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Chapter 5

COMM200 Chapter 5 CSR.docx

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Queen's University
COMM 200
Gary J Bissonette

COMM200 Week 2 Readings Chapter 5 – Ethics and Corporate Social Responsibility ETHICS IN MANAGEMENT - Ponzi Scheme o An unethical scheme utilized by Madoff Investment Securities  In all, prosecutors estimated Madoff’s fraudulent activities resulted in him scamming investors of an estimated $13 billion (USD) o ‘Using money from new investors to reward older investors, while, at the same time, siphoning off significant amounts of money for himself.’ - NortelAccounting Scandal o Nortel overstated revenue some of which should have been deferred to future years; and another $250 million was completely fictitious o Members of the senior management team allegedly intentionally inflated Nortel’s earnings to achieve management bonuses  As revenue wasn’t enough to deliver required income, those accused allegedly engaged in practice of changing revenue recognition policies and of accruing or deferring variable costs and operating expenses to improve bottom line o The company, faced with debt in excess of $4.5 billion eventually became liquidated What is Ethics? - To answer this -> must assess ethics within an organization at two levels o First level has to do with individuals themselves o Second level being the culture of the organization within which individuals work Ethics and the Individual - Ethics: reflect the moral principles or beliefs about what an individual views as being right or wrong o Beliefs in part built around norms/standards of conduct society views as acceptable  Ethics can be thought of as an invisible hand inside us guiding our decisions  This personal nature [influenced by individual motivations, upbringing, personal pressures, etc.] of ethics makes assessing ethical boundaries within which an individual operates difficult o Rather than being viewed as a values-based decision model, the desired outcome is viewed as an economics-based decision model - The difficulty of interpreting ethical boundaries applies to both managers and employees and all individuals o Each of us has a different interpretation of what is acceptable/non-acceptable behaviour influenced by our own personal upbringing as well as societal and other external influences Ethics Wheel: Four sources guiding ethical interpretation in business decision making - 1) Individual values and Influences o Personal values, spiritual influences, past experiences, past environments, etc. - 2) Societal influences o Societal interpretation and conditioning, legal and regulatory guidelines - 3) Professional influences o Professional designation and association influences, industry practices - 4) Business culture o Pressure to meet company objectives, structure of “Reward system”, pressure from superiors, corporate “ethics” guidelines, stakeholder influences - In making decisions, we need to think in terms of what is not in our personal best interests, but what is in the best interests of the stakeholders and the public at large o Two methodologies for determining if ethical issues permeating from decisions being effectively dealt with:  A) Triple yes rule  B) Ethical Decision-making process “Triple Yes” Rule: Determining if Ethical issues are Effectively Being Dealt With - Yes #1 o Does the decision which I am making fall within the accepted values or standards that typically apply to all organizational environments - Yes #2 o Would I be willing to have this decision communicated to all of my organization’s stakeholders, and have it reported on the front page of the newspaper or serve as the lead story on a news channel? - Yes #3 o Would the people in my life with whom I have a significant personal relationship, as well as managers of other organizations, approve of and support my decision - The approach causes one to fully assess, ethically, the ramifications of the decisions made and the preservation of personal integrity Ethical Decision-Making Process - PURPOSE: get manager to slow down and think through consequences of a decision about to be made o Two key elements:  1) being sure you have initiated the proper depth of assessment to ensure full understanding of ethical dilemmas/consequences from the decision  2) test your interpretation of your intended decision with a mentor or key advisor to ensure correct interpretation of the situation and a complete decision-making frame of reference o PROCESS:  1) Identify if an ethical dilemma exists  2) In recognizing the dilemma, gather as many facts about the situation as is possible  3) Evaluate the alternatives available from the perspective of the various ethical positions  4) Choose what you believe to be the best alternative, “Test” it with a valued advisor to ensure correct interpretation  5) Initiate decision and closely monitor the results Conclusion - Most important skill that can be brought to workplace -> INTEGRITY o Business is about teamwork and being able to execute strategy and make decisions in a team-based environment o Have to be reliable, trustworthy, and honest o Also means being willing to take responsibility for mistakes made Ethics and Culture - The responsibility for cultural development does not end with motivation and employee performance (a lot of emphasis is placed on these factors) o An additional critical component of an organization’s culture is the defining of the boundaries of acceptable behaviour from its management team and employees  The importance of this component is underlined in that companies are vulnerable to serious consequences and brand equity erosion that occurs from unethical behaviour within mgmt. and employee ranks • For many organizations, the responsibility for developing policies relating to values, ethics, and financial integrity lies with its Board of Directors • If no board of directors -> advisory boards, equity partners, and individual owners take charge of defining these parameters - THEORY: o Establishing what the accepted zone of business actions and activities are for an organization  Three zones (plus one around green) • Blue zone: clarity and conciseness of the organization’s ethical behaviour and financial integrity policies • Green zone: accepted business decision-making principles which govern organizational activities • Grey zone: unclear decision-making principles which could result in questionable business practices • Red zone: clearly recognized unethical behavior - PROCESS: o Begins with establishment of mission and core values of organization o Flows through its goals and objectives into business decision making framework design process o Active ongoing monitoring of organization o Taking a leadership role in tightening such processes when and where required - SPECIFICACTIONS IN CREATINGACULTURE OF ETHICAL BEHAVIORAND FINANCIAL INTEGRITY BY BOARDS: o 1) Clearly define and establish boundaries of acceptable behaviour and financial integrity + create performance standards to evaluate adherence to these parameters o 2) boundaries must be clearly understood and communicated to all employees in the form of a policy or code of conduct  Key requirement -> senior mgmt. team must fully buy into development process and integration of code of conduct o 3) must appoint a representative at the Board level responsible to audit managerial and employee performance and action in critical areas of this code of conduct o 4) create and support a mechanism for the reporting of ethical concerns (whistle- blowing) within the organization [in a way ensuring employees who utilize it aren’t penalized or ostracized] o 5) Board must interact with senior mgmt. and external agencies monitoring the organization’s activities in order to discuss issues which could arise - KEYTAKEAWAY o Board of Directors, as representatives of the stakeholders of an organization, must see itself as the creator and sentinel of the organization’s conscience  They must take a lead role in: • development of mgmt. compensation policies • shaping an organization’s personnel policy • review of senior mgmt. performance • communication of organizational activities to stakeholders Regulating Ethics - In light of challenges in regulating ethics in organizations, regulatory agencies worldwide have been forced to create regulations defining how organizations should comply with financial integrity obligations and ethical decision-making and behaviour o E.g. Enron, Tyco, and WorldCom scandals led to the passing of the Sarbanes-Oxley Act of 2002 (SOX) - These acts, and the accompanying multilateral instruments, focus on protecting the interests of investors and all stakeholders by heightening the financial operational requirements of organizations around areas such as: o Auditor independence o Audit committee responsibilities o CEO and CFO accountability for financial reporting and internal controls o Faster public disclosure o Stiffer penalties for illegal activities Financial Crisis of 2008 - The financial crisis carried with it a whole new need for financial integrity reform o The SOX was a response to business misrepresentation and fraud o The financial crisis, however, demonstrated concern about the relationship between ethics and risk management  E.g. the degree of financial leverage along with an absence of necessary levels of liquid asset management to protect against such exposure • This has led to the development of high-quality global accounting standards • KEY OUTCOME: development of a single set of global reporting standards w
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