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Chapter 6

Chapter 6- Ethics and Corporate Social Responsibility.docx

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University of Toronto Mississauga
Dave Swanston

October 13, 2013 Chapter 6- Ethics and Corporate Social Responsibility Ethics in Management  Bernie Madoff; guilty to 11 federal felonies & Nortel Networks Corporation; overstated revenue  Ponzi Scheme- A type of investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors What is Ethics?  Both the private sector and government and not-for profit sectors have had challenges in ethics  Defining an unethical behaviour involves accessing ethics within an organization at two levels; the individuals and the culture of the organization within which the individuals work  Business ethics has to do with right and wrong business behaviour  Ethics can be thought of as an invisible hand that guides each of us as we make decisions  Why is ethics important:  Facilitates all dealings- trust  Lowers cost of transactions  Alternative to more regulations  Signals intentions- hiring, values  Motivates personnel, prospective hires and customers  Stakeholders are very interested  Sound framework for decisions and actions  Developments:  Ethical decision making  Ethical corporate cultures  Corporate social performance  Ethical investing  Scandals produce more regulation  Why managers don't act ethically  Cost of money or lose revenue opportunities  Long term costs of ethical behaviour don’t get revealed for a while so short term gains are obtained but long term costs are left to decision maker  Conflict of interest: managers make decisions for self interest which may not be good for other stakeholders or the good of society as a whole  Emerging Governance trends:  Independence of directions; judgement, role  Clarification of responsibilities of directors, officers, audit  Greater accountability and transparency  Specific criminal liability for CEO and CFO for misstatements  Greater interdependence of auditors  Whistleblower systems; financial, SEC & Canada  Conflicts of interest; avoid, reduce, and/or manage Measure to keep employees and executives on the right path  Conflict of interest examples  Why not accept a bribe  Should lawyer work for both husband and wife in a divorce October 13, 2013  If you were a purchasing agent, should you accept an invitation from a supplier to dinner and a Maple Leafs hockey game?  Examples of poor ethics in management: Enron, Conrad black, Nortel, Bernie Maddoff  Need to assess ethics within an organization at two levels: 1. Ethics and the Individual  Ethics- A reflection of the moral principles or beliefs about what an individual views as being right or wrong; built around norms of conduct society views as acceptable behavioural practices  In making decisions, we need to think in terms not of what is in our personal best interests, but what is in the best interests of the stakeholders and the public at large; understand where the boundaries lie, which should aid us in framing our decisions  Use the triple yes rule is used to determine whether the ethical issues from decision were effectively dealt with:  Ethical decision making process ^ gets manager to slow down and think through consequences of decision and it has two key elements: 1. Ensuring you have initiate the proper depth of assessment to fully understand the ethical dilemmas that may permeate the decision or exist below its surface October 13, 2013 2. Testing your interpretation of your intended decision with a mentor to ensure you are correctly interpreting the situation and that your decision making frame of reference is complete  Integrity- Honesty, reliability, ethics, moral judgement; the most important skill to bring to workplace; being responsible for mistakes you have made; have courage to do what is right 2. Ethics and Culture  Just as companies are vulnerable to shifts in market conditions, changes in intensity of competitive rivalry, disruptive technologies, and changing customer behaviour are also vulnerable to consequences and brand equity erosion that accompanies unethical behaviour  Board of Directors- Governing body of corporation comprising individuals chosen/elected to oversee management of organization; responsibility for developing policies related to ethics  Lack = responsibility falls on advisory boards, equity partners, and individual owners  Green zone acts as barrier to keep managers/individuals from straying into the zone of ethical and decision making uncertainty (grey zone) or zone of clearly define unethical behaviour (red zone)  Effective creation of culture of ethical behaviour and financial integrity includes: 1. Define + establish boundaries of acceptable behaviour and financial integrity + create performance standards to evaluate adherence to those parameters 2. Boundaries must be understood + communicated to all employees in form of policy which is not limited to financial integrity but also boundaries associated with ethical behaviour (internal and external) and consequences of following policies; senior management buys into development process 3. Appoint representative at board level whose responsibility = audit managerial + employee performance + action in critical areas of policy; key participant in reviewing personal related policies 4. Create mechanism for reporting of ethical concerns within organization; Whistle Blowing- Process through which individual informs someone in authority of dishonest act or the dishonest behaviour of another person October 13, 2013 5. Interact with senior management + external agencies to discuss issues that could arise with respect to management/employees and represent best interests of organization and stakeholders  As representatives of stakeholders of organization, must see itself as creator and sentinel of organization’s conscience  Code of Conduct- Name for statement that describes the required responsibilities, actions, and rules of behaviour of organization’s employees o Used in accordance to established consequences defined when unethical situation arises Regulating Ethics  Sarbanes-Oxyley Act of 2002 (SOZ) = Bill 198  Acts protect the interests of investors and all stakeholders by heightening the financial operation requirements of organizations around areas such as auditor independence, audit committee responsibilities, etc  International and national organizations- International Accounting Standards Board, and Financial Accounting Standards Board- called for heightened reporting standardisation and regulation; development of single set of global reporting standards may arise Forensic Accounting  Forensic Accounting- Integration of accounting, auditing, and investigative skills  Look beyond numbers to interpret what is transpiring in organization; critical to determining
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