Corporate ethics

Following this session students should be able to:

Define business ethics and describe the factors that shape a

manager’s ethical decision making.

Describe the principles of good Corporate Governance

Define corporate social responsibility and explain how to

evaluate it along economic, legal, ethical, and discretionary
criteria.

Understand the Cadbury Code 1992

Learning Outcomes

 An ‘oxymoron’! – bringing together of two

contradictory concepts (Collins 1994)

 ‘Principles of conduct within organizations that guide

decision making and behavior’ (David 2008)
Good business ethics is a prerequisite for good
strategic management

 ‘The study of business situations, activities, and

decisions where issues of right and wrong are
addressed’ (Crane & Matten 2004)

Business Ethics

Ethical values: shared beliefs about right and wrong,
good and bad

 Govern the behaviour of a person or a group

Ethical issues: problems or dilemmas which present a
conflict of values

 Pay a ‘living wage’ or personal financial gain

Ethical choices: decisions about which option to take in
response to a dilemma

 Difficult decisions, because each option has its own

drawbacks

Ethical Values, Issues and
Choices

 Misleading advertising

 Misleading labeling

 Poor product or service safety

 Harming the environment

 Insider trading

 Padding expense accounts

 Dumping flawed products on foreign markets

But in many other cases, the law is unclear and

all choices have elements of both ‘right’ and
‘wrong’

Some business practices always
considered unethical and often
illegal

Business Ethics ...

Free

Choice
Law
Ethics

A personal responsibility?

Legal Standard

Social Standard

Personal Standard

 You are a strategic analyst at a successful hotel enterprise

that has been generating substantial excess cash flow.

 Your CEO instructed you to analyse the competitive structure

of closely related industries to find one the company could
enter, using its cash reserve to build up a substantial position.

 Your analysis suggests that the highest profit opportunities

are to be found in the gambling industry. You realise that it
might be possible to add casinos to several of your existing
hotels, lowering entry costs into this industry.

 However, you personally have strong moral objections to

gambling

Should your own personal beliefs influence your
recommendations to the CEO?

Ethical Dilemma
What would you do?

Criteria for Ethical Decision
Making

 Utilitarian approach – moral behavior produces

the greatest good for the greatest number

 Individualism approach – acts are moral when

they promote the individual’s best long-term
interests

 Moral rights approach – moral decisions are

those that best maintain the rights of those
affected, including free consent, life and safety

 Justice approach – decisions must be based on

standards of equity, fairness, and impartiality;
(esp. important in HR management)

 Companies experience ‘social blowback’ when

stakeholders perceive that they have breached
their deal with society

 Good business ethics is a prerequisite for good

strategic management

Why is Business Ethics
Important?

The Emergence of Corporate Social Responsibility

 Companies have responded to increasing

expectations by advocating what is now a common
term in business: Corporate Social Responsibility
(CSR)

 Most large companies now feature CSR reports,

managers, departments, and the subject is
increasingly promoted as a core area of
management - next to marketing & accounting

Crane, Matten & Spence (2008)

Who determines a good business ethics
or CSR Agenda?

 Government: the law makers?
 Business ethics begins where the law ends

 The ‘strategists’: CEO, CSO, CFO, managers
 Core values, beliefs ‘embedded’ in organization
 Business ‘code of ethics’ (Banking, Media, Food Industry)

 Board of Directors
 Corporate Governance
 Duties & Responsibilities

 Stakeholders
 Consumers/pressure groups/local community/Media

Who is Responsible for Ethics / CSR?
Leadership & Management
Issues
CEO / Strategists

Code of business ethics:

 Provides basis on which policies can be devised to

guide daily behavior and decisions in the workplace

 CEO & Management responsible for implementation

Who else is responsible for Ethics / CSR?
Governance Issues

Board of Directors Roles & Responsibilities

Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights

Is ‘being ethical’ good for business?

Is it possible to be both profitable and responsible?

Corporate Governance

Definitions…



The way in which organizations are directed and
controlled

Cadbury (1992)



The process by which corporations are made
responsive to the rights and wishes of
stakeholders

Demb and Neubauer (1992)

Corporate Governance
Structure: Stewardship

Shareholders

Board of Directors

Managers

•Stewardship theory holds there is no conflict of interest
between managers and owners. Managers are incentivised to
act, not as opportunistic agents, but as stewards who act in
the best interest of owners. (Clarke, 2007, P9).

Corporate Governance
Structure: Agency Model

Shareholders

Board of Directors

Managers

•Principal agent theory, assumes that the owners of the enterprise (the
principal) and those that manage it (the agents) will have different interests.
(Clarke, 2007, P5).

Corporate Governance

The Growth of Modern Corporations
The ‘Agency Problem’

 The agency problem arises because of the

separation between ownership of an
organization and its control

 The agency problem is inherent in the

relationship between the providers of capital,
referred to as the ‘principal’, and those who
employ that capital, referred to as the ‘agent’.

Corporate Governance
(Jensen & Meckling 1976)

The ‘Agency Problem’

 Agency problems occur because no contract, however precisely

drawn, can possibly take account of every conceivable action
that an agent may engage in

 How do you ensure that the agent will always act in the best

interest of the principal?

 ‘Agency costs’ occur where there is a divergence between these

interests

Hence original purpose of Board of Directors

How are such issues

addressed?

Corporate Governance Agents:
Stakeholder Participation &
Engagement

Shareholders

Board of Directors

Managers

Government

Regulators

Media &
Opinion Formers

Employees

Participants

Engagement

The Stakeholders within a
PLC, such as employees,
regulators or politicians
who indirectly influence
the organisation’s strategy
may be managed through
Engagement

Key stakeholders within a PLC such as
Shareholders, Executive and Non
Executive board members, which
currently directly influence the
organisation’s strategic management,
may be classed as Participants.

(Low & Cowton, 2004, P46)

Directors Roles & Responsibilities

BusinessWeek’s ‘Principles of Good Governance’



No more than 2 directors are current or former
company executives



No directors do business with the company



Each director owns a large equity stake in the
company



At least one outside director with extensive
experience



Each director attends at least 75% of all meetings



Board is frugal on executive pay, diligent in CEO
succession, and prompt to act when trouble arises



CEO is not also the chairperson of the board



Shareholders have considerable power and
information to
choose & replace directors

Corporate Governance &
CSR?
The Purpose of Corporations?
To maximise shareholder value

‘In a free enterprise, private property system, a
corporate executive is an employee of the owners of the
business. He has direct responsibility to his employers.
That responsibility is to conduct the business in
accordance with their desires, which generally will be to
make as much money as possible…’
Milton Friedman (1970)

Corporate Governance & CSR
The Debate…

The Purpose of Corporations?
To meet the needs of stakeholders

Stakeholders are individuals or groups that affect or are
affected by the achievement of an organization’s
objectives

Edward Freeman (1984)

eg., shareholders, customers, suppliers, employees,
government, local community, media…

Socially obstructive
Prioritising short-term shareholder interests
Avoids highly regulated business locations, lobby to change laws
Socially obligative
Prioritising longer-term shareholder interests
Comply with laws
Socially responsive
Balancing multiple stakeholder obligations
Pay attention to pressure groups, use CSR to build competitive
advantage
Socially contributive
Seeking to shape society
Promoting sustainability and locally led economic development

Ethical Stances of Organizations

The Pyramid of CSR

Archie Carroll (1991)

Evaluating Corporate Responsibility

Key question…
Should a business prioritise shareholder value or
stakeholder needs?

 Shareholders own the business

 Primarily for financial gain

 Stakeholders are affected by the decisions and operational

activities of the business
 Financial, non-financial and personal benefits

Organisations and Ethical
Choice

The social contract between business and society
is constantly evolving... (Waddock 2010)

The CSR Debate moves
on…

 The early message ‘doing well by doing good’

 CSR imposes political functions of govt on corporate

executives

 CSR has failed to create the good society – expecting too

much from business

 Close adherence to CSR agenda leads to falling profits

 Difficulty in allocating rights responsibilities and enforcing

them – who decides?

 Stakeholder theory the way forward – CA through building

superior relationships.

 Good CSR manages the paradox of profitability &

responsibility

Jury is still out – you decide!

 A UK code of best practice concerning appropriate senior

management remuneration, produced by the 1992
Cadbury Committee on the financial aspects of corporate
governance.

 The Code includes the provisions that non-executive

directors should be appointed for specified terms and
reappointment should not be automatic, that such
directors should be selected through a formal process,
and that both their selection and their appointment
should be a matter for the board as a whole.

 A Combinded Code on Corporate Governance, combining

the Cadbury recommendations with those of the
Greenbury Report, was issued in 2003.

Cadbury Code

List of References

Cadbury. 1992, Corporate Governance and Chairmanship. Oxford.

Carroll, A.B. 1991 The Pyramid of corporate social responsibility: toward
the moral management of organizational stakeholders. Business Horizons,
July-Aug: 39-48.

Demb and Neubauer. 1992, ‘The Corporate Board: Confronting the
Paradoxes’. Long Range Planning, Vol 25, Issue 3, June, pp. 9–20.

David, F. 2008, Strategic Management Concepts and Cases Pearson
International Edition.

Freeman, E. 1984, Strategic Management: A Stakeholder Approach.
Boston: Pitman.

Friedman, M. 1970, ‘The Social Responsibility of Business is to increase its
Profits’. New York Times Magazine, 13 September.

Jensen and Meckling, 1976, Theory of the Firm: Managerial Behaviour,
Agency Costs and Ownership Structure. Journal of Financial
Economics.3:305-60

Waddock, S. (2010) ‘The Social Contract of Business in Society’ in Aras and
Crowther eds. A Handbook of Corporate Governance and Social
Responsibility 2010 pp. 69-82