Social programmes - specific social programmes of activities, measures, and instruments implemented to achieve social policies. - Social impacts - social impacts can be traced by looking at concrete changes the corporation has achieved through programmes implemented in any period, is most difficult to achieve, since much data on social impacts os ‘soft’, and the specific impact of the corporation cannot be easily isolated from other factors. Stakeholder Theory of the Firm - Developed by Edward Freeman (1984) - is probably the most popular and influential theory to emerge from business ethics - a stakeholder of a corporation is an individual or group which, either: is harmed by, or benefits from, the corporation; or whose rights can be violated, or have to be respected, by the corporation - evan and freeman define ‘affects’ and ‘affected’ - principle of corporate rights - the corporation has the obligation not to violate the rights of others. - principle of corporate effect - companies are responsible for the effect of their actions on others. - The traditional management model of managerial capitalism, where the company is seen as only related to only four parts; suppliers, employees, and shareholders, and consumers. The ‘shareholders’ are the owners of the firm and are the dominant group - the stakeholder theory of the firm, where shareholders are one groups among several others. The company has obligations to not only one group but also to a whole variety of other continuances that are affected by its activities Why stakeholders matter - Milton Friedman - businesses should only be run in the interests of their owners - Freeman - others have a legitimate claim on the corporation - legal perspective - ‘stake’ in corporation already protected legally in some way (legally binding contracts) - Economic perspective - externalities which are outside contractual relationships, or agency problem, which are short term interests of ‘owners vs. long term interests of managers, employees, customers etc. A new role for management Freeman - rather than simply being agents of shareholders, management has to take into account the rights and interests of all legitimate stakeholders: Stakeholder democracy, which gives stakeholders an opportunity to influence and control corporate decisions. corporate governance, which codifies and regulates the various rights of stakeholder groups. Stakeholder thinking in an international context - stakeholder theory as a term is relatively new in places like Europe or Asia, the general principles have actually been practised for some time: - German supervisory board includes employee representatives, and is a broader orientation of corporations towards stakeholders in many European countries - ‘Keiretsu’ system in Japan, a network of banks, manufacturers, suppliers, and service providers Different forms of stakeholder theory - By Donaldson & Preston (1995) - Normative stakeholder theory - attempts to provide a reason why corporations should take into account stakeholder interests - Descriptive stakeholder theory - attempts to ascertain whether (and how) corporations actually do take into account stakeholder interests - Instrumental stakeholder theory - attempts to answer the question of whether it is beneficial for the corporation to take into account stakeholder interests Corporate accountability - the firm as a political actor - Corporate accountability refers to whether a corporation is answerable in some way for the consequences of its actions - Firms have begun to take on the role of political actors - taken up many of the functions previously undertaken by government because of - government failure - Risk society thesis - examples are risks of nuclear power, the risks of global warming, the risks of industrial agriculture, and the risks inherent in new technologies such as genetic engineering. - organized irresponsibility - why do governments fail? - sometimes they are too much a part of the problem to be able to be part of the solution Corporate power on the rise - liberalization and deregulation results in more power and choice for private sectors, the more strongly the market dominates economic life, the weaker governmental influence and intervention is. - privatization of major public services and formerly public-owned companies. Major industries such as media, telecommunications, transport, and utilities are now dominated by private actors - most industrialized companies countries are to varying degrees struggling with unemployment, governments cannot control unemployment level because that is a decision of the corporation - globalization facilitates relocation and potentially makes companies able to engage governments in a ‘race to the bottom’ - corporations are re-locating to low cost regions where they are faced with lower level of regulation The problem of democratic accountability - The central points are the questions of who controls corporations and to whom are corporations accountable - Key to corporate accountability is transparency, which is the degree to which corporate decisions, policies, activities and impacts are acknowledged and made visible to relevant stakeholders - corporate transparency, and accountability are being presented as necessities, with regard to the practical aspects of effectively doing business and maintaining public legitimacy Corporate Citizenship: Three perspectives - A limited view of CC - this equates CC with corporate philanthropy - An equivalent view of CC - this essentially equates CC with CSR - An extended view of CC - this acknowledges the extended political roles of the corporation in society Limited view - Focus: philanthropy, focused on projects, limited scope - main stakeholder group: local communities, employees - motivation: primarily philanthropic; also economic where citizenship is ‘strategic’ - moral grounding: reciprocity, i.e. ‘putting something back’ Equivalent view - Focus: All areas of CSR - main stakeholder group: broad range of stakeholders - motivation: mixed - economic, legal, ethical, philanthropic - moral grounding: duty to be responsible and avoid harms to society Extended view - focus: citizenship; social, political, and civil rights - main stakeholder group: broad range of citizens; society in general - motivation: political - moral grounding: grounding is not moral, but comes from changes in the political arena Corporate citizenship describes the corporate function for governing citizenship rights for individuals - the extended conceptualization of CC - Social role of the corporation in governing citizenship - social rights - corporation as provider/ignorer - civil rights - corporation as dis-/enabler - political rights - corporation as channel/blockage Assessing corporate citizenship as a framework for business ethics - The extended view of CC helps us to see better the political role of the corporation and clarifies the demand for corporate accountability that is such a prominent feature of contemporary business ethics thinking - CC in this sense also helps us to better understand some of the challenges presented by the new context of globalization - These rights of citizenship, which include rights to equality, participation, and a safe and clean environment, also have strong links to the new goal for business ethics of sustainability - finally although the notion of CSR has been widely adopted all over the world, the extended view of CC provides us with a more critical perspective on the social role of business that is more in keeping with non-US ways of thinking about business ethics Chapter 3: • Ethical theories are the rules and principles that determine right and wrong for a given situation. • The role of ethical theory (Richard de George 1999) ◦ Ethical absolutism Claims that there are eternal, universally applicable moral principles. Right and wrong are objective qualities that can be rationally determined. Western modernism Set out universal rules or principles that can be applied to any situation to provide the answer as to what is right or wrong. Ethical relativism Morality is context- dependent and subjective. There are no universal right and wrongs that can be rationally determined depending on the person making the decision and the culture in which they are located. This is for international judgment where morality is culturally determined. This is different than DESCRIPTIVE RELATIVISM which this suggests that different cultures have different ethics All sets of cultural beliefs can be equally right. Pluralism Middle ground between absolutism and relativism Considers a range of perspectives. 2 basic ideas by John Kaler 1999 Morality is foremost a social phenomenon. There is diversity of moral convictions. So there will never be an idea that EVERYONE agrees on, but we just accept that Morality is primarily about harm and benefit. Right and wrong ate about avoiding harm and providing benefits. And we trust that consequences will keep society from going too much into the harm side Normative ethical theories: north america and European origins and differences (Palazzo 2002) Individual versus institutional morality In the USA there is individual moral behaviour. In europe they focus on design of institutions in the economic system which is the main influence in developing and applying theory Questioning versus accepting capitalism In the USA they don't usually question the existing framework of management, but they still see that there are problems in the ethical system. In Europe business ethics actually question justification of capitalism. They put more effort into defending and refining the ethical legitimacy if capitalist economic thought. They have a more critical approach Justifying versus applying moral norms In Europe where previously religion has had a lot on influence on morality, but now there is a strong pluralism of moral convictions and values. In the USA justification and legitimacy of ethics are not as much of a focus. They focus on the application of morality to business ethics. They rely on mainly Christian based values in their moral code. European and north American approaches focus on philosophical arguments Asian, Islamic, Buddhist all focus on more traditional community values. • Western modernist ethical theories Ethical theories are regarded as appropriate for business contexts based on philosophical thinking generated in Europe and north America in the eighteenth century When traditional religious approaches were MODERNIZED. The western modernist theories offer rules and principles that can be applied to any situations (absolutist) because they start with assumptions about the world and about the human beings in the world. So the underlying assumptions of the situation will help us govern the approach. Figure 3.1 Right hand side- theories based on moral judgment on the outcomes of the action. If they are desirable then the action is morally right. If the action is undesirable then the action is morally wrong. The moral judgment in CONSEQUENTIALIST THEORIES (teleological) based on intended outcomes and goals of actions. Versus non CONSEQUENTIALIST approaches are linked to Judeo Christian from reasoning of rights and duties. Theories of rights and duties are called deontological which look at the desirability of principles and the duty to act accordingly in the given situation Consequentialist theories (refer to figure 3.2) 2 main theories (egoism and utilitarianism) Egoism Focuses on the outcomes for the Decision maker Following the theory of egoism, an action is morally right if the decision maker freely decides in ord to pursue either their (short to) desires or their (long term) interests Concepts of man - man has only a limited insight into the consequences of actions. Man pursues his own interests. Adam smith (1793)- in the economic system, this pursuit is acceptable because it produced a morally desirable outcome for society through the invisible hand of the marketplace. Aka one is likely to find a moral outcome as the end product of a system based in free competition and good information. This is not selfishness. Selfishness is insensitive to others, egoism is unselfish in the choice. Utilitarianism Focuses in the wider social outcomes within a community An action is morally right if it suits in the greatest amount of hood for the greatest amount of people affected by the action. Man is a hedonist with the purpose to maximize pleasure and minimize pain. Utility is measured in terms of pleasure and pain. Utilitarian analysis is highly compatible with the quantitive, mathematical methodology of economics (cost benefit analysis) Problems with utilitarianism Subjectivity-assessing consequences as pleasure and pain depend on perspective of the analyzer. Quantification- assigning costs and benefits of situations can be easy for one personabd difficult for another. Also- weighting things more than others is based on an arbitrary scale. Distribution of utility- minorities are often overlooked when the majority are benefiting from the greater utility Act utilitarianism- looks at single actions and bases the moral judgement on the amount of pleasure ad the amount of pain this single action causes. Rule utilitarianism- looks at classes of action and asks whethere the underlying principles of an action produce more pleasure than pain for society in the long run. Non consequentialist theories (2) Ethics of duties Assigns duties to act in certain ways Immanuel Kant (1724-1804) Morality and decisions about right and wrong were not dependent on a particular situation Morality was a question of certain eternal, abstract, and unchangeable principles that humans should apply to all ethical problems Humans are therefore regarded as independent moral actors who make their own rational decisions regarding right and wrong 3 Maxims Act only according to that maxim by which you can at the same time will that it should become a universal law (golden rule), but religion "recognizes God as the ultimate source of value" (Pava 1998) Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only Act only so that the will through its maxims could regard itself at the same time as universally lawgiving. If an action survives all three of these tests then it is morally right Problems with ethics of duty Undervaluing outcomes- the outcomes do to form a fundamental part of the theory itself Complexity- Kant's way of evaluating theories is abstract and lengthy Optimism- people will not always do the right thing Ethics of rights and justice John Locke (1632-1714) Natural rights and certain basic, important, unalienable entitlements that should be respected and protected in every single action. These rights result in the duty of other actors to respect them. The main difference between this and the Kantian approach is that this does not rely on a rather complex process of determining the duties by applying the categorical imperative. Natural/human rights are based on a consensus of all human beings about the nature of human dignity. Basic human rights are the right to life, liberty, justice, education, fair trail, freedom of belief, association, and expression. But there is a lot of friction between the view of rights between Western cultures and all other cultures. The problem with justice Justice can be defined as the simultaneously fair treatment of individuals in a given situation with the result that everybody gets what they deserve Beauchamp and Bowie (1997) say that theories of justice see fairness in two ways: Fair procedures- fairness is determined according to whether everyone has been free to acquire rewards for his or her effort. Procedural justice Fair outcomes- fairness is detrained according to whether the consequences are distributed in a just manner, according to some underlying principle such as need or merit. Distributive justice. It is not always possible to get both of these fairnesses in one situation. Distribution of wealth has two extreme positions- egalitarianism and non-egalitarianism Egalitarian Justice is the same as equality, burdens and rewards should be distributed equally and deviations from equality are unjust Marxist thinking tells us that in real-world manifestations, there is momentum Problems with the fact that there are differences between people (skill, energy. . ) Non-egalitarian Justice in economic systems is ultimately a product of the fair process of free markets Robert Nozick Distribution of wealth in society is just as long as it has been brought about by just transfers and just original acquisition Two tests for justice in the economic context (John Rawls 1971) Each person is to have an equal right to the most extensive total system of basic liberties compatible with a similar system of liberty for all Social and economic inequalities are to be arranged so that they are both: To the greatest benefit of the least advantaged Before allowing any inequalities, we ensure that the basic freedoms are realized to the same degree for everyone affected by the decision Looks at the general human rights and required their fulfillment before we can proceed to the next stop Attached to offices and positions open to all under conditions of fair equality of opportunity Based on the assumption that inequalities are unavoidable in a free and competitive society But it has two conditions an arrangement is just when even the one who profits least from it is still better off than they would be without it. The second condition would be met if not only a privileged few could ascend the corporate ladder, but everyone has a fair chance of doing so, regardless of gender, race, appearance! Limits of Western modernist theories Too Abstract (Stark 1994)- traditional ethical theories are too theoretical and impractical for day to day concerns of managers Too reductionist (Kaler 1999)- each theory tends to focus on one aspect of morality at the cost of all the rest of morality Too objective and elitist (Parker 1998)- ethical theories attempt to occupy a rarefied high ground Too impersonal (Gilligan 1982)- abstract principles and traditional ethics to not take into account personal bonds and relationships. Too rational and codified (Bauman 1993)- because they try to distill right and wrong to rational rules of behaviour. There is no moral feeling or emotions Too imperialist- Western business theories do not apply to the rest of the world. Alternative perspectives on ethical theory Ethical approaches based on character and integrity Focus on virtue ethics Virtue ethics contends that morally correct actions are those undertaken by actors with virtuous characters. Therefore, the formation of a virtuous character is the first step towards morally correct behavior Virtues are a set of acquired traits of a character that enable a person to lead a good life Looks at a more holistic view by also looking t the way this profit is achieved and also by claiming that economic success is just one part of the good business like Ethical approaches based on relationships and responsibility Looks for rules and principles that when applied are fair, objective Feminist ethics- an approach that prioritizes empathy, harmonious and healthy social relationships, care for one another, and avoidance of harm above abstract principles. ▪ (Borgerson 2007) Relationships- feminists perspectives put an emphasis on the fact that ethical decisions are taken in a specific context of personal human interrelationships Responsibility- giving context to responsibility , the feminist perspectives suggest that decision making needs active responsibility Experience- feminist perspectives highlight that decisions are determined by past experience. Ethical approaches based on procedures of norm generation Normative prescriptions of right and wrong actions Discourse ethics- aims to solve ethical conflicts by providing a process of norm generation through rational reflection on the real life experience of all relevant participants Has been the underlying concept for the settlement of numerout disputes about the environmental impacts of corporate decisions, in which various stakeholders with completely divergent value systems had to come to a common decision on certain controversial projects (Renn et al. 1995) Ethical approaches based on empathy and moral impulse This school of thought fundamentally questions the link between rationality and morality that is inherent in all the we stemn modernist ethical theories Postmodernism tends to embrace a whole range of theoretical propositions and arguments, postmodern thinkers have been influences by ethics and morality Subjective and emotional conviction that humans have about right and wrong, baed on experiences, sentiments, and instincts Moral judgement is the gut feeling than anything else, but nullified when people enter organizations and become distanced from people who are actually going to experience the consequences of their decisions Postmodern ethics is an approach that locates morality beyond the sphere of rationality in an emotional moral impulse towards others. It encourages individual actors to question everyday practices and rules, and to listen to follow their emotes, inner convictions, and gut feelings about what they think it right and wrong in a particular situation. Holistic approach No separation between the private and professional realm, there is an abstract approach Examples rather than principles Morality is not based on rational theories, ethical reasoning is not embodied in principles and rules. They are based on experience and metaphors "Think local, act local" Postmodernists think that ethical reasoning is too broad! No one situation or reason is the same so things have to be tailored for specifically situations Preliminary character Ethical reasoning is a constant learning process of finding better and better fits for situations and different approaches for each. Refer to figure 3.8 for a summary of the theories in this chapter Chapter 4: Making Decisions in Business Ethics: Descriptive Business Ethics Theories This guide will function in the following way: each underlined section corresponds to a title of a  subtopic within the text. Within each subtopic is a description of the most important points within  that subtopic, including important keywords and definitions. The purpose of this is useful as a  quick reference and summary guide and NOT as a replacement for the actual textbook. You should  have read the material beforehand.  Descriptive ethical theories: theories that seek to describe how ethical decisions are actually made  in business, and what influences the process and outcomes of those decisions. These ethical theories tell us what businesspeople actually do, rather than what they should do.  (Theories outlining what people should do are called normative ethical theories). Methods used to determine if a problem should be assigned a moral/ethical status: a) The decision is likely to have an effect on others b) The decision has alternatives (so the decision in question isn't the only possible decision to be made, there are alternative actions available) c) The decision is perceived as ethically relevant by one or more parties. So even if you think that your action doesn't have an ethical nature, if any stakeholder thinks it does have an ethical consequence because of either a) or b) or both, then it automatically becomes an ethical problem Stages in ethical decision­making (Rest 1986). These are the stages that people go through when  making an ethical decision: i) Recognize a moral issue ii) Make some kind of judgement about that issue iii) Establish an intention to act upon that judgement iv) Act according to their intentions Thus, knowing what a good action is and actually doing it are distinct.  Relationship with normative theory: commercial managers continue to rely primarily on  consequentionalist thinking (143). This means that they look at outcomes and make a decision  according to that. For example, car manufacturers would weigh a recall by the amount of fines or  lawsuits they might get; versus the amount it would cost them to recall all the products (144). Influences on ethical decision making. The factors that affect ethical decisions:  - Individual factors (education, age, personality, etc) - Situational factors (job role, reward system, intensity of the moral issue, and so forth) International perspectives on ethical decision making:  - North Americans focus more on choice within constraints - Europeans focus more within the actual constraints themselves Individual influences on ethical decision making (149) - Age and gender: mixed evidence. Neither age nor gender influences the ethical decision being made - National and cultural characteristics: have a significant effect on ethical beliefs and actions. o Is affected by several factors, like individualism / collectivism (what kind of culture they come from, is it more individualistic or more collectivist) o Power distance: how strong the hierarchical power is, and how the power is distributed o Masculinity / femininity: extent of valuing things based on money, which is masculine, or relationships, which is feminine o Long/short term orientation: is the culture more oriented to short term goals (fiscal years) or long term goals (heaven) (legit.) - Education and employment: somewhat unclear. People who are more educated or have had more professional experience seem to influence ethical decision making. The type and quality of the education play a major role. If people were educated to be more moral, they will in general behave on a more moral/ethical level. Psychological Factors: - Cognitive moral development (CMD): small but significant effect on ethical decision making. Defined as: the different levels of reasoning that an individual can apply to ethical issues and problems. There's 3 levels o Level 1: self-interest, and avoidance of punishment o Level 2: individual does what is expected of them by others o Level 3: They reach a stage where what they want to do or what others want them to do doesn't matter. They will act based on what is right, not what they or others want. Criticisms of CMD:  Gender bias: male subjects, no female subjects in the experiment  Implicit value judgments: it's impossible to know what people actually think versus how they say they think  Invariance of stages: people behave differently at different times, and may move from one stage to another within the same day or even a couple minutes. - Locus of control: limited effect on decision making. Defined as: the amount of control and individual thinks he or she has on the world. - Personal values: significant influence. Defined as: an enduring belief that a specific mode of conduct or end-state of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state. This basically means that a personal belief is one that influences behavior, persists over time, and is concerned with well- being either collective or individual. Organizations try to incorporate this into employee behavior by setting organizational values, which is a code of how they expect people to behave. - Personal integrity: significant influence is likely but there have been no tests or empirical evidence. Integrity is consistency. It's defined as: an adherence to moral principles and values. So no matter what situation you're in, if you believe that you should act a certain way, you'll do it despite the consequences. It plays a big role in whistleblowing (which is when employees expose immoral actions of the corporation). - Moral Imagination: this is new. It refers to whether an individual has a sense of the variety of possibilities and moral consequences of their decisions, and the ability to imagine a wide variety of possible issues, consequences, and solutions (159). Situational influences on decision making - Divided into two categories: issue related factors, and context related factors Issue related: 1. Moral Intensity: reasonably new factor. The intensity of an issue will vary according to 6 issues: a. Magnitude of consequences: sum of harms versus sum of benefits b. Social consensus: the degree to which people are in agreement over the issue c. Probability of effect: how likely is there to be a problem if the decision is carried through with? d. Temporal immediacy: speed of which the consequences are likely to occur e. Proximity: how close, or personally vested, is the person with the consequences? f. Concentration of effect: is it going to impact a few people heavily, or a lot of people less heavily? All these factors play a role in determining the action of an individual when considering an ethical or ethical action. 2. Moral Framing: affects moral awareness. The way in which an issue is presented. For example, claiming that you cut and pasted a line into your essay is quite different from saying that you 'stole someone's ideas and passed them off as your own'. The latter frames the ethical issue in a rather harsher light. This relates to the fact that managers are hesitant to ascribe moral terminology to their work, or accuse employees of acting immorally for the following reasons: a. Threats to the harmony of the workplace b. Threats to the efficiency to the task being carried out c. Damage to their image of power and effectiveness if the employee does not listen to the manager Thus, managers often amoralize actions be framing them in a light in which they would not have to deal with them in a moral light. Or, they would use rationalization tactics, which allow them to view their corrupt actions as justified. There are several other tactics used to morally frame issues:  Denial of responsibility: it's not my fault  Denial of injury: no one's getting harmed  Denial of victim: they deserved it  Social weighting: you have no right to criticize us  Appeal to higher loyalties: god told me to  Metaphor of the ledger: It's ok if I use the internet for personal use at work, after all, I work overtime at home Context Related: 1. Rewards: strong correlation between reward/punishment and ethical behavior. Ethical violations that go unpunished are likely to be repeated. Adherence to ethical principles when there's no reward for them tends not to be repeated. 2. Authority: Good general support that this significantly influences ethical behavior. People do what they're told to do, or what they think they're told to do. They have to do what their bosses want, even if this requires them to behave immorally. 3. Bureaucracy: significant influence on moral behavior. This takes several shapes: a. Suppression of moral autonomy: individuals acts as moral robots; they're expected to simply follow the rules without questioning the why or the how. b. Instrumental morality: ethical decision making centers around correct procedures have been taken to achieve certain goals, rather than focusing on whether the goals themselves are ethical to begin with. c. Distancing: person doesn't see the immoral action's results. Like buying coffee beans from a supplier over ebay – you don't know how that is going to affect the coffee bean growers, you don't see what happens to them d. Denial of moral status: render people, animals, or issues into 'resources' so you're no longer concerned with if you're treating them morally, but if you're taking full advantage of your human or animal 'resources' – thus denying them any moral status at all. 4. Work roles: no evidence that this influences behaviour. We simply adopt out prescribed roles without questioning. We stick to our role carefully and don't say nay. 5. Organizational culture: strong influence on behaviour. How people act in the organization. Like taking things from work that are 'perks' like supplies and paper and internet use for personal reasons. You're more likely to start engaging in that behaviour if everyone else in the organization is. 6. National context: no evidence that it impacts behaviour, but it is very likely that it does. The local-national culture affects decision makers where norms are ambiguous, but not where there is more broad cross-cultural consensus such in the case of hypernorms, like basic human rights (176). Summary: situational factors are the most influential, although CMD and personal values are big as  well.  CHAPTER 5  Managing Business Ethics:  Tools and Techniques of Business Ethics Management What is business ethics management? • Managing any area of business constitutes a whole range of activities covering formal and informal means of planning, implementation, and control. • Business ethics management is the direct attempt to formally or informally manage ethical issues or problems through specific policies, practices, and programs Components of business ethics management • Mission or values statements o General statements of corporate aims, beliefs, and values o Include social goals o All companies have one since it gives broad vision for where the company is going o Statements have little evidence that they impact employee behavior o Statements are not effective unless it is backed up by substantive ethics management throughout the organization • Codes of ethics o Explicit outline of what type of conduct is desired and expected of the employees from a ethical point of view • Reporting/ advice channels o Providing employees appropriate channels of reporting and receiving advice vital for identifying potential problems and resolving them o Examples ethics hotlines • Risk analysis and management o Language of risk assessment has enabled business ethics to show help by pointing out risks run into by ignoring ethics and measuring these risks in monetary terms o Most companies have not developed integrated approach to risk and ethics o These techniques focus on easily identifiable legal and ethical risks o Human rights violations, corruption, and climate change impacts starting to be on risk radars • Ethics managers, officers, and committees o Ethics officers are now common due to increased emphasis on compliance in US Sarbanes-Oxley legislation o Ethics and Compliance Officer Association (EOCA, est. 1992) in US with 1300 members o Position is less common in Europe, Asia and other countries, but 5 continents have members of EOCA o Large corporations now have ethics committee, oversee mgmt. of business ethics • Ethics consultants o Now established sector in marketplace o Driven by environmental consultants o Offers a broader portfolio including research, project mgmt., strategic advice, social and environmental auditing and reporting, verification, stakeholder dialogue. o Dominated by large firms with sections dedicated to ethical consulting • Ethics education and training o Maybe offered in house or externally o Most common in US, but is increasing around the world o Academic writers stress need for ethics training among business people to provide tools to solve ethical dilemmas but also to provide them with the ability to recognize and talk about ethical problems more accurately and easily o Goals for ethics training  Identifying situations where ethical decisions making is involved  Understanding the culture and values of the organization  Evaluating the impact of the ethical decision on the organization • Stakeholder consultation, dialogue and partnership programs o Various means of engaging stakeholders form surveying them to assess their views on issues to including them more fully in corporate decisions making o Evident that if good business ethics is about doing the right thing then it is essential to consult with relevant stakeholders in order to determine what other constituencies consider as right in first place • Auditing, accounting, and reporting o Concerned with measuring, evaluating, and communicating the organizational impacts and performance on a range of social, ethical, and environmental issues of interest to their stakeholders. o Not big in US but is in Europe. Rapidly changing throughout the world o SA8000 and Global Reporting Initiative (GRI) seek to provide internationally comparative standards for aspects of auditing, accounting, and reporting o These elements can provide crucial role to enhancing corporate accountability in era of corporate citizenship Evolution of business ethics management • Few if any businesses are likely to have all of these tools and techniques in place, many have none at all. o Many small to medium sized companies tend to not introduce more formalized elements of ethics management and reporting • Previously purpose of ethics mgmt. focused on managing employee behavior. Now there is increasing attention on the management of broader social responsibilities • More externally focused components have typically involved the consideration of other stake holder demands and considerations • Effective ethics mgmt. needs to focus on both internal and external aspects • Firms tend to be slow to integrate ethics and compliance functions with the CSR and sustainability areas of the business Setting standards of ethical behavior: designing and implementing codes of ethics Most attention in business ethics theory and practice has focused on code of ethics • Codes of ethics are voluntary statements that commit organizations, industries, or professions to specific beliefs, values and actions and/or that set out appropriate ethical behavior for employees Four main types of ethical codes 1. Organizational or Corporate codes of ethics- specific to a single organization. Codes seek to identify and encourage ethical behavior at the level of individual organization 2. Professional codes of ethics-Professional groups often have their own guidelines for appropriate conduct 3. Industry codes of ethics- can be in specific countries or on international level. 4. Program or group codes of ethics- certain programs, coalitions, or other sub groupings in organizations also established codes of ethics for those participating in specific programs. Sometimes, conforming to program code is prerequisite for using a particular label or mark for accreditation Four Main issues on the code of ethics • Prevalence of codes of ethics o 2/3rds of UK companies have code of ethics, while most of US companies do • Content of codes of ethics o Codes typically address a variety of issues many appear to reflect industry factors and prevailing concerns of the general public. o Industry factors for apparel focus on labor, while extractive industry focus on environmental. o Most codes attempt to achieve one or both of following  Define principles or standards that the organization, profession, or industry believes in or wants to uphold  Set out practical guidelines for employee behavior, either generally or specific situations o Hoffman states that for codes to be effective they should address both these tasks  Rules of conduct without general values statement lack a framework of meaning and purpose  Credos with out rules of conduct lack specific content o Question of how codes can actually be crafted to achieve these ends is crucial o Cassell argues whilst clarity is obviously important, the desire for clear prescriptions for employees in specific situations can clash with needs for flexibility and applicability to many situations o Much ambiguousness in codes of ethics to not offend many stakeholders • Effectiveness of codes of ethics o Code that isn’t communicated clearly about what its trying to achieve or why might raise resentment o Lisa Newton suggests maximizing participation in development stage to get commitment to the principles and rules of the code o Webley states that for the codes to have credibility, companies must be willing to discipline employees breaching them o Trevino’s study says follow through is much more influential on employee behavior than just presence o Sethi suggests that codes need to be translated into standardized and quantified audit instruments that lends itself to clear consistent assessment and that code compliance must be linked to managements performance evaluations o Research relating effect of codes and implementations on employees are limited o Codes have been identified as questionable control mechanisms • Global codes of ethics o Codes in multinational companies may need to be revised for international operations o Giving and receiving gifts have different cultural values across world. Japan it is offensive to not accept gift. o Many contrives like India show preference to friends and family over strangers o Islamic countries have unequal treatment of men and women in the work place o Thomas Donaldson states the key question for those working overseas is: when is different just different and when is different wrong? o Relativist would suggest that different codes should be developed for different contexts o Absolutists would contend that one code can fit all o Donaldson’s solution is to propose a middle ground between the two extremes where organizations be guided by 3 principles  Respect for core human values, which determine an absolute moral threshold  Respect for local traditions  The belief that context matters when deciding what is right and wrong o Beyond that solution codes should also respect cultural and contextual difference in setting out appropriate behavior in areas such as bribery and gift giving o Interfaith declaration: A code of ethics on international business for Christians, Muslims and Jews; identifies key principles shared by 3 faiths  Principles are justice, mutual respect, stewardship, and honesty o CAUX Roundtable-worldwide view for ethical and responsible corporate behavior. Principles guided by human dignity and kyosei (belief of living and working in a world together for the good of all) o UN Global Impact- set of 10 universally accepted principles concerned with human rights, labor, the environment, and anticorruption o Establishing and implementing a global code of ethics is increasingly expected from multinationals o Important that code of ethics is never going to solve the mgmt of business ethics o Code can rarely do more that set minimum expectation Managing Stakeholders Relations McKinsey survey found 4 out of 5 executives from global companies agreed that generating high  returns for investors should be balanced with other stakeholders interests, Indian managers most  positive and Chinese demonstrating the least commitment to this Managing stakeholder’s commitment has expanded to more those businesses, like charities and  schools for example • Assessing stakeholder importance: an instrumental perspective o Hill and Jones found that there might be conflict between business and stakeholders. It is important to please the most important stakeholders and satisfy their needs  Not so much rate the strength of ethical claims but the strategic objectives can be realized when deciding which stakeholders are more likely to influence the organization o Mitchell suggest 3 key relationship attributes likely to determine the perceived importance or salience of stakeholders  Power- the perceived ability of a stakeholder to influence organizational action  Legitimacy- whether the organization perceives the stakeholder’s action as desirable, proper or appropriate  Urgency- the degree to which stakeholder claims are perceived to call for immediate attention  Stakeholders with one of these attributes are considered latent stakeholders  Those with 2 attributes are expectant stakeholders  Those with all 3 attributes are definitive stakeholders • Types of stakeholder relationship o Might be a place for cooperation between stakeholders in business which was pioneered in environmental management o Examples are NGO’s with corporations o Dutch covenant approach involved business and government in jointly setting up voluntary environmental agreements based on consensus and consultation between gov and industry bodies o Different forms of stakeholder relationships  Challenge- relationship based on mutual opposition and conflict  Sparring Partners- relationship based on healthy conflict and periodic bouts of conflict  One-way Support- relationship based on philanthropy, sponsorship, or other forms of resource contribution from one party to the other  Mutual Support- relationship based on formal and informal two way support, such as derived from strategic philanthropy, or as formalized through a third party association or body of some kind  Endorsement- relationship based on paid/unpaid public approval granted form one partner to the other in relation to a specific product or program  Project dialogue-relationship based on discussion between two parties regarding specific project or proposal  Strategy Dialouge-relationsip based on discussion between partners over longer-term issues and the development or overall strategy for organizations, industries, or regulatory regimes  Task Force- relationship based on co-operation to achieve a specific task  Joint venture or alliance- relationship based on formal partnership involving significant mutual resource commitment to achieve specific goals o Collaboration increasingly important tool for managing business ethics because closer forms of collaboration can show stakeholders demands and interests, so companies have greater opportunity to satisfy them o Also may enhance corporate accountability • Problems with stakeholder collaboration 1. Resource intensity- Can be extremely time consuming and expensive 2. Culture Clash- Companies and stakeholders often have different values and goals that can lead to a clash in beliefs and ways of working. Both between and within collaborating groups 3. Schizophrenia- could be collaborating on one idea and in conflict over another different idea which leads to schizophrenic behavior on both sides and is hard to deal with 4. Uncontrollability- no guarantee a solution will be reached. Companies can lose control of strategic direction and corporate image 5. Co-optation-some stakeholders are just being co-opted by corporations to embrace a more business friendly agenda rather than maintaining true independence 6. Accountability- concerns about the accountability of stakeholder organizations themselves 7. Resistance- may try to resist the development of collaborative relationships thus preventing partners from fully achieving their goals Conclusion is that whilst the problems above need to be effectively thought through and dealt with  such developments should be cautiously welcomed and encouraged, given their considerable  potential for enhancing the management of business ethics Assessing Ethical Performance Initiatives that we include within the umbrella of assessing ethical performance like social auditing,  environmental accounting, and sustainability reporting. There are problems distinguishing between  different tools, techniques, and approaches o Approaches that begin with ethical tend to focus on internal management systems or individual level aspects. Second common use is found in approaches which tend to focus on stakeholder values such as ethical accounting o Approaches prefaces “environmental” tend to focus on exclusively on the organizations impact on the natural environment o Approaches prefaced “social” tend to have a broader remit, covering a range of issues in addition to the environment like employee conditions. Often incorporate impacts on a wide range of organizational stakeholders o Approaches prefaced “sustainability” tend to be concerned with the triple bottom line of social, economic, and environmental considerations o Differences between the use of the terms auditing, accounting and reporting are still less clear cut  Accounting is overall process or discipline which includes auditing and reporting • Defining Social Accounting o Key Factors that distinguish social accounting from conventional accounting  Focus on issues other than financial data  Intended audience being stakeholders other than shareholders  Unlike financial accounting, social accounting is not required by law in most jurisdictions o Social Accounting is the voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical, and environmental issues relevant to stakeholders o Most of the data for social accounting is qualitative o Problem is how to assess social impacts but also account for in first place o Social accounting will be evolutionary by nature with business o Report is how companies sees itself o Social accounting has revolved around communicating with stakeholders and getting views on what issues matter, and how they regard the organizations impact on areas of concern. • Why do organizations engage in social Accounting? o Internal and external pressure- Pressure from competitors, industry associations, governments, shareholders, consumers, and internal exec can give incentive for social accounting. Pressure can also come from unions media and pressure groups o Identifying risks- social auditing provides cleaner picture of what is happening in terms of social, ethical, and environmental impacts throughout their sphere of operations o Improved stakeholder management- social accounting gets new channel to communicate with stakeholders. Give clearer picture of what they are trying to achieve, what they are actually doing and what the implications are of their bus activities o Enhanced accountability and transparency-corporations need to make evident their social role and impacts for key in ensuring they are answerable in some way for the consequences of their actions. Limitations are that social accounting is voluntary and there are no standards to abide by o Disincentives for social accounting  Perceived high costs  Lack of standards  Insufficient information  Secrecy  Unwillingness to disclose sensitive information • What makes for “good” social accounting? o Key principles of quality (zadek) 1. Inclusivity- good social accounting will reflect views and accounts of all principal stakeholders, and will involve 2way communication with them 2. Comparability- In order for assessment of social performance to be meaningful social accounting should be allowed for comparison across different periods with other organizations and relative to external standards 3. Completeness- all areas of organization should be in assessment 4. Evolution – demonstrate a commitment to learning and change 5. Management policies and systems- consolidated within systems and procedures that allow it to be rigorously controlled and evaluated 6. Disclosure- clear disclosure of accounts and reports to stakeholders in a appropriate form for their needs 7. External verification- done by an external body trusted by audience 8. Continuous improvement- actively encourage organization to continually improve its performance across areas Evidence shows many of these principles are not integrated well in most social accounting,  o Important schemes to tackle issues in social accounting  Auditing and certifying- Social Accountability standard, SA8000, global workplace standard placed in 1997.l covers key labor rights working hours, forced labor, discrimination, and certifies compliance though independent auditors  Reporting- GRI has effort to create common framework for reporting social, environmental, and economic lines of sustainability  Reporting assurance- AA1000 Assurance Standard provides a coherent basis for assuring public report. Is consistent with GRI guild lines Organizing for business ethics management • Formal ethics programs o Compliance orientation- main emphasis is on preventing, detecting and punishing violations of the law. o Values orientation- defining organizational values and encouraging employee commitment to certain ethical aspirations. Rooted in personal self-governance and provides means for ethical decisions when no rules are in place o External orientation – focus on satisfying external stakeholders. What is right is what is expected to key externals o Protection orientation- some programs oriented to protect top manegement from blame. • Informal ethics management: ethical culture and climate o Improvements in ethical decision-making have been widely argued to require a managed transformation of the organization’s values in order to create a more ethical culture. o Companies that adopt a enterprise wide ethical culture dramatically reduce misconduct o Limited attention on how a culture change might take place, how it might occur or even if its possible o Existing cultural beliefs about what is right and wrong are very resistant to change o Peter dahler-larsen contends that attempts to create ethical cultures tent to reward conformity o Less than 10% of US companies have strong ethical culture o Cultural Learning focuses on smaller subculture groups ethical discourse and dialectic as well as conflict can be prompted, thus bringing the surface and challenging commonplace assumptions and behaviors o Role of management becomes identifying conflicting values, unleashing moral commitment of subcultures, and from their promoting moral imagination rather than imposing authoritarian ideological control o Limitations on cultural change approach  May have only limited potential to effect real change  More attractive to many firms who not only desire control over culture but also worried about damaging affects of bringing moral differences through process of cultural learning  Both pose challenge for leaders in presenting a appropriate context for ethical decision making • Business ethics and leadership o Leaders play a significant role in the contextual factors such as authority, norms, and culture, which we have shown to be key influences on ethical and unethical decision making o Kotter defines management as imposing order and leadership is about coping with change o Leadership is intrinsically moral terrain for its fundamentally entwined with a particular set of values or beliefs about what is right to do o Leaders can shape business ethics but can change business ethics o Trevino suggests there are two pillars to developing a reputation for ethical leadership  To be perceived as a moral person; starting with executive employees need to recognize a genuine individual traits  To be a moral manager entails focusing on organizations attention on ethics and values and infusing the organization with principles that will guide the actions of employees. o Cultural Learning perspective, role of leadership is more one of participation and empowerment in order to foster moral imagination and autonomy o Employees are encouraged to think independently, to be able to make reasoned, responsible evaluations and choices on their own o Advocating postmodern and discourse ethics o Ethical behavior is promoted through promulgation of specific beliefs and principles, facilitating personal moral engagement, dialogue and choice Chapter 6: Re­assessing the importance of shareholders (page 236) • Have a crucial stake in the organization • Expansion of ethical investment and the emergence of sustainable or socially responsible stocks suggest that stakeholders are interested in societal good as well as their own self interest • Financial crisis of the late 2000s due to lending practices in the U.S. mortgage industry, brings attention to ethical issues • Business ethics is now a core consideration for many investors and shareholders • Various ethical issues arise in shareholder relations, including insider trading, executive pay and money laundering Today owner­managers are rare. Examples of owner­managers (page 237)  Luciano Benetton in Italy  Richard Branson and Virgin in UK  Tata family in Italy Common pattern today is a separation of ownership & mgmt functions. (pg  237)  Owners no longer have a personal relationship to their corporation  Owners buy a share in the corporation  Owners expect the managers and employees of the company to run it in their (and other shareholders’) interest  Debate about the separation of ownership and control dates back to the 1930s – a publication by Adolph Berle and Gardiner Means. (i.e. if I own a bike or a house I can do whatever I want with it – paint bike green, or destroy it, etc.) There are crucial differences with the ownership of corporations (page 237) (1) LOCUS OF CONTROL. Control no longer in hands of owner. Control is hands of directors, the board or another committee. Shareholders thus have at best an indirect and impersonal control over their property. (2) FRAGMENTED OWNERSHIP. There are so many shareholders of a corp., that one individual could hardly consider themselves to be the owner. (3) DIVIDED FUNCTIONS AND INTERESTS. Shareholders interests are not necessarily the same as those who control the company. Shareholders→seprofits. Managers seek→ growth Primary consideration for shareholders is the protection of their  right  to   property , which amounts to certain  rights  (page 237, 238)  The right to sell their stock  The right to vote in the general meeting  The right to certain information about the company  The right to sue the managers for (alleged) misconduct  Certain residual rights in case of the corporation’s liquidation BUT THE RIGHTS DO NOT INCLUDE THE RIGHT TO A CERTAIN AMOUNT OF PROFIT OR  DIVIDEND. Managers are entrusted with duty to run company.  As follows (page 238) o Duty to act for the benefit of the company. →short term financial performance and →long term survival of the company. Shareholders decide at which level they want company to perform, managers have the discretion to implement this duty. o Duty of care and skill. Seek to achieve the most professional & effective way to run company o Duty of diligence. Refers to expected level of active engagement in company affairs. Invest every possible effort in running company in most successful way. Relationship between shareholders & company is defined by RIGHTS FOR THE  SHAREHOLDER and DUTIES FOR MANAGERS, or firm in general.    Conflicts can plague the relationship. These conflicts focus on key phrase of Corporate  Governance. CORPORATE GOVERNANCE  (page 238)  DESCRIBES THE PROCESS BY WHICH SHAREHOLDERS SEEK TO ENSURE THAT THEIR CORPORATION IS RUN ACCORDING TO THEIR INTENTIONS.  IT INCLUDES PROCESSES OF GOAL DEFINITION, SUPERVISION, CONTROL & SANCTIONING.  IN THE NARROW SENSE IT INCLUDES SHAREHOLDERS AND THE MANAGEMENT OF A CORPORATION AS THE MAIN ACTORS.  IN THE BROADER SENSE IT INCLUDES ALL ACTORS WHO CONTRIBUTE TO THE ACHIEVEMENT OF STAKEHOLDER GOALS INSIDE AND OUTSIDE THE CORPORATION (PAGE 238) Example of the Porsche CEO Mr. WENDELYN WIEDEKING made speculative investments, and  when discovered, the company was days away from bankruptcy in 2009.  (PAGE 239) Example of the CEO of Royal Bank of Scotland Sir FREDERICK GOODWIN “Fred the Shred”  was fired after the collapse of the bank in 2009, yet still was awarded a £16.9 million pension.  (PAGE 239) Agency relations (page 239)  The shareholder is a principal who contracts management as an agent to act in their interest  Within the boundary of the firm Two features of agency relations (page 240) 1. An inherent conflict of interest between shareholders and managers. Shareholders want profits, increases in share price, low salaries. Managers want to have high salaries and might pursue power and prestige to the detriment of the shareholder value. 2. Informational Asymmetry The principal has only limited knowledge and insight into the qualifications actions and goals of the agent. Referring to the example of Porsche above, Porsche shareholders might have been happy with profitability of company but had no knowledge of the investments made. Also, referring to the example of Royal Bank of Scotland, the shareholders may not have known about the pension previously agreed to, years before the scandal. Corporate governance • Describes whom the organization is there to serve • How the purposes & priorities of organization should be decided 2 systems of corporate governance: 1. Anglo-American model of capitalism →Market-based form of corporate governance. →focuses on the stock market as central element. →corps have to provide a high degree of transparency and accountability. →ethical problems can be insider trading. →a dominant role to shareholders. →employees have no say in the control of the firm (PAGE 241) 2. Continental European model →network based form of corporate governance. →small number of large investors. →banks and their loans are of major importance. →do not rely predominantly on the stock market. →long term preservation of influence and power. →executive pay is usually less directly performance related. →no need to disclose this to general public. →Stake holders other than shareholders play an important role. (PAGE 243). Board of Directors → separate body of people that supervise and control management Executive Directors →responsible for running the corporation Non-Executive Directors →ensure that the corporation is being run in the interest of shareholders Anglo-American model: →single tier board. →Executives & non executive directors Continental European model: →two tier board. →Upper tier (supervisory board which includes representatives of stakeholders other than just shareholders, and also includes banks and employees) Upper tier is non executive directors. → Lower tier of executive directors. The non-executive directors: 1. Drawn from outside the corporation 2. Not have personal financial interest in the corporation. Any remuneration must be minor 3. Appointed for limited period of time, so they don’t get too close to company 4. Competent to judge the business of the company 5. Sufficient resources to get information or commission research into company 6. Appointed independently. An independent auditor can audit the work of the board. (PAGE 245) BRIC countries:  Brazil, Russia, India, China.  (PAGE 244) EXECUTIVE REMUNERATION (PAGE 247)  In the late 2000’s executives of failing companies continued to earn millions in salaries and billions in bonuses.  A global trend towards million dollar salaries  Pay executives in shares.  Massive stock options.  Performance-related pay. 3 problems with executive pay in firm / shareholder relations. I. Performance related pay. →Salaries have sky-rocketed. →Leads to unrest in the company. →Executive salaries now include shares and share options. →Doesn’t always have the desired effect on share prices. II. Influence of Globalization on executive pay. →Market for executive talent is a global one. →Sets standard for high levels of pay. →In both Anglo-American model and Continental European model. III. Influence of the board is limited. →Fails to reflect the shareholder interests. Mergers and acquisitions are becoming more common across the globe. Sometimes only target the  profitable parts of the corporation.  Firm is restructured, downsized.  Consequences are that the  employees or local communities are disregarded.  (PAGE 249, 250). Hostile takeovers:  an investor or group of investors intends to purchase a majority stake in a  corporation, often secretly, against the wishes of the board.  Are ultimately possible only because shareholders want to sell their stocks (otherwise they would keep them anyway)  But, ethical concern arises if remaining shareholders do not want to sell. Executives have two options in a hostile takeover (PAGE 250) 1. Agree to the take-over. Are offered a “golden parachute”. Large sum of money 2. Offer to buy back the shares at higher price, in order to secure their jobs. “greenmail” (as opposed to blackmail) Faith stocks: (PAGE 251) • stocks that have no value, • are built on little more than blind faith. • Not built on solidly calculated profit expectations. • Optimism is misplaced • Products too complicated for managers to foresee the consequences • ETHICAL ISSUE; Stock prices contain an element of spectulation, and stock markets do not always fully reveal the amount of uncertainty • ETHICAL ISSUE; Analysts are responsible for ensuring informed transactions on the stock market Insider Trading: (PAGE 251,252) • Opposite of faith stocks • Investors might have superior knowledge of the market • Occurs when securities are bought and sold on the basis of non public information • Insiders are privileged over other players in the market regarding knowledge • Insiders can use their knowledge, take advantage for profit • Executives know company well, know information that will have a significant impact on companys share price well in advance of other potential traders • Can undermine investors trust in the market • Stock markets forbid the practice Four main arguments against insider trading (PAGE 252) 1. Fairness. → Inequality in the access to the information, leads to an unfair advantage. 2. Misappropriation of property. → Insiders use valuable information that they have no right of access. 3. Harm to investors and the market. →Makes the market riskier, threatens confidence in the market. 4. Undermining of fiduciary relationship.→ relation of trust and dependence among shareholders and corporate managers are based on managers acting in the interest of shareholders. But insider trading is fuelled by self interest. Strongest argument against insider trading. Accountants and credit­rating agencies (CRA’s)  Financial professionals and market intermediaries are Important professions  Provide a true and fair view of a company’s financial situation  Provide a judgement of the trustworthiness of an investment opportunity  Role of accounts varies from country to country  Today’s audits target the actual or potential shareholder  Focus on past periods of time  And focuses on the future potential of corporation also known as creative accounting. Projects figures for the future. Can be risky. Role of C.R.A.  Provide a credible assessment of financial productions  Investors have a better idea about what a fair price for the product would be  And what the risks associated with product are  Is the assessment of the CRA trustworthy? FIVE MAIN PROBLEMATIC ASPECTS OF THE FINANCIAL INTERMEDIARYS JOB (page  253­56) 1) Power and influence in markets→ the auditor can make an assessment on the corporation; if it is negative, this can have a detrimental effect on the firm & add to it’s difficulties. 2) Conflict of interest →intermediaries get close insight into the corporation; they have strong incentives to provide good ratings for their clients in order to secure business 3) Long-term relationships with clients→ the financial intermediaries enter a position of confidentiality with their clients & look for a long term relationship; this can threaten independence 4) Size of the firms→ many accounting firms are large multinational companies (MNCs); the bigger the firm grows the harder it is to maintain a constant standard of diligence; the auditor might lose the personal sense of responsibility for the task 5) Competition between firms→ there is a danger that corners will be cut to reduce costs; raising the prospect of less diligence and scrutiny by the auditing firm Private equity firms (PAGE 256, 257)  Usually invest money from institutional investors & wealthy individuals to reach a majority stake in a public company  Then take the company private  The private equity firms restructure the companies with the goal of reaching the highest possible value for the company  Now there are no longer obligations for public information about the company  Also, now lack of consideration for other stakeholders (employees and earlier investors) Hedge Funds (PAGE 257)  One specific form of private equity firm  Initially for investing in complex structured financial products for “hedging” risks from other investments  Now operating in a diverse array of financial investments  Transparency issues  They do not have to report to regulators  Do not have to fully disclose their strategies to their own investors  Notorious because of their high risks, unusually low taxes, huge fees for investors  Potential to mislead potential investors about their performance  Lack of transparency hides systemic risk  Have been identified as playing a key role in bringing about the financial crisis of late 2000s  Influence in restructuring many companies at the expense of jobs and employees interests  Their ethical reputation has been described as “locusts” SHAREHOLDERS AND GLOBALIZATION (PAGE 257, 258) Shareholders might become players in the global arena in four different ways: 1. Shareholders might become DIRECTLY involved abroad by buying share of companies in other countries 2. Shareholders might become INDIRECTLY involved by buying shares in a domestic company that operates globally by selling goods & services worldwide 3. Shareholders become involved in MNCs. Investing makes them INDIRECT players in global capital markets 4. Shareholders might become DIRECT players in international capital market by investing funds that direct their money to global capital markets. GLOBAL FINANCIAL MARKETS (PAGE 258)  Are the total of all physical and virtual (electronic) places where financial titles in the broadest sense (capital, shares, currency, options, etc) are traded worldwide.  Technological advances mean that via electronic trading, financial markets today are confined neither to certain locations nor to certain time slots  The key political development is the high degree of deregulation of financial markets  It’s possible to talk about one global market rather than many individual places of financial trade FIVE ETHICAL ISSUES OF GLOBAL FINANCIAL MARKETS (PAGE 258­260) 1. GOVERNANCE AND CONTROL→ deterritorialized markets impose the problem that no national government is entitled to govern these markets. In the late 2000s the economic crisis in the U.S became a global problem for many international banks since many of the mortgage-based securities were traded globally 2. NATIONAL SECURITY AND PROTECTIONISM→ Soverign Wealth Funds (government owned funds of countries which invest their budget surpluses in capital markets worldwide. ) None are governed by a liberal democracy. Governments in the west might want to avoid other countries gaining control of key industries such as banking, telecommunications and utilities. 3. INTERNATIONAL SPECULATION→ large speculative movements of financial assets can have particularly detrimental effects on the poor in developing economies. 4. UNFAIR COMPETITION WITH DEVELOPING COUNTRIES→ speculative moves of capital out of the country can cause an economic crisis in that country. Investors are initially attracted, they invest, realize the boom was speculative, withdraw the capital and the economy of that country collapses. 5. SPACE FOR ILLEGAL TRANSACTIONS.→ markets are not fully controlled by national governments; they can be used for transactions that would be illegal in most countries; terrorism / money laundering / illegal drug trafficking; tax evasion and fraud; secrecy in the swiss banking industry makes it successful REFORMING CORPORATE GOVERNANCE AROUND THE GLOBE (PAGE 260­261) Sarbanes­Oxley Act in July 2002 in the U.S.  Leads to significant changes in the practices of corporate America  A mandatory piece of legislation  Attempts to reform corporate governance through improvement of internal controls and external reporting mechanisms  Main focus is avoidance of criminal misconduct  Has an effect on the rest of the world, since many countries have business activities in the U.S. Introduction of new corporate governance codes in Europe  Since 1998 more than 50 national corporate governance codes have been introduced Introduction of South Africa’s “King Report on Corporate Governance in South Africa” 1994  Also known as The King Code  Influential as a template for corporate governance for the entire continent TYPICAL ISSUES DEALT WITH IN CODES OF CORPORATE GOVERNANCE ARE: (PAGE  261)  Size and structure of the board  Independence of supervisory or non executive directors  Frequency of supervisory body meetings  Rights and influence of employees in corporate governance  Disclosure of executive remuneration  General meeting participation and proxy voting  Role of other supervising and auditing bodies The financial crisis of the l
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