MBA BOOK global business ethics

MBA BOOK global business ethics MBA BOOK global business ethicsMBA BOOK global business ethicsMBA BOOK global business ethicsMBA BOOK global business ethicsMBA BOOK global business ethics MBA BOOK global business ethics MBA BOOK global business ethicsMBA BOOK global business ethicsMBA BOOK global business ethicsMBA BOOK global business ethics MBA BOOK global business ethics

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Global Business Ethics

School of Distance Education

Bharathiar University, Coimbatore - 641 046

MBA Second Year (International Business)

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Author: R Hema Nalini

Produced and Printed

by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028

for

SCHOOL OF DISTANCE EDUCATION

Bharathiar University

Coimbatore-641046

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Page No.

UNIT I

UNIT V

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GLOBAL BUSINESS ETHICS

SYLLABUS

UNIT I

Introduction to Business Ethics: The nature, purpose of ethics and morals fororganizational interests; Ethics and Conflicts of Interests; Ethical and SocialImplications of business policies and decisions; Corporate Social Responsibility;Ethical issues in Corporate Governance

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Global Business Ethics

School of Distance Education

Bharathiar University, Coimbatore - 641 046

MBA Second Year (International Business)

Trang 6

Author: R Hema Nalini

Produced and Printed

by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028

for

SCHOOL OF DISTANCE EDUCATION

Bharathiar University

Coimbatore-641046

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Page No.

UNIT I

UNIT V

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GLOBAL BUSINESS ETHICS

SYLLABUS

UNIT I

Introduction to Business Ethics: The nature, purpose of ethics and morals fororganizational interests; Ethics and Conflicts of Interests; Ethical and SocialImplications of business policies and decisions; Corporate Social Responsibility;Ethical issues in Corporate Governance

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5 Introduction to Business Ethics

UNIT 1

UNIT I

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1.2.1 Definitions of Ethics and Business Ethics

1.3 Introduction to Business Ethics

1.4 Need for Business Ethics

1.5 Importance of Business Ethics

1.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to understand:

z Meaning of Ethics

z Need for Business Ethics

z Importance of Business Ethics

1.1 INTRODUCTION

In any organisation, from top management to employees at all levels, ethics is

considered as everybody's business It is not just only achieving high levels of

economic performance, but also to conduct one of business's most important social

challenges, ethically, at the same time simultaneously What are the ethical problems

which arise in business and how to solve them or what can be done about them are

explained in this module

The problems in a business are multifold Many of the vendors offer kickbacks to the

buyers, for the purchase of their goods These bribes are many a times hefty and

within a short period, the buyers make plenty of money

1.2 MEANING OF ETHICS

Ethics in Latin language is called 'Ethicus' and in Greek, it is called 'Ethicos' In fact,

this word has originated from 'ethos', meaning character or manners Ethics is thus

said to be the source of morals; a treatise on this; moral principles; recognized rules of

conduct

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By which we can judge again

Requires

Conduct

of a Person

Series of Actions

Known as Moral Judgement

Good or Bad, Right or Wrong, Moral

Moral Standard

Character

of a man

Figure 1.1: Meaning of Ethics

Ethics thus can be considered as the source of character of a person expressed as right

or wrong conduct or action

1.2.1 Definitions of Ethics and Business Ethics

z We will examine different definitions given for ethics in the dictionaries as well

It is a treatise on morals (capable of knowing right and wrong)

z 'Ethics' refer to the code of conduct that guides an individual while dealing in a situation It relates to the social rules that influence people to be honest in dealing with the other people

z Ethics are the principles of behaviour that distinguish the right from the wrong Business ethics is the evaluation of business activities and behaviour as right or wrong Ethical conduct conforms to what a group or society, as a whole considers right behaviour

z According to R.Wayne Mondy, 'Ethics is the discipline dealing with what is good and bad, or right and wrong, or with moral duty and obligation.'

z Ethics is that branch of philosophy, which is concerned with the lightness or wrongness, goodness or badness of human conduct Ethics provides the basis for deciding that a particular action is morally good or bad

z Ethics describes what is 'right' and what is 'wrong' in human behaviour, and what 'ought to be' Business ethics are the desired norms of behaviour exclusively dealing with commercial transactions Ethics is a description of 'observed' as well

as 'desirable behaviour' and 'conduct' that attempts to articulate moral values

z Ethics concern the rightness or wrongness of human conduct

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z According to John Donaldson, Business ethics, in short can be described as the

systematic study of moral (ethical) matters pertaining to business, industry or

related activities, institutions, or practices and beliefs It can also refer to the

actual standards, values or practices or beliefs (An example of the latter use is

seen in the title of Max Weber's book, 'The Protestant Ethic and the Spirit of

Capitalism') Business Ethics is the systematic handling of values in business and

industry

z In the simplest terms, business ethics are moral principles that define right and

wrong behaviour in the world of business What constitutes right and wrong

behaviour in business is determined by the public interest groups, and business

organisations, as well as an individual's personal morals and values

z The word 'ethics' is derived from the Greek word 'ethos' which refers specifically

to the "character" and "sentiment of the community."

z Shea, in 1988 defines ethics as the principles of conduct governing an individual

or a profession and "standards of behaviour."

z Ethics are the 'rules or standards that govern behaviours.' As per Brian Harvey,

ethics stands for a practice as well as a reflection on that practice As a practice, it

can be described as the conscious appeal to norms and values, to which, on

reasonable grounds, we hold ourselves obliged, as, reciprocally, we hold others

obliged to the same norms and values As a reflection, ethics is the methodical and

systematic elaboration of the norms and values, we appeal to in our daily

activities

z Ethics are about norms and values of a certain seriousness, about standards and

ideals, i.e., ones that people cannot easily neglect without harming others, or

without being looked at disdainfully by significant others It is about keeping your

promises, respecting sentiment of beings, and distributing benefits and burdens in

a fair and equitable way

z Business ethics are the application of general ethical rules to business behaviour

z According to Keith Davis and associates, ethics are a set of rules that define right

and wrong conduct These rules tell us when our behaviour is acceptable and

when it is disapproved and considered to be wrong Business ethics are the

application of general ethical rules to business behaviour

z Business ethics concentrate on moral standards as they apply to business policies,

institutions and behaviour It is a specialised study of moral right or wrong It is a

form of applied ethics It includes not only the analysis of moral norms and moral

values, but also attempts to apply the conclusions of the analysis to that

assortment of institutions, technologies, transactions, activities and pursuits that

we call business

z Business ethics are nothing but the application of ethics in business It proves that

businesses can be, and have been ethical and still make profits Today, more and

more interest is being given to the application of ethical practices in business

dealings and the ethical implications of business

z Business ethics are rules of business conduct, by which the proprietary of business

activities may be judged It also relates to the behaviour of managers

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10

Define the following:

1 Ethics ……… ………

2 Business Ethics ……… ………

1.3 INTRODUCTION TO BUSINESS ETHICS

Ethics is commonly defined as a set of principles prescribing a behaviour code, explains what is good and right, or bad and wrong It may even outline moral duties and obligations There is a combination of two familiar words, namely business and ethics in 'Business ethics' Business ethics are concerned with moral issues in business just as medical ethics are concerned with morality of medical practices and pedicles,

or political ethics are concerned with the morality of political affairs In business ethics, we arrive at two things:

z Looking at the problems which raise moral issues in business

z Critically examining the various problems for solving them

Includes

Figure 1.2: Understanding of Business Ethics

By what method do we decide on answers to questions of moral right and wrong in business? There is no special or unique process to do this, nothing more or less than is involved in any disciplined enquiry into complex problems, whether in business or anywhere else

We can subject this to three different kinds of tests

z Test of agreement with the evidence: Does the evidence support or deny the explanation we have put forward? Example, we are arguing for the benefits of greater worker participation in the running of companies, what is the evidence that employees actually want such involvement?

z Test of internal coherence: Are all the parts of the explanation in agreement with each other or is itself contradictory in some way? Does it say things which are somehow in opposition and so cannot be or are unlikely to be, equally true at the same time?

z Example: We cannot accept the workers who are exclusively interested in maximising wages and argue for the importance to them of an enhanced self esteem that would come from participation in decision making

z Test of its compatibility (with our more general system in belief): Does it fit in with what we generally take to be true in this area or does it somehow contradict our assumptions, or at least test uncomfortably with them? How well, for

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example, does the claim that the workers are exclusively interested in maximising

wages, fit in with what we generally accept about human motivation?

We attempt to solve ethical problems in much the same way as we would solve any

other complex and contentious questions There is the same range of test available and

the same kind of critical relationship to theory

1.4 NEED FOR BUSINESS ETHICS

Some of the experts in business ethics have stated the following:

1 Business Operates within the Society: It is a part of subsystem of society

Business's functioning must contribute to the welfare of the society In order to

survive, develop and excel, business must earn social sanction of the society

where it exists and functions Without earning social sanctions, business cannot

get loyal customers, cannot operate in the market place It will soon collapse and

die away

Society

Business

Figure 1.3: Business is a Subset of Society

If business grows larger, the public takes more interest in it, since this will lead to

a greater impact on the community Managers are tuned to public opinion and

they react to it They seek to maintain a proper image of their company in the

public mind This leads to the assumption of greater responsibilities:

Every business irrespective of size exists more on ethical means or in total

regard to its social concern to survive long: Otherwise, resorting to unethical

behaviour or not concerning with social welfare, it will call for its own doom

Thus, business should be ethical and socially responsible

As a statement of purpose, maximising of profit is not only unsatisfying, it is

not even accurate Business needs to remain ethical for its own good

Unethical actions and taking decisions will shorten the life of the business like

a flash in the pan, quickly growing and even more quickly dying and

forgotten

2 Business needs to Junction as responsible corporate citizens in the country: It is

that organ of the society which creates wealth for the country Hence, narrow

mentality and narrower goals and motives are to be avoided

Check Your Progress 2

Fill in the blanks:

1 _ refer to the code of conduct that guides an individual while

dealing in a situation

2 _ concentrate on moral standards as they apply to business

policies, institutions and behaviour

3 _ and _ schemes have become very common and

penalise honest business firms

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12

Business ethics has already been defined earlier However, it is the application of general ethical rules to business behaviour It is not a special set of ethical rules different from ethics in general and applicable only to business For example: If a society's ethical rule says that dishonesty is unethical and immoral, then anyone in business, who is dishonest with employees, customers, creditors, stockholders or competitors is acting unethically and immorally Similarly, if protecting people from harm is considered ethical, then business firm that recall a defective and dangerous product is acting in an ethical way

In most cases, the general public expects business to exhibit high levels of ethical performance and social responsibility Business firms and their employees are encouraged to act ethically is to prevent harm to society "Do no harm" is one of the strongest ethical principles Next is to protect business firms from abuse by unethical competitors Bribery and kickback schemes have become very common and penalise honest business firms High ethical performance protects the individual who work in business

Businesses that treat their employees with dignity and integrity reap many rewards in the form of high morale and improved productivity People feel good about working

in an ethical company since they are protected along with the general public

In spite of the positive benefits of good ethical practices, ethical problems occur for the following reasons:

z Personal gain/dubious character

z Individual values widely differ with organisational goals

z Managers values and attitudes

z Competitive pressures

z Cross-cultural contradictions

1.6 LET US SUM UP

Ethics can be defined as the study of what makes up good and bad conduct inclusive

of related actions and values Business ethics, which is a subject of the study of Ethics and is defined as the study of what makes up good and bad conduct as related to business activities and values (Business is defined as any individual or organisation, a corporation, a partnership, joint ventures or a franchise whose primary goal is to provide goods and services in order to obtain a return on investment) The value of Ethics can be well appreciated if a member of a society realizes that no one can ever live in isolation All the wealth and health is of no value if a man lives in an inhabited island Therefore the happiness come to a man only when he lives in the company of his near and dear ones and the society in harmony This is possible only when a sensible moral frame work that caters to all possible contingencies in a living world, especially in a business world

1.7 LESSON END ACTIVITY

Ethics concern the rightness or wrongness of human conduct Explain with appropriate examples

1.8 KEYWORDS

Ethics: It is the source of morals; recognized rules of conduct

Business Ethics: It is application of ethics in business

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1.9 QUESTIONS FOR DISCUSSION

1 Define Ethics What is business ethics?

2 Explain the concept of business ethics

3 Highlight the need for Business Ethics

Check Your Progress: Model Answers

CYP 1

1 It is the study of morals and moral choices It focuses on standards, rules

and codes of conduct that govern the behaviour of individuals and groups

2 In the simplest terms, business ethics are moral principles that define right

and wrong behaviour in the world of business What constitutes right and

wrong behaviour in business is determined by the public interest groups,

and business organisations, as well as an individual's personal morals and

Manuel G Velasquez, Business Ethics

Laura P Hart Man, Business Ethics

John R Boat Right, Ethics in Conduct of Business

William A Wines, Ethics Law and Business.

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2.5.2 Creating a Training and Development-oriented Organisational Culture 2.5.3 Values of Work

2.5.4 Fundamental Questions 2.5.5 Need for Values

2.5.6 Education and Training 2.5.7 Nature of Work 2.6 Let us Sum up

2.7 Lesson End Activity 2.8 Keywords

2.9 Questions for Discussion 2.10 Suggested Readings

z Nature of business ethics

z Objectives of business ethics

z Morals of organisational interests

Ethics does not bind people in a society through a framework of rules regulations and code of conduct That is put in a literature what is vital to the understanding and adaptation of principles of Ethics is the design development and implementation of an organisation That would facilitate inculcation of the principles and philosophy

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15 Nature and Purpose of Ethics

2.2 NATURE OF BUSINESS ETHICS

z Ethical issues commonly "occur in management It goes many a times for beyond

the commonly discussed problems of bribery, collusion and theft, reaching into

areas of corporate acquisitions, merger of firms, marketing policies and capital

investments

For example, if two firms are merged, ethical question arises with regard to

demoting or firing the employees of those who have been serving honestly for

many years

z Ethics is unstructured (does not have standard format or framework; abstract in

concept; does not have universal concept) as shown in figure 2.1

z Ethical decisions should express some obligations to others If a decision helps in

benefitting only to oneself, then that is not an ethical decision The very concept

of being ethical means that results in some good for the larger society and not just

Justice is not only done;

Also seen to have been done

Right

Just

Proper

Good Equitable

Right

Morally correct and due Characteristics needed

for a decision to be ethical

Just & Equal

Figure 2.1 Characteristics of an Ethical Decision

Ethics

Their Background and childhood Experience

Value system

of people

Moral Standards

D

I FFEREN

T

Depends

Depends on

Hence, Ethical practices of people are different.

Figure 2.2: Different Ethical practices of people

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16

Global Business Ethics

2.3 OBJECTIVES OF BUSINESS ETHICS

As per Peter Pratley, Business ethics has a two fold objective:

1 Evaluates human practices by calling upon moral standards

2 Gives prescriptive advice on how to act morally in a specific kind of situation

Scope of Business Ethics

Stake Holders level

Personal policy level

Societal level Internal policy

level

1 Employees Security of

job Better working conditions Better recommendation Participative Management Welfare facilities

2 Customers Better

Quality of Goods

Goods and services at reasonable price Not to corner stocks and create securities Not to practice discriminatory pricing Not to make false claims about products in advertisements

3 Shareholders Ensure

capital appreciation Ensure steady and regular dividends Disclose all relevant information Protect minority stake holder’s interest Not to window dress balance sheets Protect interests in time of mergers, amalgamations and takeovers

4 Bank and Other Lending Institutions

Guarantee safety of borrowed funds Prompt repayment of loans

5 Government

Complying with the rules and regulations

Honesty in paying taxes and other dues

Acting as partner in the progress of the country

1 Not to use Office car, stationary and other facilities of own use

2 Not fall prey to short ends

3 Not to misuse others for personal

4 Not to indulge in politics to gain power

5 Not to spoil promotional chances to others

or group

3 Concern for clean Environment

4 Contributing to better quality of life

1 Fair practices relating to requirement, compensation, layoffs perks, promotion, etc

2 Transformational leadership to motivate employee to aim

at better and higher things in life

3 Better communication at levels

Figure 2.3: Scope of Business Ethics

1 The first objective implies Analysis and evaluation It leads to an ethical diagnosis

of past actions and events

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Analysis consists of clarifying standards and lines of argument Here ethics can be

useful as one is often unaware about most moral values and habits of thought The

basic assumptions behind our moral actions and judgements are mainly taken for

granted Normative ethics sets itself a second and more curative purpose Ethics

develops rational methods for answering the present and future issues In order to

achieve the second objective, one has to inform Balanced judgements are based

on the careful assessment of the relevant information One has to be quite specific

when deciding upon appropriate normative standards If both these conditions are

met, ethical thought may lead to valid prescriptions

2 The second objective is to provide therapeutic (curative) advice It suggests

solutions and policies when facing the present dilemmas and future dangers, based

on well-informed opinions This especially requires an identification of relevant

stakeholder and a clear understanding of the vital issues at stake

What are the objectives of business ethics?

………

2.4 ETHICS VS MORALS AND VALUES

Ethics can be distinguished from 'morals' which are rules or duties that govern our

behaviour as persons to persons (such as "do not tell lies" or "do not hurt another

person") Ethics can be distinguished from 'values' which are ends or goals sought by

individuals (such as health or happiness)

Ethics is an area dealing with moral judgement regarding voluntary human conduct

Moral judgement requires moral standards by which human conducts are judged

Ethics are for the ultimate end or the highest good to be pursued Moral standards are

also related to moral obligations It is for the duty to do what considered to be right

and proper

2.5 MORALS FOR ORGANISATIONAL INTERESTS

2.5.1 Ideas at Work

On the quality of our aim in life depends the quality of life We are what our thoughts

are Doing is very good, but that comes from thinking Fill the brain, therefore with

high thoughts, highest ideals, and-place them day and night before you

Motivating the man in the manager to work for his self-development

What are we all working for? What is our purpose in life? Knowingly or unknowingly

we are all working for the attainment of the highest ideal of perfection This perfection

is already within us It is our real nature It is a state of limitless knowledge, happiness

and life The question is this - how can we work so that whatever we do brings us the

realization of that perfection within us? A manager must work in such a way that

he/she will manifest more and more of his/her inner perfection through his/her work

Managers are leaders of men Whatever a leader does, people follow that

If the Managers adopt for themselves a higher set of ideals; develop a visionary

purpose in life and a missionary zeal in action, then the entire organisation becomes

surcharged with effectiveness What is the ideal of work placed before us? Each

Manager is potentially perfect The goal is to manifest this perfection within Do this

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Global Business Ethics by work (or by knowledge, or worship or control techniques, by one, or more, or all of

these) and be free This then is the ideal of work; to attain the highest perfection through work and be free Our actions and its consequent reactions presently disturb this perfection within; the question is this, Is our daily work at par with this perfection? How can we work so that whatever we do, brings the realization of that perfection? This is the subject of Karma Yoga, the philosophy and science of work, which should be studied and practiced by every manager This is the science, which

we have inherited from the rishis

The responsibility for the effectiveness of organisation rests with the level of development of the individuals who run them The development of the individual to achieve the development of the organisation is necessary and it really means developing the man in the manager

The reason of low productivity in India is jealousy three men cannot be in concert in India for five minutes Each one struggles for power and in the long run, the whole organisation comes to grief

As per Vivekananda's analysis, India's thousand years of slavery and political imprisonment has generated this quality in the Indian people just as it has for others who had experienced similar servitude The solution lies in surrender to love and discipline throughout the management and entire workforce Indian managers need to return to sadhana to turn to specific practices for developing themselves, since all management is finally subjective

2.5.2 Creating a Training and Development-oriented Organisational Culture

The river is continuously giving It, therefore, always remains fresh A pond on the Other hand, does not give and so it stinks Knowledge is also like a river The more you give, the more you get This is a universal law Thus, the more the efforts the senior managers make in imparting their knowledge and skills in developing their juniors, the more will they themselves grow This chain reaction leads to organisational growth and, expansion

Any intervention to change or the development of the organisations culture should come from the top with total faith and commitment HRD is an important intervention Unless the top and senior management puts its heart and soul into training and development and is totally committed to it, these interventions will have no impact The senior managers should first be inspired towards undertaking self-development programmes for themselves and then inspire and motivate their managers and help them to grow and develop

Training and development does not merely mean going on a training programme but it means a continuous, deliberate effort to improve one self This is not easy; we always have to be on the lookout for inspiration

2.5.3 Values of Work

Work we must, because values are no substitute for hard work But values give direction and add flavour to the work and give it an altogether new dimension, a profundity that converts work into worship

What is the essence of the Indian thought as applicable to the managers?

Very simply stated, it is as follows:

Each manager is potentially perfect and the purpose of life is to manifest this perfection within This perfection can be achieved through work itself if we have the right perspectives and perform the work with the right attitudes

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Instead of just working, without a higher purpose, if we spend some time in seeking

answers to some fundamental questions, it will help us in being better managers It

will give our work a sense of direction and the work will acquire a new meaning

2.5.4 Fundamental Questions

The fundamental questions are:

Who am I? Who is the man behind the manager? Who is the person who sees and

perceives the objective world? What is our mind? What is our intellect? What is the

Universe? What is its purpose? What is the relationship between me, the work and the

Universe?

2.5.5 Need for Values

Management is decision making Decision making has always been, is always and

shall always be in the ultimate analysis, subjective The training and the purification

of the subjective, the man behind the manager is thus, imperative for effective

decision making

Having a set of values and ideals as our guide and practising sadhana - the techniques

for self-development every day gives us that all-important subjective quality that may

be called character efficiency Its results may not be immediately perceived but

nevertheless it is this that ultimately leads to individual and organisational

effectiveness

If not apparent in the short run, it will most certainly show up in the long run

It is our duty to determine our purpose and mission in life We may have many goals

to achieve but the purpose of life is something higher It is the road we decide to travel

on Goals are mere milestones on this road and one should avoid treating goals as the

purpose of life The purpose of life is an ongoing, continuous process and requires a

long-term vision and corporate leaders have to be men of vision

It is up to the managers to improve the image of India and bring back our pride in

being Indians as is the case with the Indian goods in the world market

It is a universal law that whatever a leader does, people follow that Thus managers, as

the true leaders of the workforce of the nation, must lead the way and adopt for

themselves the highest philosophy, the highest values and ideals and the best

techniques available for self-development The workforce will then follow suit and the

nation will prosper

Fill in the blanks:

1 _ guarantee safety of borrowed funds, prompt repayment of loans

2 Moral standards are also related to moral _ It is for the duty to do

what consider to be right and proper

3 Good actions will entail upon us _

2.5.6 Education and Training

Education and training is meant not only to give us knowledge and information, which

the present systems provide, but also builds up our character for which we have not

yet made any provisions We need a set of values and ideals as our guide, and

self-development techniques, to make values a part of our character The works and

examples of men who have lived with such ideals give us the inspiration to strive for

it The education and training programmes must therefore cater to this need and if not

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on us These ideas of the science of work, Karma - Yoga, need to be thoroughly discussed and understood since we all have our own misunderstandings This confusion is quite natural and is to be expected and accepted Through constant study, analysis, reflection and Sadhana, we move towards clarity of vision But first we should have Shraddha, faith in the values and then we should ask questions to clear our doubts and seek to understand This process makes understanding easier, in Algebra, when we assume 'X', we can assume it This is shraddha

The philosophy of Vedanta and the science of Karma Yoga, perhaps are the foundations of the Indian management culture, Indian management ethics, and Indian work culture We, as professionals have to usher in, to rediscover it, to imbibe it and

to spread it in our organisations and make it our guide in our work and day-to-day life

Ethics want a manager to be honest with himself and also with the society The manager has to perform his jobs well and his quality reflects in the success of a business Ethical issues may be sometimes occur as managerial dilemmas, measured

by revenues, cost and profits and the stated performance (in terms of obligation to persons both inside and outside the organisation) The essentials of designing developing and implementation of an organisational framework is vital if a society has

to learn to enjoy the benefit of ethical value system

“The responsibility for the effectiveness of organisation rests with the level of development of the individuals who run them.” Do you agree with the statement?

Give reasons for your answer

2.8 KEYWORDS

Moral: Standards to do what considers to be right and proper

Values: Quality of being useful or desirable

Moral Values: Desired level of morals

1 Business ethics is a form of applied art Comment on this statement

2 Examine the scope of ethics in business

3 Discuss the purpose of ethics in an organisation

4 Does business ethic leads to the organisational morals and values?

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Check Your Progress: Model Answers

CYP 1

As per Peter Pratley, Business ethics has a two fold objective:

1 Evaluates human practices by calling upon moral standards

2 Gives prescriptive advice on how to act morally in a specific kind of situation

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3.2.3 Direct Competition 3.2.4 Misuse Position 3.3 Managing Conflict of Interest 3.3.1 Ethics of Managing Conflicts of Interest 3.4 Ethical and Social Implication on Business 3.4.1 Benchmarking

3.4.2 Stake Holder’s Dialogue Approach 3.5 Let us Sum up

3.6 Lesson End Activity 3.7 Keywords

3.8 Questions for Discussion 3.9 Suggested Readings

z Managing conflicts of interest

z Ethical and Social Implications of Business

z Benchmarking

z Stake holder’s Dialogue approach

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23 Ethics and Conflicts of Interests

The ‘conflict of interest’ is not merely a conflict between conflicting interests,

although conflicting interests are involved The conflict occurs when a personal

interest comes into conflict with an obligation to serve the interests of another More

precisely, we can say that a conflict of interest is a conflict that occurs when a

personal interest interferes with a person’s acting so as to promote the interest of

another when the person has an obligation to act in that persons interests This

obligation is stronger than the obligation merely to avoid hamming a person and can

arise only when the persons in a special relation, such as employer and employee

3.2 CONFLICTS OF INTEREST

Conflicts of interest concept is a tough one to study It covers several distinct moral

failings that run together often In order to fully understand regarding the definition

and as well as the reasons that is morally wrong for a person to be in a conflict of

interest situation, it is important to separate them Four kinds of conflict of interest

found are as shown in the figure 3.1 below

Conflict of interests’

types

Exercising Biased Judgment

Misusing a Position

Violation of

Confidentiality

Engaging in Direct competition

Figure 3.1: Conflicts of Interest Types

3.2.1 Violation of Confidentiality

z Confidential business information has been recognised from a long time as

property Such a thing acquired or compiled by a company in the course and

conduct of its business is a species of property to which the company has the

exclusive right and benefit

z Violation of confidentiality under certain circumstances is a conflict of interest

3.2.2 Biased Judgment

z A characteristic of professionals, such as lawyers, accountants, engineers

(specialised knowledge used in the service of clients); professionals paid for using

the knowledge to make judgement for the benefit of others; also value of their

services lies in the confidence that can be placed in a professionals judgement

z Judgment is not exclusively a feature of professional work; Decisions to be used

in the best interests of the employing firm; But, outside business interests

influence the judgement of an employee E.g Potential conflict of interest in

accepting a gift from a supplier who expects favourable treatment in the future

3.2.3 Direct Competition

An employee to engage indirect competition with his employer; an employee's

judgement is apt to be impaired for having another interest E.g A Director of a public

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24

Global Business Ethics sector company in India had an interest in a private company where his son was

working as a managing director The private sector was competing with the PSU in some areas Majority of the services from that PSU was offered to the private company (free of cost sometimes or at cost price many a times)

1 What do you understand by conflicts of interest?

……… ………

2 What are the different types of conflict of interest?

……… ………

3.3 MANAGING CONFLICT OF INTEREST

Conflicts result from structural features of a profession or an organisation These are

to be managed with carefully designed good systems A person in a conflict of interest (potential or actual) may be in the wrong Conflicts usually occur to a person as a member or a professional of an organisation Conflict of interest is not merely a matter

of ethics Certain professions are highly vulnerable to conflict of interest Business firms face conflicts more because of their need to provide many kinds of services to different customers In some cases, both professional and organisational factors are involved

Various means for managing conflict of interest exist Many corporations in their codes of ethics have mentioned in a separate section which addresses the problem However, the management of conflict of interest requires a variety of approaches to be adopted by professional groups and business organisations

To conclude, we can say that similar to whistle blowing, trade secrets and conflicts of interest involve a delicate balancing of the rights and interests of:

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A commitment to be objective serves to avoid being biased by an interest that

might interfere with a person's ability to serve another

Identifies objectivity (the obligation to be impartial and intellectually honest)

with avoiding actual conflicts of interest and independence (avoiding relations

that would impair objectivity) with potential conflicts

2 Avoidance:

Direct means of managing conflicts of interest is to avoid acquiring any interests

that would bias one's judgement or otherwise interfere with servicing others

Avoidance is easier said than done It is difficult to identify or anticipate a

conflicting interest; Acquiring conflict of interest may be unavoidable due to the

nature of business; when adverse interests cannot be avoided, they can be

countered by introducing new interests in a process known as alignment

3 Disclosure:

Serves to manage conflict of interest primarily because whoever is potentially

harmed by the conflict has the opportunity to disengage or at least to be on

ground

In legal ethics, there is no conflict of interest if the lawyer discloses the

conflict and is confident that the client will be unaffected and the client

accepts the lawyer’s service Disclosure may include all types of information

The greater the transparency (openness of information), the less opportunity is

for conflict of interest to occur

4 Competition:

Stiff competition provides a powerful incentive to avoid conflicts of interest,

both actual and potential

5 Rules and Policies:

Companies have policies regarding conflicts of interest These need

employees to avoid acquiring adverse interests by not accepting gifts or

investing in potential suppliers

Controls on flow of information that affect who has access to what

information are necessary; rules and policies in question also limit conflict of

interest

Priority rules are useful means for managing conflicts of interest

6 Independent Judgement:

Conflict of interest results in biased judgement; the problem can be corrected by

utilising a third party who is more independent For example, in companies,

independent appraisers are used, similar to a judge in the courts of law

7 Structural Changes:

Conflicts of interest arise from providing different services to different

customers or client; these can be reduced by compartmentalizing the services

Sometimes there are dictated by law

In multifunction institutions, conflicts can be reduced by strengthening the

independence and integrity of each unit

3.4 ETHICAL AND SOCIAL IMPLICATION ON BUSINESS

Encourage the emergence of a professional approach with a framework of standards,

training and accreditation that will allow social and ethical accounting, auditing and

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3.4.1 Benchmarking

Benchmarking is comparison of the social and environmental performance of companies by scoring them against another company's industry or sector averages or societal norms Corporate benchmarking is carried out in the following ways:

a) Through voluntary questionnaire based surveys in combination with research through public records such as company's annual reports

b) Questionnaires are sent to companies concerned and they answer the questions c) Specialist organizations also have particular aspects of corporate activity, common wages and equal opportunity to staff members

Benchmarking has many advantages:

a) It allows people (including external stockholders and other interest parties) to compare the performance of companies and other organizations according to the criteria relevant to them

b) It provides cheap information about comparative financial performance of companies

c) It helps ethical investment and aids customers to make investment and consumption decisions

Some of its disadvantages are:

a) Selection of benchmarks for particular audience, i.e., group of people or a particular area will exclude the other areas For example, if environmental benchmarking for a product is conducted in northern India then the interest group and other areas will not be considered, and moreover, government rules and regulations vary from state to state

b) It is just not enough to tick a box 'we do' or a warning to prove an ethical dimension of an organization Fox example, a simple warning written on cigarette boxes in India does not absolve the company of its social and ethical responsibilities

c) Relative cheapness is achieved at the cost of considerable simplification

Check your progress 2

Fill in the blanks:

1 The conflict occurs when comes into conflict with an obligation to serve the interests of another

2 of confidentiality under certain circumstances is a conflict of interest

3 All professional codes require

4 is comparison of the social and environmental performance of companies by scoring them against another company's industry or sector averages or societal norms

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3.4.2 Stake Holder’s Dialogue Approach

Value, against which an organization should be assessed, reflects the values of

stakeholders groups These groups should regularly assess the organisation’s

performance based on those values This approach has been most systematically

applied through ethical accounting process development at Copenhagen Business

School and was first used Danish Regional Bank, SBN Bank in 1989

a) The core values transcend mundane existence and provide the organisation with a

sense of well-being, pride and confidence

b) The existence of such values in explicit form enables managers to take complex

value decisions

The different advantages of stakeholder’s dialogue approach are:

a) Detailed study of situation which was not possible with benchmarking

b) Dialogue could raise issues related to customer, staff satisfaction, supplier, etc

c) Ability to underpin strategic processes unlike benchmarking

The various disadvantages are:

a) Expensive and time consuming in comparison to benchmarking

b) Offers little basics for comparison with other organisations or industry norms

The first most important understanding required to live in balance is the awareness

and realization that conflicts are unavoidable and even essential as a process of

growing up It acts not only spice to business life but also leads to better

understanding of different interests in the business community

Visit some of the organisations you know Find out and discuss the techniques they

use to manage conflicts in their organisation

3.7 KEYWORDS

Benchmarking: It is comparison of the social and environmental performance of

companies

Conflict: It differences in personal interests

1 What is conflict of interest?

2 Elucidate ethics and conflicts of interest with a few examples

3 Do conflicts arise? If yes How it occurs and gives the means to manage the

conflicts?

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2 Types of conflicts:

a) Violation of Confidentiality b) Biased Judgement

c) Direct competition d) Misuse Position

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29 Corporate Social Responsibility

4.2 Concept of Corporate Social Responsibility (CSR)

4.2.1 A Socially Responsible Organisation – Basic Understanding

4.2.2 Ethics Postulate Responsibility

4.2.3 Language of Business Responsibility

4.3 Social Responsibility of a Business Enterprise

4.4 Ethical Issues in Corporate Governance

4.7.2 Need for Strong Boards

4.8 Factors Constituting Good Governance

4.9 Right Composition of Boards

z Corporate Social Responsibility

z Concepts of Corporate Social Responsibility (CSR)

z A Socially Responsible Organisation – Basic Understanding

z Ethics postulate responsibility

z Corporate Governance

z The Context

z Socio-economic Character of Business

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30

Global Business Ethics 4.1 INTRODUCTION

Ethics and social responsibility are important concerns in making decisions in all aspects of our life The special responsibility of a business is defined as a concern of business about both its profits seeking and its non profit seeking activities and their intended unintended impact on groups and individuals other than management or the owners of the corporation

4.2 CONCEPT OF CORPORATE SOCIAL RESPONSIBILITY (CSR)

The concept of CSR originated in the 1950’s in USA and the concept came into prominence in public debate during late 1960’s US had lots of pressing social problems like poverty pollution urban blight, race and unemployment Corporate social responsibility became a matter of at most importance for diverse group demanding change in the business

4.2.1 A Socially Responsible Organisation – Basic Understanding

The society is a nexus of individual perceptions In recent years, socially responsible businesses have become a pervasive buzzword lending its mystique to demands for sustainable business practices, calls for greater respect for the needs of staff, customers, local communities and the environment for fair pricing of imported goods from 'third world' countries, policies covering the recruitment of racial and ethnic minorities The paradigm now is one of global competition where business competes against the best in the world and therefore, customers have a choice

4.2.2 Ethics Postulate Responsibility

The Oxford dictionary's definition of 'responsible' is 'liable to be called to account, answerable morally, accountable for actions' and its definition of 'responsibility' is charge for which one is responsible' Thus, corporate social responsibility is either misleading because it suggests that there is an impersonal collective focus for the accountability of commercial behaviour or because it allows for decision making without involving the people Therefore, it is necessary and desirable to establish an agreeable terminology for our study

4.2.3 Language of Business Responsibility

Business

The term business is used to describe any type of industrial or commercial enterprise including both manufacturing and service activities, private or public companies, nationalized or government subsidized utilities, profit making and non-profit organisations and international and multinational firms

Society

Society is not an element in the system but it is the system itself We, therefore, define society as a total of all those individuals, irrespective of their membership in particular interest, who are bound together through their membership in a common political and economic unit, protected by its laws

Responsibility

Responsibility requires a focus and does not exist in vacuum One cannot be responsible if there is nobody to hold you accountable

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Ethics and Morality

Ethics is the study of individual and collective moral awareness, judgement, character

and conduct Morality is customarily socio-legal practice and activities and the values

that are fostered or pursued by the conventional, socio-legal activities and other

activities

Individual

No social entity, particularly a business organisation, can exist purely as an

abstraction and that society derives only from the individuals who comprise it

Attitudes, patterns, customs, behavioral experiences distinguish an individual from the

rest of the group

Authority

Without authority, there is anarchy and without individual freedom of conscience,

there is tyranny Unlike power in the armed forces, where authority derives from the

State, power in business is vested in individuals through ownership or the financial

interest of the shareholders

An innovation fostering culture would prosper in the firms, which would sincerely

demonstrate belief in building human capital (investing in employees' skills), a strong

ethical culture and carry an ambiance, which would promote experimentation

Ethical Duality

A recurring topic in any discussion on social responsibility is the conflict between the

law and individual conscience, or, in the more specific context of business, between

company policy and the ethical values of the employee Everyone needs some

framework of values to guide the personal behaviour The dual source of ethical,

social and political standards is both natural and necessary

Define the following:

There are some questions which come to mind when we talk of social responsibility in

business enterprise in the context of corporate governance such as:

z What underlies behind the growth of concern for socially responsible business?

z What are the theoretical underpinnings of this new perspective on enterprise?

z How can the theory lead to measurable accountability?

z What is the status of social and ethical assessment?

z How are such accounting methods being applied in practice?

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32

Global Business Ethics Corporate social responsibility is either misleading because it suggests that there is an

impersonal collective focus for the accountability of commercial behaviour or because

it allows for decision making without involving the people More and more enterprises today are becoming socially responsible for the following reasons:

z There is interpretation and analysis of the rights and privileges granted to business activities and the inter-relationships between these activities and the well-being of society

z There is a growing minority of concerned and sensitive manager who are honestly seeking to promote a ‘new ethics’ for business based on a sense of responsibility that spans a broad spectrum of social and environmental issues

z Social, ethical and environmental responsibilities are growing because of transparency in the behaviour Employees are emphasizing the need for harmony between their personal values and those of the firm Consumer interest groups are keeping a sharply focused watch on product quality, environmental hazards and discriminatory hiring policies

4.4 ETHICAL ISSUES IN CORPORATE GOVERNANCE

Ethical issues have been brought to the forefront in Australia as the result of growing public concern This concern is reflected in business management education at the advanced level in particular It is also exhibited in the reports of illegal, scandalous, or other questionable behaviour and practices across a wide spectrum of commercial and government activities Economic times in Australia are poor The vast number of personal, business, and corporate insolvencies in recent times has triggered public demand for an explanation It has become apparent that illegal and other questionable business practices have contributed significantly to Australia's present economic troubles, and people are asking how such behaviour can be prevented in the future Some believe that the problem can be solved by maintaining higher ethical standards Codes of professional conduct or ethics both interact with complement the law The law reflects the standards, expectations, and values of a society as a whole and is enforced through the properly constituted courts of that society Members of these groups believe that they maintain higher expectations and values than those of society

as a whole, if ethical codes are enforced at all, it is usually by each specific group Possible exclusion from a particular association is an incentive to follow these standards

Peregrine W F Whalley, of Northern Territory University, suggests, however, that it is naive to expect people to adhere to rules or principles that are not, and cannot be, clearly formulated He believes that the business community is too diverse a group to follow standards above and beyond the law itself The best way to ensure high ethical standards in business is to make legislators aware of and responsive to changing social values and conditions Common interest groups must become active as lobbyists

In Australia, certain large retail organisations are taking steps to develop international common interest groups while awaiting changes in legislation They have had limited success in establishing clear standards for conduct and effective procedures for securing compliance

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governance includes certain structural and organisational aspects The processes that

help corporate governance should embrace how things are done within such structures

and organisational systems

4.5.1 Objectives

z To understand the context of corporate governance in present scenario

z To know the socio-economic character of modern business

z To learn the need of core values for any organisation

z To understand the structural and organisational aspects relating to corporate

governance

4.5.2 Context

Any discussion on corporate governance beliefs of an understanding of the context in

which businesses operate would be futile as the paradigm has shifted towards global

competition where businesses compete against the best in the world and customers

have choices The operational word to businesses is now innovation, which means the

capability of bringing out newer products, and providing superior service most often

at a lower price Innovation prospers in the firms, which exhibit the following

characteristics:

z Environmental sensitivity especially in relating and responding to change in the

technology dimension of industry structure

z Customer focus: relating to serving and delighting the customer with appropriate

products, often in a proactive manner

z Quick response time wherein bringing out new products rapidly, especially in

relation to competitors

z Employee's empowerment by acknowledging that front-line employees are often

the best judges of appropriate responses and thereby allowing them to take

decisions at the 'local' level

For firms to be competitive and innovative, flexibility in approach towards decision

making necessarily gains special importance An innovation-fostering culture would

prosper in the firms which would sincerely demonstrate belief in building human

capital (investing in employees' skills), a strong ethical culture, and carry an ambience

which would promote experimentation At the same time, to prevent organisational

drift, manipulative behaviour, and a misalignment in organisational employee goals,

firms need to be strong on core values

4.5.3 Socio-economic Character of Business

Since corporations are constituted legal bodies they assume concomitant social and

legal responsibilities Milton Friedman may insist that the only social responsibility of

business is to make profits However, a larger stakeholder view of the corporation has

to be necessarily adopted rather that just adopting to a financial shareholder

perspective Business enterprises (especially private ones) at their inception are

economic entities, but as they grow, the emphasis shifts towards a more social

character Socially responsible tasks such as pollution control, maintaining ecological

equilibrium, community development, etc later become integral part of organisational

commitments The integration between business policy, business ethics, social

responsibility and public policy has been shown in the figure below:

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34

Global Business Ethics

Public

Social Responsibility

Figure 4.1: Public-Business-Policy Interface

The socio-economic and competitive character of a corporation entails that it has to make a fine choice of its competitive strategy within the ambit of legal, social and ethical boundaries Corporate actions should be justifiable in terms of its letter and spirit in which the society allows it to function Timely collection and deposit of taxes and duties, payment of minimum wages, adherence to laws such as MRTP, Labour Act, etc are examples of legal commitments Corporations cannot become profitable

by not adhering to the existing laws of the land If some of the laws are anachronistic (such as the Official Secrets Act, or certain clauses in the Exit Policy), effort should

be made to bring about a change in them, instead of breaking them

While corporations have to perforce function within the legal framework, it becomes imperative for them to identify and make explicit a code of ethical behaviour to honour its commitments to the customers, employees, and other societal stakeholders The grey area is what constitutes ethical dimensions of corporate behaviour and who

is to oversee this aspect of social responsibility of business

4.5.4 Core Values

The process of laying down the ethical character of a business can be facilitated with a clear articulation of corporate core purpose (the raison d'etre) and a concomitant set of core values Formulation and implementation of any strategy occurs under the context

of core values of the organisation's fey decision makers Values govern behavioural choices For achieving growth should a company diversify its business, expand its current capacities, or acquire other units? Should it go for opening up of schools and community hospitals for the poor and needy? Should it divest a product? Should the company pay bribes to win a lucrative tender? What should the stakeholders do when the chief executive becomes a tyrant and starts treating company employees as his personal servants? It is alleged that Henry Ford could introduce newer models because

of a childhood mental trauma Many chief executives find it extremely difficult to relinquish office, often using ingenious means to delay retirement In a country where 99.9 per cent of all business and 70 per cent of the hundred largest corporations are family-owned, should the progeny automatically become heirs to the corporate throne? What happens to other stakeholders when two or three feuding sons carve up businesses leading to inefficiency of scales and thereby losses In a capital-intensive industry such as tyres, where economies of scale in manufacturing and distribution are crucial, three sons of a business house divided three tyre manufacturing units amongst themselves leading to severe losses in what was once a profitable business The other side of the argument is that family-owned units have large pools of intrinsic strengths-and investors inherently assume a larger risk in such companies in the hope of making larger profits

4.6 BUSINESS PURPOSE

At this point, a discussion on the concept of 'organisational purpose' mentioned earlier becomes important It means that an organisation (just like individuals) must have a

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holistic super ordinate substance to its existence defined by the core values that it

holds Therefore, ends and means are identified within which core values cannot be

dictated and are difficult to change A vegetarian cannot be made to change his habits,

or a philanthropist cannot be asked to quantify his time-value If Levi-Strauss insists

on its subcontractors not to use child labour, it is one of their core values The

organisational values have to be in consonance with country-specific legal values A

core value transcends mundane existence and provides the organisation with a sense

of well-being, pride and confidence Existence of such values in explicit form enables

the managers to take complex value decisions Thus Motorola's local executives in an

African country could take a decision of not paying a bribe of one million dollars and

thereby losing a lucrative contract worth several million dollars in profits, knowing of

the backing from the corporate head office

4.7 STRUCTURAL AND ORGANISATIONAL ASPECTS

The word 'systems' includes structural and organisational aspects that facilitate better

corporate governance It is well known that a company being an artificial and juristic

entity cannot function by itself The person of a company is manifested through the

board of directors In fact, the most important body in the corporate sector is its board

of directors It is often said that the cause of corporate governance is served depending

on how well the board of directors of a company is organized and structured The

Companies Act, 1956 does not exhaustively describe the powers and duties of the

board It can be said that some of the shareholders' agreements talk more extensively

about the power and duties of company boards than the Companies Act, 1956

While dealing with the issues connected with the board of directors in the context of

corporate governance, the following aspects have to be borne in mind:

a) optimum size of the board;

b) optimum composition of the board in terms of both whole-time and part-time

directors;

c) whether the Chairman of the board should be different from the CEO of the

company;

d) the role of nominee directors;

e) personal competencies and qualifications of individual directors;

f) the frequency with which the composition of the board should be changed; and

g) the different committees of the board and the optimum size of the board

Various studies have been undertaken both in the US and the UK on what should be

the optimum size of a board One conclusion of these studies is that a board should

ideally have about twelve directors This, of course, does not take into account the

peculiarities that the company may have, warranting a variation from this number

The Companies Act, 1956, one may note, also talks of a maximum number of twelve

directors Regarding the optimum composition of the board; studies have revealed that

out of the twelve directors only three or four should be whole-time directors and the

remaining part-time directors The ratios of whole-time directors to part-time directors

should be heavily in favor of part-time directors so as to ensure maximum

independence of company boards Whether the Chairman should be different from the

CEO of the company: The Cadbury Committee which went into the financial aspects

of corporate governance in the U.K had come out with a definitive recommendation

that the Chairman of the board should be a person different from the CEO of the

company It was felt that this would ensure the right accountability of the CEO to the

board and that the independence of the board to a large extent would be whittled down

if the chairman and the CEO were one and the same person It is of the considered

view that in the Indian context it will be advisable to have as Chairman, a person of

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36

Global Business Ethics great stature and eminence, who is not in the executive management of the company

This will ensure greater independence and credibility in board proceedings

4.7.1 Nominee Directors

Role of nominee directors: Although it is to a large extent that professionalisation of company boards in India got accelerated with the induction of nominee directors by Financial Institutions (FIs), in many cases, these nominees have remained content with safeguarding the interests of the FIs vis-a-vis the company

There is a general impression that whenever a conflict arises between the interests of the term lenders (FIs) and that of the company, the nominees invariably safeguard only the interests of the term lenders This impression is wholly erroneous As a matter of fact what is good for the company should be good for the FIs too If the nominee directors ensure that things happen in the best interests of the company, rarely will the interests of the financial institutions and term lenders be jeopardized After all, in the ultimate analysis, only if the company does well, the investments of the public financial institutions will be protected Hence, there is no question of a conflict of interest between the term lenders and the company

Personal competencies and qualities of individual directors: To be an effective member on the board of a large company, besides stature and eminence, one also requires certain other competencies A company's director, apart from having an independent mind, should have a close insight into how companies operate It is also important that the company's director should know the rudiments of the company 4iw Besides a general appreciation of commercial matters, a company's directors should

be able to think in a' top of the line' manner He should be well informed about the macroeconomic trends as well as the specific trends in the business in which the company is engaged Personal attributes like ability to listen, open-mindedness and sound articulation will go a long way in making a company's director effective

4.7.2 Need for Strong Boards

The importance of strong boards in laying down the driving values of the corporation cannot be overemphasized Directional leadership and control has to be exercised by a representative board of directors constituted of financial institution nominees, business executives and professional non-executive members These must be people

of character and proven integrity and experience Organisations are also cradles of power games and political behaviour and only a strong board would be able to separate organisational interest from personal empire building Common situational conflicts are chief executive succession, intercorporate-funds transfer, senior executive recruitment, financial or other improprieties, continued poor managerial, market performance, etc A body must exist which could think strategically and if necessary bridle the executive Boards in USA regularly set strongly to check executive's performance Some of the prominent companies, which have had new CEOs in the last few years at the instance of governing board, are General Motors, IBM, Chrysler, and Apple Computers In case of the last mentioned company it was the founder- CEO that had to resign for non-performance

4.8 FACTORS CONSTITUTING GOOD GOVERNANCE

z Independent directors have a major role play in promoting good corporate governance, and if certain practical steps are taken to ensure the right composition

of the Board, adherence to standards and best practices, and accurate disclosures and reviews of audit plans, then there is a greater chance of good governance, said speakers at a recent seminar organized by the Bombay Chamber of Commerce and Industry (BCCI)

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