Amity Business School

Amity Business School

MBA Class of 2011, Semester II
Business Environment and Strategic Analysis Dr. Himani Sharma

Ethics

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Discipline of dealing with what is good and bad, or right and wrong, or with moral duty and obligation

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Business Ethics
Business Ethics means conducting all aspects of business and dealing with all stakeholders in an ethical manner

Ethical Issues Around the World

Japan

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Payments to politicians for favorable treatment Concealing customer complaints Unequal status of women in the workplace

Europe
Widespread acceptance of side payments (bribes) as a business cost Discriminatory workplaces

China
Lack of workers rights Weak IP protections/enforcement

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Many Examples of Unethical Corporate Behavior

Headlines have exposed the far-from-ethical exploits of Enron, Arthur Andersen, WorldCom, Global Crossing, Adelphia Communications, Tyco International, and others Enrons stated values, respect, integrity, communication, and excellence, were once proudly etched on Enrons paperweights Ruthless self-interest that motivated the leaders of some large corporations has been revealed

Not Just Corporations

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Virtually no occupation has not had its own painful ethical crises in recent years Even so, business ethics scandals continue to be headline news stories today. Lying on resumes, obstruction of justice, destruction of records, stock price manipulation, cutting corners to meet Wall Streets expectations, fraud, waste, and abuse, unfortunately, are occurring all too often when those in business go ethically wrong

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Globalization, Business Ethics & Competitive Advantage

Globalization has brought about greater involvement with ethical considerations and most importantly achieving competitive advantage through business ethics. Globalization and business ethics are linked as they affect a companys ability to commit to its shareholders, in particular to external investors, and preserve the trust needed for further investment and growth.

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Ethics of Scandal Versus Ethics of Strategy

It is increasingly important for companies to deal with ethics as a corporate strategy that, if uniquely implemented, could achieve competitive advantage for the company rather than waiting to react to possible ethical issues of importance to the targeted stakeholders. It is the necessity of being ethically proactive company rather than being ethically reactive company.

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Business Ethics as Competitive Advantage

As the speed of comparable tangible assets acquisition accelerates and the pace of imitation quickens, firms that want to sustain distinctive global competitive advantages need to protect, exploit and enhance their unique intangible assets, particularly integrity (building firms of integrity is the hidden logic of business ethics).

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behavior that is trusting, trustworthy, and cooperative, not opportunistic, will give the firm a competitive advantage. Sustainable global competitive advantage occurs when a company implements a value-creating strategy which other companies are unable to imitate. For example, a company with superior business leadership skills in enhancing integrity capacity increases its reputation capital with multiple stakeholders and positions itself for competitive advantage

Business Ethics as Competitive Advantage (Cont.)

A MODEL OF ETHICS

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Sources of ethical guidance

Lead to

Our beliefs about what is right or wrong

Determine

Our actions

Type I Ethics

Type II Ethics

Code of Ethics

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Statement of values adopted by company, its employees and directors and sets official tone of top management regarding expected behavior Code of ethics establishes rules by which organization lives and becomes part of organizations corporate culture

Sources of Ethical Guidance

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Number of sources to determine what is right or wrong, good or bad, moral or immoral Bible and other holy books Conscience Significant others Codes of Ethics Sources of ethical guidance should lead to our beliefs or convictions about what is right or wrong

Corporate and Auditing Accountability, Amity Business School Responsibility and Transparency Act of 2002
Known as Sarbanes Oxley Act, primary focus to redress accounting and financial reporting abuses in light of recent corporate scandals Criminalized many corporate acts Whistle-blower protections Prohibits loans to executives and directors

Sarbanes-Oxley Act (2002)

In US, for example, firms now operate under Sarbanes-Oxley Act (2002)

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CEO and CFO required to approve and declare accurate all financial statements provided to SEC for publication Ensure transparency of all disclosures Make content appropriately accessible for audit and verification

Organizational Ethics: 4 bottom lines

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Example of Enron

The scandalous nature of the Enron scandal: the financial fraud gets most of the publics attention! The three other fields of ethics are overshadowed : equity, dignity, viability Whereas the activities of Enron are problematic in the 4 fields

Enron in India: an Isolated Case ?

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Other countries affected by Enron : Argentina, Brazil, Mozambique, Poland California

Other companies : Shell (Nigeria), BP (Colombia), Mobil (Indonesia), Total (Burma); Oracle, Merck, Qwest, Xerox, Vivendi, Worldcom
Characteristics of international finance LBOs acceleration of IPOs

stock options (700% increase in 10 years)

institutional investors (50%+) short term value of stock as only performance criteria virtual assets

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Enron in India: an Isolated Case ?

Characteristics of New Economy management:
value associated to idealized top executives; CEOs = 500 times average employee salary; bonus gone from 3$ to 64$ per 1000$ of value in 10 years; aggressive PR; image of responsibility ; only 1.5% of stock options paid to employees; etc. Complicity or cooptation of social actors: governments (Enron financed by 7M$ public investments : USA, Germany, UK, France, Italy, Japan); financial analysts; accounting and consultation firms; business schools; business press; host governments; etc

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Precursory Signs (Prodomes)

1992: rumors that the Dabohl contract signed in India was corrupted (level of investment = 50% of the provinces education budget) 1993: the World Bank refuses to finance the project (cost of energy 4 times higher than locally-produced energy) 1995-96: the Indian government attempts to withdraw from the project; beginning of physical violence with assistance of police 1997: Amnesty International report 1997-2001: abnormal stock price growth 1999: Human Rights Watch report 2000: note 16 in Enrons financial report 1992 2002: Enron : 29 allegations of corruption 2001: resignation of VPs and CEO 2002: report of the US House of Representatives

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Response of Social Actors to Ethical Issues

Enron : denial; legal attack for breach of contract; lobbying; corruption; intimidation; etc. Financial analysts: no investigation of allegations, nor of note 16 Accounting firms and internal audit: complicity and cooptation Monitoring bodies ineffectual: SEC, FERC, board Media: a few articles on tensions in India; no field investigations, no images Still today: the Enron scandal: a financial scandal for most people

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Present-day Positive Signs

Cleansing of financial markets Some companies enter stocks options into their books as expenses : Boeing, G.E., G.M., Citigroup Some Enron top executives cooperate with justice

Proliferation of new approaches and tools: ex: U.N. Global Compact; CSR; social and environmental accounting; OECD principles, Caux Table; etc.
36% of CEOs more aware of integral responsibilities (but only 10% invest in CSR) 19% of transnational companies have disinvested from countries where Human Rights are violated

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Many Questions Still Remain

How to bring accounting firms and financial analysts to integrate CSR norms ? guarantee that these norms represent reality ? ensure company governance ?

make companies responsible not only towards shareholders ?

de-co-opt media and other organizations ? increase the integrity of business students and managers ? diminish the phenomenon of ethical leveling, denounced by Kierkegaard in 1850 !?

Ethics and Social Responsibility Around the World

Ethical Problems and Concerns China

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Ethical issues
Workers not well paid (often work 12 hours a day, 7 days a week) Piracy of intellectual property, counterfeiting, and industrial spying

Human rights violations

Use of prisoner and child labor

Ethics and Social Responsibility Around the World

Ethical Problems and Concerns United States

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Political campaign contributions & lobbyists Fraud in mortgage sector

Attitude of caveat emptor

Rising wage inequality

middle class wages stagnant for a decade

Lack of health benefits for workers

Loss of promised retirement benefits

Globalization
Criticisms of globalization

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Offshoring of business services jobs to lowerwage countries Growing trade deficits Slow wage growth Environmental and social impacts

Principles of the Global Compact

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http://www.unglobalcompact.org/AboutTheGC/faq.html

Corruption Index: Amity Business School Least and Most Corrupt Countries

Definition

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Corporate social responsibility (CSR) refers to

Those actions taken by a firm that are intended to benefit society beyond the requirements of the law and the direct interests of the firm (HLD, p. 65)

CSR is generally concerned with

Working conditions The social and environmental impacts of corporate activities (externalities)

Why is CSR Important?

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MNCs are becoming more concerned about CSR. Why?

Is it from the goodness of their hearts? Is it due to external pressure? Is it good for business?

Is there a trade-off between financial performance and social responsibility?

MNC Concerns and Response

Why ethics is vital for business

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Increased media and public attention Ethical failures can have damaging effects on workers, managers, investors An ounce of prevention.

MNC responses
Adoption of internal codes of conduct Working through business alliance Supporting the adoption of global standards

CSR and Sustainability

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In The Triple Bottom Line (2006), Andrew Savitz wrote,

The truly sustainable company would have no need to write checks or give back to the local community, because the companys daily operations would not deprive the community, but would enrich it.

Trust in Leaders
NGO leaders Leaders at the U.N.

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52 42 41 36 36 35

Spiritual/religious leaders
Leaders of Western Europe Managers of the global economy Managers of the national economy Executives of MNCs Leaders of the U.S.A. 27

33

10

20

30

40

50

60

Average Across All 15 Countries Surveyed

Adapted from Figure 3-1: Trust in Leaders: Percentage Saying A Lot and Some Trust

Perceptions of MNCs

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TIs 2006 Global Corruption Barometer

Most corrupt: Political parties and legislatures In the middle: the business sector Most trusted: religious bodies and nongovernmental organizations (NGOs)

MNCs face pressure to pay greater attention to CSR

NGOs mobilize public support and opposition MNCs expected to adhere to higher standards

The Role of NGOs

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Emergence of organized civil society

NGOs have altered the global business environment NGO activism has lead to important changes in corporate behavior and governance

Major criticisms of MNCs by NGOs

Exploitation of low-wage workers Environmental abuses Intolerable workplace standards

Legal and Regulatory Issues

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Foreign Corrupt Practices Act (http://www.usdoj.gov/criminal/fraud/docs/dojdocb.html) Illegal to influence foreign officials through Personal payment Political contributions When bribes removed, MNCs more willing to do business in that country Restrictive bureaucratization Government controls often inefficient and uncorrected Local politics often prevail over national concerns Privatization

Corporate Governance
Corporate Governance Structure Distribution of rights and responsibilities

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Stakeholders Board Managers Shareholders

Spells out the rules and procedures

The system by which business corporations are directed and controlled

Setting objectives Means of attaining objectives Monitoring performance

Making decisions

International Assistance

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Governments and corporations increase collaboration to provide assistance to communities and locales through global partnerships Best investments
Controlling and preventing AIDS Fighting malnutrition Reducing subsidies and trade restrictions Controlling malaria

Regulation of Trade and Investment

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Individual countries use legal and regulatory policies to affect the international management environment If a country is perceived to engage in unfair trade practices (WTO and similar agreements) Government support (subsidies) Require MNCs to accept local partners Response may be Retaliatory tariffs Restrictive trade regulations

Millennium Development Goals

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