You are on page 1of 442

V)an t*N,'rr Ehotrlrs (t0onsho)

rolo3r Pq S' OXFORD

nusf ness
Ethfcs CORPORATE

-u\ r:r"lIC A Lti*ru:,r,,


x*flfr E TEH
tt l^ n
-#HI@EfftHry
^l-Ull\ I
fnfnrvr\l

^
pis 8t]P3#* *, r\rna T r oN u LEJ N,q

iSffiMffiHET# ?,i;-
-IsP?HEEilr$HHr#lg-
'h'a3g-i'hA"P+i=o4=
={afti?fff-ffig=#r
<f
Eq'=r= r url-***+ Vl5lUl\FY_(Y;ffiu

EM=F#EEG{HEE+T
sM
ANALY s
o,JI[Affo# _A
I D E E HES1

t#cchtotGE#?E$
zF t \I+L

We,Ssiness
Ethics
POI

,sH,{,ffiffffii&mHnuB,
^*t'^mGUll
DECENC\
,VtNTAGEI
is#M VALUES

,#HHE?H

-=EfiEEE
rrffia#
.G-ai2n Li*= | vtstotrtV. (yifr'

ixffi
=m=f-6F!
''' U -"**
HAt to EI
H#*E
E'AE-"rtr-?v

HECtdolcE?E

Ali ' Zulkufly Ramly o Lau Teck Chai


KhaliCah Khatid

OXTORD
UNIVERSITY ?RESS
9H9*R
Oxford New York.
Auckland Cape Town Dar es Salaam Hong Kong
Karachi Kuala Lumpur Madrid Melbciurne Mexico City
Nairobi New Delhi Shanghai T'aipei Toronto

@ Oxford L-ajar Sdn. Bhd. (008974'T) 2014


First publishcd 20t4

ISBN 978 983 17 1271 6

All righx reserved. No part cyf this publication rnay be reproduced,


stored in a retrieval system, or transmitted in any form or by any mean\
electronic, mechanical, : '\otocopying, recording or otherwise,
without the prior .permission oi Axford University Press.
Within Malaysia nnd Singapore, exceptions are allo+ued in respect
of any lair deahng for the ptn"pose of research or private study,
or criticism or re:view, as permitted under the Copyright Act
currently in force. Enquiries concerning reproduction outside
these ternts and tn other countries should be s,:nt to
Oxford {lni,tersit1, Press at the address below.

Vrhile e.very efiort has been mode to trace the originaL


sourL:e of copyright materioL t.ontained in this book,
there might be omissions" For this v,t: sincerel), tencier
our apologies.

P er pustakaan N ego.ra M aLay'sra D ata P engkatalogttn - dalarn Penerbrtan


I{halidah Khalid Ali, 19.56-
Bttsiness Ethics / Khlidah Khalid Ali, ZulkrLfy Raml1,, Ldu Teck Chni.
lncludes index
ISBN 978-983 47 t27t 6
l. Business ethics- -SttLdy and teaching.
I. ZulkuJly Rantly, 1971-. ll, Lau, Teck Chai, 1969
IlI. Iudul.
t74.1

Impression: 10 9 I 7654j 2 I

Text set in 10.5 point Minion Regular by CLtitra Computers, India


Published by axford Fajar Sdn. Bhd. (008974-T)
under licence from Oxford University Press,
4lalan Pemaju Ul/15, Seksyen Ul
40150 Shah Alam
Selangor Darul Ehsan, Malaysia
Printed in Malaysia by
Yivar Printing Sdn. Bhd., Selangor Darul ELtsan
Lilian Yap
Senior Lecturer
School of Business and Administration
\Mawasan Open University
Penang, Maia1r5i2

Dr Ho Jo Ann
Associate Professor
Department of Management and IMarketing
Facultr. o1 Economics and Management
I lnir,:r'siti I)rrtra Malavsra
Selangor, Malaysia
To our dear parents, families and children, the source of inspiration in realizing our
dream. We made it with patience, respect and gratitude. Ivlay the Almighty continue
to grant us wisdom as we move fonvard in the journey of lifel
l,&'.:-.-^:.!,14t
,ii. ..'' -:: , rr.:.
r1$rrr.:...1
l&iii+'$ dir;*-;i i 1 ;.1.: :
:f&,.,1']....:.'.
itiS!.ri:r;i:: :' ;:.i ;:, ..

It is an honour and a privilege to write the Foreword for this book, aimed at providing business ethics
knou,ledge to budding leaders of a grou,ing nation, Malaysia, and the globai workforce at large. As Malaysia
doubles its ef-forts to realize Vision 2020 to attain developed nation status, it is synonymous with a civii
society, characterized by not only economic progress but a comrnu;rity with strong ethical vaiues.
Tbday's giobalized and comperitive environment reminds us of the need to revive the emphasis on
moralrty and internaiizalic-rr-r of ethiralvalues, as frar-rd, bribery,, corruption and manipulative practices have
beconle corrrnon f'eatures in business deals and transactions, not to mention the public sector. Citing some
indicators from Transparenc), International studies, Malaysia, on the international front has been ranked
53rd oirt of 177 nations, a step up frora its ranking rn 2012. Regionally, I!4alaysia is currently ranked as the 3rd
leasr con'upted nation among the ten countries in the ASEAN region, after Singapore and Brunei. While the
Government unclertakes relentless and significant efforts to tackle the challenges that abound and curb the
various abuses at large, indrviduals too har,e to be accountable for therr actions based on the values tl'rey carry
in litr. lndeed, it all begins r,vitl'r a strong fundamental knou,ledge of ethrcs ar-id the universalvaiue of clean,
moral juclger-nents, inciuding tl-ie rrarior.is religious principles practised in the country.
fhrs publication is rndeed timely tbr iv'{alaysian studentsto not onl-v equip themselves vr'ith business
ethics knou.,ieilge frorn the conrrentional tir"ciretical framework, but aiso from religious dimensions, which
are seen as critical components in the shaping process of an individual frorn Eastern cultures. This book will
p;rve the u,ay for the accolnplishn're nt of a vision to revive the importance of ethical values not only fri,n'r
r"uriversalistic logical/rational thinking processes but from moral objectivism contexts as well. It nill indeed
add to the lrnrited business ethics books rvith a iocalised ASEANI flavour.
Congratulations on this noble piece---another significant contribution towards nation buildingl

Dato'Hafsah Hoshim
Chief Executiv e OfJ'icer
SME Corporation Malaysi a
Ethics is a branch of phiiosophy. Every branch of philosophy is a normative endeavour. Business ethics is no
exceptron. As a field of study, it is certainly not an oxymoron but a reality tirat must be internalized by all
business people to be sustainable in this chailenging global environment. This study requires one's moral
judgements and deep rationalization of business issues. It requires a constructive application of either relative
or objective ethical principles, including religious principles.
{' Although the primary objective of a business is to make profits, it has to meet social interests since
t any business entity is a cornponent of a civilized community aspiring to sustain economic prosperity and
weil-being. Several established business organizations in the global scenario har.e coilapsed at the wake of
the 21st century dui: to compronrises on ethics. Business decisions therefore must not only be economically
effective br"rt legally and morally sound, complying with man made rules and regulations, what rnore God
made principles and commandments.
'Ihis text aims to eqr-rip readers, especiail,v students ln higher iearning institutions, with the fundamentals
of br:siness ethics knou4edge. It has brought in iocal flar,our rvithin the Eastern perceptions of ethics in the
conduct of business, rvithout cornprornising on the \\/esterir dimensions.
This text begins u,ith ethics as a philosopLical concept and relates it n,ith life. Next, it links ethics
with leadership and rnanagement to set tht stage for the economic character and organizational set up of a
business. Following this, it introduce s readers to ethical theories and principles that are applied in the global
lvorld of business rvith discussions on strengths and limitations of each. Along with this, religious ethics rvr1l
also be linked ancl discussed. Next, t}-re text dwells upon contemporary ethical issues at the r'r,orkplace such
as conflicts of interest, privacy, dismissal and rvornen at the rvorkplace. it deliberates on ethically related
business topics such as marketing, social responsibiiity, and go\rernance. The text r,r,iil er-rd w-ith Etl-]ics in
the Global Environment to rnake readers realize tire rmportance of the ethical condrict of multinational
corporations.
It is hoped that this text r,vili impress upon all readers onthe importance of ethics in life; be it in business
or non business matters. 'Ib all students, who are potentially going to be organizationaI stakeholders of public
or private institutions. business or non-business establishments, may this piece of knor'r,ledge be an added
value as you are stepping on the stone to sllccess in your undertakings.
As iuthors, lve har.e strived to impart our diverse business knolvledge within our limitatrol)s as humans.
\4Ir apolosize for any shortcomings, irr due collrse.

Khalidrh Khalid Ali


Zulkufly Ramly
Lau Teck Chai
We would like to convey our heartfelt appreciation to all the scholars who have been engaged in business ethics
research and publications We have trred our best to cite and acknowledge your relevant contributions in this
text, but in case of any missing information, we sincerely hope this general acknowledgement will repay for the
shortcomings. We would Iike to thank Dr. Noor Akma Mohd. Salleh from Universiti Malaya for contributing
some of the content for chapter 8 (Business Ethics and f'echnology). To Dinis, thank you very much tbr
),our
constructive feedback" "fo the Oxford Higher Educatiex Team, Mr. Terence Chierl the commissioning editor,
and Ms. Khor FIui Min, the editor, thank you very much for your endless support at work. Appreciate your
kindness and understanding in reahzing this inaugural project. N{r. Tanweer and Puan Azra,we thank you
fbr you; noral support. Ma,v the synergy sta1, lvith us to realize future value,added projects togeti"rerl Our
heartiest appreciation aiso goes to YBhg. Dato' Hafsah Hashim, CEO, SMECorp Malaysia rvho has kindiy
eontributed her meaningful foreword specially for this text. \4,rr- hope that you rvill extend this inaugural
piece to the competitive global worlcl as a soft signal that ethics is still relevaitt in business.

Khalidah Khalid Ali


Zulkufly Ranil1,
Lau Teck Chai
We would like to convey our heartfeit appreciation to all the scholars who have been engaged in business ethics
research and publications We have tried our best to cite and acknowledge your reievant contributions in this
text, but in case of any missing information, we sincerely hope this general acknowledgement wiil repay fbr the
shortcomings. We would like to thank Dr. Noor Akma Mohd. Sallch from Universiti Malaya for contributing
some of the content for chapter 8 (Business Ethics and Technology). To Dinis, thank you very much for your
constructive feedback. To the Oxford Higher Education Team, Mr. Terence Chieu,, the commissioning editot
and Ms. Khor Hui Min, the editor, thank you very much for your endless support at u,ork. Apprecrate your
kindness and understanding in realiz.ing this inaugural project. Mr. Tanweer and Puan Azra, ne thank you
for you; ,r-Ioral support. May tlre synerglr stay r,vith us to realize future value-added projects togetherl Our
heartiest appreciation also goes to YBhg. Dato' Hafsah Fiashim, CEO, SMECorp Malaysia who has kindly
r-ontributed her nreaningful forer,r,ord specially for this text. \\'r- hope that yoti tvil1 extend this inaugural
piece to thc competitive global norid as a soft signalthat ethics is still relevant in business.

Khalidah Khalid Ali


ZulkuJly Ramly
Lau Teck Chai
Oxford Advisory Board iii
Dedicatian v
Foreword vi
Preface vii
Acknowledgements viii
Table of Contents ix

Ethics and Its Conceptualization in Life 1


10 Introduction 2
1
', FLhics in definitron 2
1"2 The contrast between ethics and morality )
J
I3 The onqin of ethics 4
1.4 Ethics and its importance in life 5
1.5 The contrast between ethics and legality 6
1.6 Religion and ethics 7
1.7 Eastern and western perspectives on ethics:
Is there a difference? 14
1.8 Universally accepted moral values 10
l(J

]9 Fthics arrd its imporlarce rn busi;.ress ?2


St.tmrnary 25
Glossary 27
Revrew and discussion ?B
Case study 28
References and suggested reading 29

Internalizing Ethics in the


Conduct of Business 32
2.A introduction ')))
.).
2.1 Common ethical dilemmas faced by business pecple aa
JJ
\

x Table of Contenis

2.2 The three leveis of decision-making 36


2.3 Ethical management versus management of ethics 3B

2.4 Role as an ethical ccncePt 40


2.5 Code of ethics for an ethical corporate culture 43
2.6 Economic, legal and moral dimensions for effective
business decisrons 44
2.7 Managing ethical dilemmas 45
2.8 The role of religion in resolving ethrcal issues in bustness 46

Summary 47

Glossary 50
Review and discussion 51

Case study 57

References and suggested readina 53

Ethical Theories and PrinciPles 55

3.0 lntroduction 56
3.1 Understanding the fundamentals of moral philosophy 56
3.? Utrlitarian theory of ethics 59
3.3 Kant's ethics of duty theorY 64
3.4 Arrstotle's virtue ethics theory b/
3.5 Fthrcs oI care 72
-71
3.6 Theory cf rights
3.7 I heory o{ justice 82
3.8 Justice and the market systenl 87

Sumrnary 90
Glossary 93
Revlew and discussion 95
Case study 95
References and suggested reading 96

Ethical Leadership and


Corporate Culture 99

4.0 lntroduction i00


4.1 Defining ethical leadership 100
4.2 Two pillars of ethical Ieadership 101
'10-l
4.3 Setting the right tone from the too
4.4 Critical elements of a formal ethic. progr.amme 106

4.5 Detining corporate culture and ethical culture 1tl


Table of Contents

4.6 Ethical leadership and ethical corporate culture 1i3


Summary 114
Glossary 115
Review and discussion 116
Case study 116
References and suggested reading 117

Corporate Governance 119


5.0 lntroduction 120
51 Definrtion of corporate governance 121
tra
J.L Corporate governance and public corporations 121
5"-t The concentrated ownership of Malaysian
public corporations 125
54 The development o{ corporate governance in Malaysia 128
55 The Malaysian code on corporate governance 129
56 Theories of corporate governance 134
57 Corporate governance mechanisms 140
5B Ethical issues in corporate governance 1r)
IJJ

Sunmary 158
4 /-
Glossary tol
Review and discussion 164
Case study 164
References and suggested reading 165

Corporate Social Responsibility 1,68

6.0 lntroduction 169


6.1 Definrtron of stakeholders 170
6.2 Types of stakeholders 171
6.3 Analysing stakeholders' relative importance 172
6.4 Three perspectives of stakeholholder theory 173
6.5 The concept and nature of corporate social responsibility 1/5
6.6 The debate of corporate social responsibility 180
6.7 Corporatesocialresponsiveness 184
Summary 186
Glossary 189
Revrew and discussion 190
Case stt,dy 191
References and suggested reading 192
xit I'able of Contents

Common Issues at the Workplace 194


7.0 lntroduction 195
7.1 Whistleblowing 196
7.2 Trade secrets 199
7.3 Conflict of interest 201
7.4 Privacy 201
7.5 Discrimrnation and affirmative action 218
7.6 Women at work 229
7.7 Employees' rights and duties 238
7.8 Occupational health and safety 240
7.9 Termination of service/unjust dismissal 242

S .n:mary 244
Glossary 248
Review and dlscussion 252
Case study 253
References and suggested reading 254

Business Ethics and


In form ation Technolo gy /_>6
arn
8.0 lntrod r-ction LJ'/

B.'1 Overview of ethical and social concerns in


lnformation Technoiogy (lT) .,59
8.2 Security threats that affect informatron systems 1A,t
8.3 Current ethical issues in Information Technology (lT) 266
8.4 Managing inforrnation system security 271
'273
Summary
Glossary 274
Reviey,i and dlscussron 276
Case study 276
References and suggested reading 277

Marketing Ethics and Consumerism 279


9.0 Introduction 280
9.1 Marketing in definition 280
9.2 Theories of marketing ethics ,o?
LO.)

9.3 Ethicai issues in product develol-ment


aof
LO/
Table of Contents xiii

9.4 Ethical issues in packaging and labelling 289


95 Ethical issues in pricing 2:92
9.6 Ethical issues in advertising ?aq,
9.7 Ethical issues in retailing 297
9"8 Ethical'issues in the use of direct marketing 300
9.9 Consumer ethics and customer reseonsibility 302
9.10 The company's ethical review 308

308
Glossary 311
Revrew and discusston 1aa
Jt1
Case sludy 312
References and suggested reading 111
JIJ

Ethics and the Environment 314


10.0 lntroduction 31s
10.i Fndustrialization, modernism and sustainability
in the wake of the 2lst century 316
10 2 The concepts of sustainability and
susta inable development 323
10"3 Renewable and non-renewable resources 323
10.4 The history behind sustainability and
susta rnable development-an oxymoron? 32s
10.5 F;ee market arguments on sustainability and
pr-eservation of the environment 1?6
10.6 Free market arguments and their rmpact
on the environmenl 3?7
1A 7 S;sl ainable consumption aao
JLO
l0"B Barriers towards sustainable consurnption 329
149 Steps towards sustainable consumption 331
10.10 Green jobs 333
10 'i1 Challenges of Cifferent labour and
environmental standards across the globe 336
10 "12 Environmental ethics J)O
10.13 Environmental ethics-an lslamic dimension ).11
J+l

Sumrnary 345
Glossary 348
Revrew and drscusslon 3s0
Case study 3s0
References anc) suggested readinq 351
iv Table of Contents

Islamic Ethics 354


11.0 lntroductron 355
11.1 Definition of ethics from the Islamic perspective 355
11.2 Sources'and oriqin of lslamic ethics 358
1/4
11.3 lslamic worldview and ethical systerir JOI

ll.4 Axioms of lslamic ethical philosophy 365


1'1.5 lslam and stakeholder relationships JOO

11.6 Relationship with stakeholders from the


perspective of lslamic ethical system 369
11.7 Prohibited earnings and business transactions 3/6
Summary 384
Glossary 3B/
Review and discussion 3BB

Case study 389


References and suggested reading 389
I

Ethics in the Global Environment 392


?o2
12.0 lntroduction
12.l Ethics rn international business 393
12.2 The ethical conduct of multinational corporations 395
12.3 Ethical rheories in the context of international business 397
?oo/
12.4 Ethics in cross-cultural and internatronal contexts J/

12.5 An ethical drlemma 4l)2


12.6 A framework for ethical decision-making 403
12.7 Current ethical issues in internatlonal business 404
12.8 The value of ethical behaviour 412

Summary 413
Glossary 414
Revrew and dtscussion 415
A1':
atJ
Case study
References and suggested reading 415
't11
+t/
lndex
CHAPTER

Ethics and Its


Conceptuali zatton in Life

q,
\

LEARNING OUTCOMES

At the end of this chapter, you should be able to:


r Define and differentiate between ethics and rnorality.
r Understand how ethics is developed in an individual.
r List and explain the various factors that influence the ethical
values of an individual.
n Compare and contrast between ethics and legality.
r Compare between Eastern and Western perspectives on ethics.
r Relate the role of religion as an important contributing factor in
shaping the ethical values of individuals.
E ldentify universally accepted moral vaiues.
r Recognize ethics and its importance in the global business world.
2 Buiiness Ethics

1:0 INTRODUCTION

This introductory chapter begins with ethics as a concept. It will differentiate between
ethics and morality and outline factors that contribute to the shaping of one's ethical
values. iustifications will be drawn as to why ethics is important in life, what more in
business. It will include a section to compare and rontrast the concept of ethics from
Western and Eastern perspectives. it will continue to discuss the role of religion in
shaping one's values. Finally, it will introduce readers to the universally accepted moral
values ihat must be emulated by ail irrespective of social and cultural drfferences.
We often reflect and ask ourselves some basic questions:
r How should I lead my life?
r What type of person should I strive to be?
r What values are critical for me to lead a rewarding iil"e?
r What standards or principles should I follow to conduct my life?
Our self-reflection and conscience in addressing these personal issues immerses
us in the study of right and wrong or moral reasoning. Moral reasoning leads us to the
study of morality i.e. ethics.
Human beings are special creations of God. Behold, thy l,ord said to the angels:
'1 wilt create a vicegerent (i.e. Khatifah or leader) on earth' (Al Qurart, Al Baqorah,
l:30). Hr-rrnans differ from non-humans because they are made in a baiancc and are
directly informed of their role-to be ieaders in the universe. They are therefore in
a unique position to be guardians. Humans are endor,vecl rvith inlelligence and the
I-righest degree of free wiil to think sensibly whether their acts are right or u'rong rvhile
lultiliing their desires and self-interests. They are good by choice and given inner
control but are made accountable for all their actions. '\4& have indeed creoted rnan in
the ltest of moulds' iAl-Quran, At Tin 95:4).
Humans har.e three responsibilities-to make himseif or herself good; to help
others be good and to make the physical world good. \\re cannot preach goodness
if we do not embody goodness ourselves. This is .'.r,here the study of ethics becomes
relevant as a field of knowledge.
Chapter I introduces readers to ethics and its conceptualization in life. Although
the follou.ing chapters will focus on ethics in the world of business, this chapter is aimed
at providing a clear understanding of the direct link between ethics and the conduct o{
life, be it in business or non-business relaied matters. Aptlr'', each of us takes on diverse
roles as leaders at any point of time, be it at home, at work, in br-rsiness or nhiie serving
tlle community through a voluntary social activit),. As leaders, we are expecteci to displav
ethics in the conduct of 1ife, wherever we are and in all situatioi-ts. We may have acquired
knowledge oi-r ethics but this does not ensure good practrce Let us ask ourseives a valid
question, 'How can we lead Mother Earth without inter nalizing ethics?'
lVe have been using the terminology'ethics', but what is ethics?

?h,., - -, **f I
1"1 ETHICS IN DEFINITION
principles rhat
contains behavioural
Ethics can be described as a set of principles that contains irehavioural ccdes to
codes lo derermine
cletermine rvhat is right or wrong (Khaiidah el c1.,2012a). It also outlines the moral
what is righr or
wrong.
duty and obligations that any hurnan being should practise. The term 'ethics' is derived
Ethics and lts Conceptualization irr Life 3

from the Cireek word ethos, which means character, spirit and attitudes of a group of
people or culture (Rahman, 2013).
There are many formal definitions of ethics. To mention a few, Stanwick and
Stanwick (2009) define ethics as the values an individuai uses to interpret whether any
particular action or behaviour is considered acceptable and appropriate. Velasquez
QAn) and Nickels (2008) regard it as a discipline that examines one's moral behaviour
or the moral standards of a society. According to Abdullah and ZainolAbidin (2011),
ethics concerns itself with what is good or right in human interaction. It revolves
around three centrai concepts-'self', 'good' and 'other'. Ethics is also defined as a
critical analysis of human acts to determine their rightness or wrongness in terms of
tu,o major criteria---truth and justice (Mauro et al., 1999).
To conceptualize ethics as a field of study, we are trying to rationalize rvhat actions
are right or lvrong and assess r.vhether they are just or fair from different perspectives-
individual, organizational or societal levels" Certainly, we have to consider the rights
of others (humans and non-humans) much as we are equally interested to exercise our
own individual rights and self-interests.
We have just defined etiiLcs ancl its scope. Next, we shail iook at the contrast
between ethics and morality.

1.2 THE CONTRAST BETWEEN ETHICS


AND MORALITY
One may ask 'ls there a significant dilfbrence between ethics and morality?'
Practically, these two terms are being used interchangeably in everyday life. While
many may agree that there is a very thin lire to differentiate these two concepts from
a layman's viewpoint, in the study of ethics, however, several scholars have proposed
clear dilferences betlveen ethics irnd moralitl,. Tiie objective behind this distinction is
to clarify certain arguments (Shaw, 2011).
Morality is concerned n'ith tire norms, values and beliefs embedded in social F,l.r,rrr,r,.f.r, ,..,
processes r,l'hich define right or 1,,,rrong for an individual or a community. Ethics, in irornrs, r,alues and
contrast, is the study of moral standards whose explicit purpose is to determine, as far rg ,ei! er.,rlredde.l
as possible, r'r4rether a given moral standard or;udgement based on that standard is - i,-!.rl -.r,.r.e!-qi:r-(
more or less correct (\,'elasquez, 2006). This tl-ierefore demands fcr analytlcal thoright ,"'i .'- i,:- -.' ii:lrL
and apolication of reason to define specific rules, principles or ethical irreories that .rr \'' Tir:r! i--'i
determine right or 1\rrorlg for a grven situation. In addition, these rules and principles ttrclr" dr; :ri '
iy
rrrust give an account of the rights or entitlements we have and what is jusl or fair 'omnrun
(Boatrigl'rt, 2007).
Let us further differentiate these trvo concepts by an example fbr claritl'. We knol-
:hat all religions and cultures vierv strongly that lying, cheating and manipulation
are wrong. These are sub-values of dishonesty. The society's acceptancelrecognition
that these values are morally wrong is termed as morality. However, when we apply
a specific theory or principie to explain why lying, cheating and manipulation are
wrongful acts, this is ethics. Based on Ruie Utilitarian Theory, iying, clreating and
rnanipulation are unethicai after assessing the bad consequenccs against the good
consequences of such actions. in addition, applying Islamic ethics anC princrples,
these three values are irnmoral based on the verses stated inthe Al-Quran andsunna/'t.
Emmanual Kant's Ethics of Duty will also share the same view since these values do
not promote gor;dwill among fellow humans and they do not follow the universal larv.
4 Business Ethics

To quote:
'Act only according to that maxim by which you can at the same time will that
it should becorne a universal law.'

We have so far defined ethics and seen its contrast with moraiity. Next, we shail
examine the ongin of ethics and factors contributing to the shaping of one's ethical
values. We shall also explain why ethics is important in life'

1.3 THE ORIGIN OF ETHICS

E,h"d;;;;;l One may ask'Where do ethical values come from and how is good ethics developed
from one's inner i1 an individual?' It comes from our inner feelings which subsequently translate into
feelings which- our moral t,ehaviour (Khalidah et al.,20l2b). Ethics thus begins with each one of us.
subsequently As hun,ans, we are fuliy responsible for our ethical or unethical behaviour. According
translate into his or tcr Ebert and Griffin (2007), ethical behaviour conforms to ethical beliefs and social
her moral behaviour. norrns about what is right and good. Conversell,, unethical behaviour cottforms to
individual beliefs and social norms that are defined as wrong and bad.
;..*t -ft.*n.rt-l Many of us rvil1 agree that the degree of one's self-control and will Power have a great
ethical values intluence on character building and development. However, looking from a rvider per-
include upbringing, spective, se\reral factors influencc onc's cthical valucs. Thcsc factors includc hislher up
socialization process, bringing, socialization process (i.e. the behaviour of surrounding people), experience and
experience and Lrltical reflectior-rs on those experiences and the explicit and implicit standards of culture
crrrical reflecr'ons (Sl-raw, 2008 and 2011). 'l'hey may be referred as social, culturirl and environmental factors.
on one's expei-iertces Durirrg our childhood days, our parents nurture us with good discipiine and
and rhe explicit and. 'J'hey are
morality. They guide us on lvhat is right and what is n,rong in our actions.
implicit srandards of
our 'first' teachers a-rd role models. In fact, they shoulder the responsibility to shape
cultr:re.
us to be good people. The pertinent role of parents in the upbringing of therr children
has also been duly recognized in Islam based on a reievant Quranic vcrse:

'C) ye t+,ho believe! Savc yourselves and your


families.fron t l:irt'rr'/to','Jtrc1
is Men ctnd Stones, over u,hich are (appointed) angels stern (ond) seyerc, who
flinch not (from executing) the Commands they rt:ceive .fron'L Allah, ltut do
(preci.sely) what they are comntanded.'
(Al- Quran, At-T'ahri irtr 66 : 6)

When we go to school and higher learning instrtutions, our teachers and lecturers
gir,e us added knowiedge and skills for survival. In adclition, they also impart e'.hics
knowledge through moral and religious studies. Much as our teachers ancl lecturers
are exemplary role rnodeis in our chrracter buiiding, we are also influenced by pecrs
and the surrounding environment.
Nowadays, the media and Internet har.e some$,hat contributed to the shaping
o1'human character and vaiues; more so with growing chlldren" The knowiedge
acquired through the numerous search engines and countiess websites, not to
mention Facebook, Twitter and several other sc'ciai networking websites, have
srgnificantly wired the brains and shaped the character of our youngsters. Irt
addition, one's myriads of experiences and critical reflections on what l-re or she
has gone through, be it good or bad, does to a Lertain extent influence iris or her
character and vaiues. We have seen people's values chiinge for the better out of his
or her own self-realization and positive attitudr io improve, especially afier having
experienced a rnishap or misfortune.
Ethics and lts Conceptualization in Life 5

Finally, culture has aiso an influence on one's values. For example, respect and
care for the eideriv have ahva,vs been accepted as noble values internalized by Asian or
Eastern cuiture until today. It is immorai to abandon parents when they are old. \{re
shouid sincerely extend our love and care to them out of gratitude, no matter hou, busy
we are in our lives. Their endless 1ove, care, patience and sacrifices made to guide us
during our childhood are of intrinsic value.to determine our successful lives. in fact,
they have a right to be looked after by their children in their old age. We wouid not
have enjoyed the beauty and bounty of this world without our parents' existencel
We have so far discussed at length the influence ofsocial, cuitural and em,ironmental fAil r.[Cl*t pr*d.
factors on one's ethical values. Aptly, they are also developed and internilized from irs believers wirh a
religrous teachings" Aii religions provide its believers with a worldview and strong worldview and srrong
composition of conduct, values and commitments based on instructions that have to be composirion of
strictly follou,ed without cornpromise. For example, the fundamentai principles of iman conduct, values and
and taclwa in Islan-r require every Muslim to display uprightness, honesty and integrity, commirments based
irrespective of the state he or she is in, be it an individual, a business person or a figure cn insrructions rhat
.i'hese have ro be srrictly
of authority and pow,er. tw'o principles remind Muslims not to act soiely for the
followed without
fulfilment of self-interests, but to dispiay actions that subsequently benefit others as he
compromise.
or she assurnes the role of a leader or Khalifah (Khaiidah et al.,20l2a).

C According to Shaw (2008 and 201 1), rationally, we learn and adapt to the ethics and
morai principies through our:
- Upbringing
- Socialization (i.e. the behaviour of those around us)
- Experiences and our critical reflections or r those experiences (self reflection)
- The explicit and implicit standards of our culture

{q We also learn ethics from religious teachings. All religions provide their believers with a
strong composition of conduct, part of which involves moral instructions, values and
commitments.

Figure 1 .1: The far:tors inf lr-iencing one's ethical values

Frgure 1.1 summarizes llic factors influencing one's ethical values. \&re sha1l dwell
on the role of religion in shaping the etl-rical values of individuals in a separate s(cti.n of
this chartelas \{e gii along" l.et ris firstly acknou,iedge the importance of ethics in life.

1.4 ETHICS AND ITS IMPORTANCE IN


LI FE

Humans, despite their differences, live in a community and develop a web of


relationships in life. Although we value individual privacy, freedom of speech
and materiai rucll-being, as individuals, we also value happiness by sharing and
6 Business Ethics

complementing others. We value compassion, respect, fairness and gratitude. Tf


these values, among others, become the standards for a society's quality of life and
well-being, we shall all arrive at a consensus that ethics is important in life" Imagine
ourselves living in a community which compromises on these ethical values. Will we
live in peace and harmony? Much as we enjoy material wealth, u.ill we achieve well-
being in the true sense?
In the challenging and competitive global environment that we are ail facing toda,v,
individuals pursue their self-interests. However. we are expected to be equally conscious
of our roles in the community and the effects of our good deeds and wrongdoings on
others. fb reiterate an earlier fact, ethics deals with individual character and moral
values that govern and limit one's conduct. It investigates questions of right and
wrong, duty, obligation, moral responsibility and social justice (Wiley,1995 cited in
Malrro, Natale and Libertella,1999; Shaw, 2008). Every society aspires to be developed
and civilized. How can a society call itself civilized if the citizens are not ethicai while
the nation is enjoying an abundance of material wealth?
From a communitarian perspective, an ethical society is thus an outcome of
members lvho internalize and apply ethical values in their lives. The general well-
being, quality of life and prosperity of a nation therefore largeiy depend on the
internalization of good morai values among members of the communitl, (Khalidah
et. a\,2010). Only ethical societies will sustain economic growth, prosperlty and r,r,ell-
being. Without doubt, only ethical socreties rvrll sustain civilization and dignity of
humans as guardians of the universel
Our life nowadays is governed by a myriad of larvs, rules and regulations. Let us
pose a question: Do laws assure that ethics is internalized among nrembers of society?
Simply put, will iau,s instil ethics in individuals?

1.5 THE CONTRAST BETWEEN ETHICS


AND LEGALITY
Some people have the opinion that being ethical means complying with the law or
a set of stipulated rules and regulations. This is in line rvith the vieu,s of Aristotle, a
renorvned Greek philosopher and scientist (384-322 B.C.). In atti:mpting to outline
universal justice, he viewed that a good person ,s one who obevs the larv. Societies
normaliy adopt formai laws that reflect prevailing ethical standards or social nonns
(Ebert and Griffin, 2AA7). It is true that obeying lau,s is an important first step to
LrsrhiJ;' **-- be ethical as laws promote justice and fairness in human aclions. The F.mployment
narrower scope of
Act 1955 in Malaysia protects the rights of employees. Employers must corr-rply with
erhrcs. But a person
who foliows rules
this act. Nonetheless, rve also hear of irresponsible employers' over-exploitation of
and regulations need
labour at work despite the need to comply with the act. We see wrongful acts such as
not necessarily be an disrespect, greed and selfishness within the pubiic and private sectors while complying
ethical person. Ethical rvith stipulated government and business laws. These are all seen rr ithin the so-calied
behaviour rests upon 'rules of the game'. As Ebert and Griffin QAAT) have rightly poiirted out, laws do not
one's full conscience make people honest, reliabie or truthfui.
and accounrability I.egality therefore carries a narro\ver scope in ethics. It ret-ers to laws that lve have
to do,good written to protect ourselves from fraud, theft and violence. Hrrtvgl,sl-, ntan)'immorai
deeds as a social
and unethicai acts fail well within our iaws (Nickels et a1.,2008). T'hcy need not
responsibility under
necessarily drive one's conscience to internaiize good values (Khalidah et al.,20l2a).
all circumstances.
Ethics and lts Conceptualization in Life 7

The collapse of Enron, 'fyco International and World.Com at the beginning of


the millennium fully supports this contention. While nations were actively trying to
promote globalization as a call from the World Trade Organization (WTO) to increase
the welfare of the rvorld economy through free trade ano competition, the entire globe
was alarmed by the coliapse of these giant American corporations.
In Malaysia, corporate scandals such as those surrounding Pewaja Steel, Bank
Bumiputra and Bank [siam prior to the 1997-98 financial crisis have also charted
history in the local manufacturing and banking industries and challenged the
integrity of corporate governance. An example of a recent scandal is the RM12 biliion
Port Kelang Free Zone project involving civil servants and renowned politicians who
are supposed to represent public interests.
In an international scenario, the legal suit against San Lu Corporation in 2008
for producing milk tainted with melamine, which killed manybabies in China, is also
a classic example that laws, rules and regulations are not foolproof to ensure ethical
behaviour among individuals and businesses. These established corporations must
have developed a clear code of ethics as a governance mechanism to compel employees
to behave ethicaliy, but they do not necessarily result in internalization of good ethical
values. The muitinationals and organizations mentioned above would have sustained
their multi-billion dollar businesses until today if not for the unethical behaviour of
their upper management and employees at work.
Seriously. ethical behaviour requires more than having to complv with policies, fErh"t b rb"* ,l*
1aws, r ules and regulatiols. Ethrcs is above the law. It reflects peoplet relations with law. It requires a

others. It requires a sincere reflection on how we should treat others and the impact sincere conscience
ol our actior-rs on others. It boils down to a person's commitnrent and responsibility on how we shoulcl
tolr,ards others as he or she fulfiis personal needs and interests, treat others and tlre
Ethical behaviour therefore rests upon one's full conscience and accountability impact of our actiolrs
on others.
to do good deeds as a social responsibility under all circumstances (Khalidah el al.,
2012a). Nevertheless, how do lve then develop one's full conscience, commitment ancl
accountability to do good deeds as a sociai responsibility under all circumstances?
\\re shall next address this issue under the role of religion in shaping one's
,:hrca1r.alues. Earlier in this chapter, we have noted that religion is one of the factors
i ntluencin g ethical r,alues.

1.6 RELIGION AND ETHICS

Some people do not believe that morality boils down to religion but rather that
it is just a function of what a particular society happens to believe (Shaw, 2011).
some nrry even view that it is misieading and inappropriate to link morality with
'.lritualitv and religious bcliefs since it may violate individuai or human rights
whicli promote freedom of choice in religion and privacy. After all, one's of
'hoice
religion is a negative right (i.e. free from others'interference) and is clearly stated in
:l:e 1948 United Nations Universal Declaration of Human Rights (Boatright, 2009;
r..halidah et al., 20l2bj.
While we respect these 'westernized'iiberal and universal viervs on the role of
i,:ligion ttxvards shaping one's ethical vaiues, the point remains-a belief in religion
and internaiization of the principles and teachings will shape one's character and
r,alues. Most religions have an ethical component. Quoting the words of Simon
F'i;ickburn, in nis book, Ethics: A Very Short Introduction (2001):
I Business Fthics

'For ntany people, ethics is not only tied up u,ith religion, but is t-om.pletely
settled by it. Such people do not think too much about ethics, becau.se there is
an authoritatiye code of instructions, a handbook o.f hout to live .'
Mala1,5l2's Rukun NegaralNational Principles directly states the belief in God
as a doctrine to be followed by ail Malaysians irrespective of religious and cultural
differences" This implies the importance of religion in Malaysian society despite its
racial and cultural diversity (see Figure 1.2).

Good
Behaviour
Loyalty to King
and Morality
and Country

Figure 1.2: Rukun Negara

Let us delve further to justify this statement bv explalning the role of Islam,
Christianity, Buddhism and Hindr"rism in shaping the ethical r,alues of ti-rcjr follorvers
or believers. These are the four common reiigions embraced br. J\4ala1'sians, living in
a multiracial community. Let us begin with Islarn, thc officiai religion of Mala,vsia.

1.6.1 lslamic Ethics: Ethics of the Soul


Islam is derived from the Arabic root Salema-peace, pLrrit1,, subrnission and obedience.
1n the religious sense, Islam means submission to the lvill of God and obedience to llis [aw.
G;;d.'r.d ---l Much as Islam is recognized universally as a religion, it is ir-r fact a u,ay of Irf.e for N4uslims.
from an Arabic
Prophet Muhammad SAW once said in ahadith narrated b1, X4ushm:
word Salema which
means, peace, 'Religion is advice.'
purity submission
and obedience
The foundation of Islamic ethics is the A/ Qurol ancl Sunnah (i.e. the sayings and
lslamic erhics takes practices of Prophet Muhammad SAW). Islarnic ethics integratr:s the inner and outer
a Cod-centred view aspects of an individual's life (lbn. Manzur, i990; lv{iqdad Y:ljin, 1973).It concerns
and emphasizes on individual physical development rvith priority on tl-ie soul's cleveiopment, cnrcial to
rhe importance of the individual's behaviour and character devel rpment. The r,;iiues of the soul are
integrating worldly universal and consistent without having to separate human, physicai and spiritual
affairs wiih religion. values determined by the Creator, Allah SWT. These values shall remain unalfected
Ethics and lts Conceptualization in Li{e

by changes in external conditions and circumstances of life (Al-Maududi, 1978).


Therefbre, regardless of their environment, humans, especially Muslims, are
believed to have a moral re,sponsibility to submit to Allah's orders and strictly follow
Islamic principles without compromise (i.e. as revealed in the Al-Quran and Sunnah).
Humans have been granted the faculty or inteiligence to discern God's will and to
abide by it as obedient servants. This faculty most crucially involves reflecting over
the meaning of existence which uitimately points to the reality of Aiiah or God as the
Creator and determinant of everything in life-in this Earth and the hereafter. As
believers, Muslims are expected to internalize the fundamental principles of Iman
(i"e. a Quranic term for faith) which will lead to Taqwa (i.e. a Quranic term for piety).
Figure 1.3,1"4 and 1"5 represent the five principles of Islam, the six principles of Iman
and more elaboration on Taqwa to be internahzedby Muslims.

The Five Pillars of lslam


a,r'l :;'rn:. -
*;,:
rn rs the f,

i Faith or belief in the Oneness of God'and the


finality of the prophet hood of Muhammad 'ar'

* Establishmenl of the daily.playeqs (! timesla


) Concern for a nd -almsgiving:to the nieay,;$}
i Self-purification through fasting :.
(fasting in the month o{ Ramadhan}
) The pilgrimage to Makkah for those who are

(S o tt rce'. http://www.isl a m 1 0 1.co m/d awah/ pi I I a rs.htm l)

Figure 1.3: The five pillars o{ lslam

.Eelief in the
,t i
$iiiiisiiiiirio'i'r'
: rrr *l$fl\ll6fii(jf ',I :,,'

Belief in the 'ri! &*ii ngg toJtr *ie, ;


ci:mmissioned o,:.r;
Messengers . l$r
ipeacq,S, r:,,
uPql'$Kr$l''

Figure 1.4: The six pillars a{ lman


10 Business Fthics

. , ,
) .-^
t&.:1 ,
.,1
.;
.',3:.,
i.: {. 't .{. . :..t:1 --. . ":.

Taqwa y4 i '
1.* r':t t, .
:'t':')' ' ),i
-*i ,:,t ,4-&.

w A 'irlthe AlOuran that carries


.$,
and
...,1-.,, .r1..,':., 3

'ely obey the rule-s of Allah and be grateful to


q.1-., ,il .r'i",u. ri i'l:l:";is{'l

but responsibil

& the ex

ffi lVe remembrance of Allah


:.:
,
&
-
.-.1
ln'1: .cibedience; not

{Source: Green. 2.008)

Figure 1.5: Taqwa

Ethics in Islam therefore addresses eyery aspect of a Muslim's life-for seif, others
and the pirysical wurld. Sirniiar l-u lhc study of ethics, though ciifferent in scope and
nature is ilm al-akhlaq in Islam. Al-A:;hlacl is derived frorn the root word khuluq,
lr,hich means to create, to shape and to give form. Accordingll,, ilm al-Akhlaq, as a
branch of knowiedge, is a science ivhich deals with the ways to maintain virtues at
their optimum ievei, i.e. to avoid wrongdoing and to do what is right ancl desirable
(McDonough, l9B4).
Muslims rnust not only be virtuous, but they must also enjoin virtue. They
tttt-tst t-tot only refrain from evil and vice, but they must also forbid them while going
thror,igh the challenges of life. Muslims are aiso tarLght to act fairly and uphoid justice
in their dealings since every action will give an impact on others; be it humar"rs or non-
humans (Syed Othman and Aidit, 1994). They are always encouraged to emulate the
four attributes of Prophet Muhammad SAW the role rnodel of the mukmins--fatanah
(i.e. inteiligent and sagacious), amanah (i.e. faithful and trustworthy), siddiq (i.e"
truthful and righteous) and tabligh (i.e. informative and conve-ving the truth; never
withhoiding what has been revealed to them).
To summarize, Isiamic ethics strongly view that it is inrportant to integrate
rvorldly affairs with religion. Islam takes a God-centred woridvierv compared to
the secular rvorldview which separates worldly and r:cligious affairs. As a Khalifah,
Muslims har..e to consistentiy strive and promote the rvell-being of the ummah and
the society at iarge. As mukmins (i.e. a believer; Muslims who religioLtsly follow the
rules of Al-Quran), they will keep Allah in their hearts and regard the materialistic
world as a platform or medium to ultimately gain the rewards in akhirah (the world
hereafter) by doing good deeds. Material being is not seen as pride or a nleans to fulfil
one's egoism but it becomes a tool to contribute towurds the ummah which wili finally
determine one's destiny-heaven or heli in the hereafier. For the muknins, the entire
life is one of worship (Ibadah). Life is therefore a jihad or sacrifice. It is not oniy about
pleasing oneself and other fellow humans. Ultimateiy, life is to fuifil the expectations
of the Creator, Allah SWT through total submissron to Him for a promise mad,: to all
mukmins or believers-to enter heaven in the tvorld after.
Ethics and lts Conceptualization in Life 11

,:
Quoting from the verses of the Al-Quran:
'O My seryants wl'to believe! Surely My earth is vast, therefore Me alone shoulcl
you serve. Every scttil is going to face death, and then to Us you shall be brought
back. And fitr those who believe and do righteous deeds, We will most surely
establish them in a lofty place in Gardens beneath which rivers flow, abiding
thereirr" Excellent is the reward o-f the ruorkers; those who are patient, and put
their trust in their Lord.'
(Al-Quran, Surah Al 'Ankabut: 56-559)

Religious Professional Personal QualitY


Values Values Values Values

Taqwo (God Education, skill, Accountability, Quality, Productivity,


consciousness), syukur honesty, Moderation, /fqon (i.e. the level
(gratitude; being pu nctual ity, Excellence, Patience, of quality work),
gratetul), Tawokkol trustworthy and Tolerance, Humble, lstiqamah
(relying on Allah after 5yuro (consultation). Salam. {commitment, being
making own efforts), straight and
Muhasabah (self- steadfast), Efficiency,
evaluatton),.lustice creativity,
and amar makruf innovation,
nahi munkor collectivity, lhsan
(promoting good (benevolence i.e.
and forbidding evil). being kind and
helpful).

lAdapted from'The Role of lslomic Ethics in Organizations: An Experience in Moloysia' , L)SM)

[:igure 1.6: Values and ethical components in lslamic management

Figure 1.6 shou,s the reiigious, professional and quaiitl, values and ethic
components in Islamic n.)anagement to be internalized by all Muslims in striving for
a rewarding life"
\&'e shall look at Budclhisrlr nexf .
fB,ddt.i'n-.;;n...'
from the word

1.6.2 Buddhist Ethics budhr which


means to awaken.
Brrddhism comes from the word budhl which means 'to awakeri. Buddhist ethics I ne rounoatron
are traditionally based on the enlightened perspective of the Buddha, or his of Buddhism is
enlightened folloi,r,ers. Siddhartha Gotama (i.e. the Buddha) was born into a royal rhe Pancasila.The
basic conceprs of
fanrily in Lumbini, nou/ iocated in Nepal, in 553 BC. At 29,he realized that wealth
Buddhism can be
and iuxur,r' did not guarantee happiness, so he explored the different teachings.
summarized by rhe
religions and phiiosophies of the day, to find the key to human happiness. After sir
Four Noble Trurhs
years of study and meditatiorl, he finally found'the middle path' and rvas enlightened.
and rhe Noble
Aftcr enlightenment, the Buddha spent the rest of his iife teaching the principles oi- Eighrfold Parh.
12 Business Ethics

BLrddhism-called the Dhamma, or Truth-until his death at the age of 80" He was not
a prophet, nor did he claim to be. He was a man who taught a path to enlightenment
from his orvn experience.
Most scholars of Buddhist ethics rely on the exarnination of Buddhist scriptures,
and the use of anthropological evidence from traditional Buddhist societres, to justify
claims about the nature of Buddhist ethics (Keown, 2000). According to traditional
Buddhism, the foundation of Buddhism ts the Parcasila-no killing, stealing, lying,
sexual misconduct or intoxicants i.e. losing one's mindfulness. The initial precept
is non-injury or non-violence to all living creatures, be it humans or non-humans.
Tb become a Buddhist, a person is encouraged to vow to abstain from induiging in
immorai actions. This is referred as vinaya. The Buddha taught many things, but the
basic concepts in Buddhism can be summed up by the Four Noble Truths and the
Noble Eightfold Path.
The First Noble Truth is that life is suffering i.e. life includes pain, getting old,
disease, and ultimateiy death. Humans also endure psychoiogical suft-ering like
loneli'-ess, frustration, fear, embarrassment, disappointment and anger. Buddhist
ethics explain how suffering can be avoided in order to achieve true happiness.
The Second Noble Truth is that suffering is caused by craving and aversion. One
lvill suffer if he or she expects other people to conform to his/her expectations. instead
of constantly struggling to get what we want, we should try to modify our u'anls.
The Third Noble Truth is that suffering can be overcome and happiness can be
attained; that happiness anr3 confentnrent in the fnre sense are thus possible. \\rherl
we give up useless craving and learn to live each day at a time (not dwelling in the past
or the imagined future), then we can become huppy and free. We then hal'e more time
and energy to help others. This is Nirvana.
The Fourth Noble Truths states that the Noble lrightlbld Iratl.r is the path u'hicl.r
leacis to the entl of suffering. The threading of the Noble lrightfold Path is essenttal to
seif-deliverance. Tn quote the teaching of the Buddha:

'Oease to Co evil, learn to do good, cleanse yoltr o1\'tt hcarl '


(Humphrevs, n.d.)

ffi nignt views or Preliminary Understanding

ffi night Aims or Motives

ffi ntgh,t speech

ffi ntgnt Rcts

ffi night Livelihood

ffi Risht rffort

ffi nignt Concentration or Mind Development

ffi
;-S:MiA;:-
nignt Samadhi,leading to full Enlightenment.
s"leryW---
i..,mi (Source: Huinphreys, n.d-).,--
,,, {J r, .!li.s#fd?ffir

Figure 1.7: Noble Eightfold Path


Ethrcs and lts Conceptr_ralization in l,.ife 13

To summarize, from potential to actual enlightenment, there lies the Middle :

Way-'from desire to peace, a process of self-developrnent between the 'opposites',


avoiding ali extremes. The heart and mind must be developed equally. Buddhism
ieaches that wisdom should be developed n ith compassion. Compassion includes
qualities of sharing, readiness to give comfort, sympathy, concern and caring. In
Buddhism, one can really understand others when one is able to understand his or her
olvn self, through r,visdom.
To many, Buddhism goes beyond reiigion. It is more of a phiiosophy or 'way of
life'. It is a philosophy because philosophy means 'love of wisdom' and the Buddhist
path can be summed up as follows:
r To lead a rnoral life.
r To be mindful and aware of thoughts and actions.
r To develop rlisdom and understanding.

Buddhism is also a belief system which is tolerant of all other beliefs or religions.
Buddhism agrees with the moral teachings of other religion-s but Buddhism goes
lurther by providing a long-term purpose within our existence, through wisdom and
riue understanding (BuddhaNet, n d.).
I-et r:s iook at Christianity and the ethical values that are taught to its foilowers.

'1.6.3 Christian Ethics


r-hristianity offers a view of human beings as unique products of a dir.ine intervention ICh,t""*y r"*
that har-e been endou,ed with consciousness and the ability to love (Shar,v,2011). humans as unique
Christian ethics in general has tended to stress the need for love, grace, merc1, 31d products of a divine
iorgivt-ness because of sin. It is not substantially different from |ewish or even Islamic inrervention thar
traditions. While Islam and ]udaism are based on the teachings within Al-Quran and lrave been endowed
Torah respectively, Christian ethical princinles are based on the teachings within thc wirh consciousness
Riblc" T'hese principles begin with the notion of inherent sinfulness, which requires and rl.re abrliry ro

"rsentjal atonentent. Sin is estrangement from God which is tire result of not doing love. Chrisrian erhics
stress on the need
1''..1'c r,r,ili" God's will is interpreted by the precept:
for love, grace, mercy
'Lovc GocJ n'ilh ail vour heart, soul, mind, strength and yortr neighltotrr as and forgiveness
),ott,'ttl.l'. because of sin.

['his precept is commonly called the Great Coinmandment.


In sutnmary., thc key principles of Christianity (i.e. the Kingdom of Heavcn where
(.hrrst is King according to Scripture) are based on the following:
r Humiiity or faith and trust in God.
lir C()nrmunication with God tl"rrough prayer and self-deniai.
x ()bservance of The Law which is written in Scripture and in the hearts of
those who love the truth.
; T'he offering of sacrifice to God and partaking of the sacrificial offering
(various animal and bird offerings in the Old Testament, the Lamb ol God in
the l{ew Testament, the sacrifice of the Mass in the catholic church).

ijclief in fesus Christ and following Him in a personal relationship is thc central
,irle under rvhich all others come. This personal relationship with God rvhich
salvation brought it into being can never be earned by personal devotion or rvorks of
i , ' l.arv. Peopie get close to ]esus because His Spirit lives inside of the belicver and
''' , , 'rlu'ays rn'ith them. This feeiing among the Christians very much i t-sembles tl-ie
14 Business Ethics

Muslims'love for Prophet Muhammad SAW as a Messenger of Allah SBT and a role
model of the mukmins.
Lastly, we examine Hinduism and the ethical values that are embedded in its
principles.

1.6.4 Hindu Ethics


;,hd,r-,r"t *lr*d I Hinduism is related to reincarnation, which is a way of expressing the need for
io reincarnation, a reciprocity, as one may end up in someone else's shoes in their next incarnation.
way of expressing the Hindu ethics places emphasis on one's intention. Therefore, selfless action for the
need for reciprocity. benefit of others without thought for oneself is an important principle in Hinduism.
Hindu erhics This is known as the doctrine of karma yoga. Kindness and hospitality arr: key Hindu
places emphasis values. AIso, more emphasis is placed on empathy compared rvith other traditions.
on one's intention, The Mother is a Divine Figure in Hindu Ethics, as seen in the creative female Hindu
sur-nmarized as the
ethos of the Devi. Of all the religions, Hinduism is among the most compatible with
doctrine of karma
the vi.,v of approaching truth through various fornrs of art.
yoga. Kindness and
The basic philosophy of Hinduism is that God is Omnipresent and Omnipotent,
hospitality are key
Hindu values.
God appears in everything, living and non-living. 'fhis is the reason why Hindus
seem to worship almost everything. Hindus consider any life frrrm sacred because il
is a manifestation of God. Hindus beher.e in many Gods because they resemble the
attributes of the Supreme Divine. He is the origirr of ever1.1fiing-ail knowledge, one's
cmotions and all actions. The ser.erai Gods in Hinduism resemble the varioits sub'sets
of qualities that human beings can imhibe. For example, a Hanun'Lan-bhakt would be
interested in maintailting celibacy, honesty and Io,valty to tire rnaster.
Hinduism has different strata of spirituality. At the lou.'est level, the Hrndu goes to
a temple and worships the idol. The next level is u,hen one praYs to Hin'r with prayers
in any language and sings His praise. The highest level is when one renoLlnces all these
'gr-rides' to reachin3 Him and directly meditates thinking of the Supreme Divine or
Brahman. Each individual is given the freedonr to choose his modc o[ worship and
connccting to the Divine.
r^re have elaborated on the various religior-rs ernbraced by Malaysians in the sprrit
of 1 Malaysia with openness and respect for humans as a general rigl-rt. We have aiso
seen the ethical values to be emulated b)' the follorvers of e ach religion. You must have
noticed the similarities and differences between these religions, mucir as we respect
that the choice of religion as a negative right, i.e. free from outside or other people's
interference.
Next, rve slrall compare and contrast the -Er,stern and Western perspcctives on
ethics.

1.7 EASTERN AND WESTERN


PERSPECTIVES ON ETHICS:
IS THERE A DIFFERENCE?

Is there a reai difference between the Eastern anri \\estern perce'ptions on ethics?
Let us begin by revisiting the issues of reiigran and cuiture to spur discussrons. As
seen in our earlier elaborations, most religions, despite differences, have a firnr beliet in the
Ethics and lts Conceptualrzation rn Lite 15

existence of God. We have also noted in the early part of this chapter that reiigion provides
its beiievers with a worldview and strong composition of conduct, part of which involves
moral instructions, vaiues and commitments (Shaw, 2011). However, the question remains
whether a community still upholds and internalizes religious principles in their lives.
The East has been known to uphold religious principles and cultural values more
than the \{est. Ib reiterate, the Rukun Negara or National Principles in Malaysia has
stated 'Belief in God' as its main principie; signifying the prominent role of religion
in Malaysian society despite its cultural diversity and religious differences. The legal
system of the country is verv much intertwined with religious principles. Religion is
openly discussed in society and there is high respect and tolerance for people in the
community despite the differences.
In contrast, in Western societS religion is a privacy issue, much as the East I. -.t"r" t*I.,x
and West share that it is a negative right (i.e. a human right, to be free from outside religion is a privacy
interference). Religion does not seem to be openly discussed by the Western issue.ln contrast,
community" Although the majority of Westerners are believers of Christianity, Easrern culture does
according to Bloomsfield, religious words such as 'God', 'devil', 'heaven', 'hell', not seem to have
'Christ' and '|esus' are availar,lc to people only on religious or solemn occasions. In serious religious
'caboos'. Religion is
contrast, Eastern culture does not seem to have serious religious 'taboos'. It is normal
parr and parcel of life
for people to use religious words and discuss religion in casual conversations. Most
in the Easr
pe'ople are free to talk about any goddess to their hearts' content (Ying Zhan g,2012).
This point implies that religion is still part and parcel of life in the East. Therefore, it
may h: suggestive that one's ethical vaiues are developed and internaiized through
rehgrou s conlmrtments.
In contrast, the West has somewhat compromised rehgious principies for liberal
unir.ersalism and secr:larism to promote objectivity, rational thinking and freedom
of thought. Althougir Western ethics is supposed to be iudeo Christian, secuiarisrn
has been rvidely applied in the conduct of everyday life inciuding state affairs. The
foundation of secularism is the separation of religion and state. Secularism is about
ensuring that the freedonls of tirought and Lonscience apply equaily to all believers and
non-bclievers alike. It also promotes fieedom of speech and expression, a framervork
for a democratic society and human rights.
Quoting from a relevant statement by Barrack Obama, the President of America:
'[)entocracy demcLrrds that the religiously motivated mtist translate their
conc(rns intt't tlnittcrsttL. rather than religion-specific yalues. Their proposals
musl be sultjt'et f,) (lrdttrllr'llL unrL reason, antl sltOuld nctt be occorded any
undu c n Ltto nt ol.i r r( s D ect.'

(National Secular Socicty, n.d.)


Mucli as we respect these r,,ier,vs and note that religion may piay a role in fR.lg". *ry h^".
shaping the ethical vaiues of the West, secular principies are equally strong in greater influence rn
contrasi with tire East wl'rich sees reiigion as part and parcel of life, including state shaping the ethical
r,ffairs. Religion may have a greater infiuence in shaping ethical values of the East values of rhe East
compared to the \A/est due to the difference in the God-centred versus secular compared to the
rvorld views. The West may place more value on the application of universally Wesr due to rhe
accepted 'man-made' ethical theories/principles to resolve ethical issues. To difference in the
Cod-cenired versus
mention a f'ew, they may apply Mill's Rule Utilitarian Ethics, Kant's Ethics of Duty
secular world views.
or the Golden Rule compared with the Easi, which may ultimately fail back on
religious or cultural principles although references may be made to these theories/
principles in the decision-making process.
Next, rve shall focus on cuiture and its influence on ethical rralues 1o see whether
there are differences between the perceptions of the East and the West. Redding and
16 Business Ethics

Wong (1986) reviewed a number of empirical studies on holv cultural characteristics


contribute to the new economic power of East Asia. One of the cultural characteristics
is about ego needs versus social needs. The cross-cultural comparison reflects that, in
the East, social needs take a greater significance as part of an individual's psychology
composition; in contrast to Westerners, for whom ego-centred needs such as self-
actuaiization tend to dominate. Aptly, the East values harrnonious interpersonal
relationships and promotes coliectivism more than individualism as promoted by the
West in support of privacy as a negative right.
Morgan (i986) cited in Bob (2009) explaiirs why the ]apanese economy is
successfui from a cultural perspective. He points out that the cultural values of the rrce
field (i.e. cooperation and teamwork) combined rvith the samurai tradition of servrce
(i.e. of willingness to share) account for its success. T'hese cultural aspects promote
conformity and tradition that are favoured over opportunism and individuality, more
common in Western society (Bob, 2009).
Eastern cuiture is more likely to emphasize the importancc of family, clan, group,
organization or society, in which an individual life may represent a tiny thread of
the greater fabric. It manifests the view that group benefits are more important than
pandering to personal desires (Bob, 2009).
From the above explanations, we may conciude that there are differences in hou,
the East perceives ethics as compared with the West. The East secms to place emphasis
on religion as a dominant factor influencing ethical values tvhereas the \4rest may vier,r-
otherlvise due to the strong hold of secularisrn as a world.",ierv. In addition, the West is
seen to be promoting individualism as a sign of respect for hunian rights and privacy
u,hereas the E,ast still values collectir.ism and comnmnity living althor"rgh individual
rights are duly recognized.
We earlier mentioned that the West has also developed thc Golden R.u1e as an
ethical principle to be used in the globalization era. It is also applicable ir-r t1-re conduct
of business. The follorving section describes these prrnciples in greater detail as a piece
of iiterature in our study of business ethics.

1.7.1 The Golden Rule Ethical Principles


There are six principles:
r The Golden Rule
r Immanuei Kant's Categorical hnperative
r l)escartes' Rule of Change
r UtilitarianPrinciple
r Risk Aversion Principle
r Ethical 'no free iunch'rule

il,,i. I 'fhe Golden Rule suggests that we shouid act in the nlanner we rvouid lrke othr:rs
r,-: ; ...-

5rrgg.r: j r.iraL
i r'oyer ac to treat us (i.e. doing unto others as you would have them do unto you). Refer to Figure
in rhL rn.rnNer v/e 1.8 to see an illustration of the unii,ersalityof the Golden Rule in the world religions.
woLrii i ke oihers tr.r Kant's Categorical Imperative suggests that if an action is not right for everyone to
rreai us take. then it is not right for anyone to take (i.e. the principle of universalizability).
Descartes' Rule of Change, also known as the Slippcry Siope Rule, suggests that if
.fhe
an action cannot be taken repeatedly, then it is not right to be taken at any time.
Utilitarian Principle suggests taking the action that achieves the higher or greater
value after rvcighing the costs and benefits or Cor-r:Quences. The Risk Aversion
18 Business Ethics

1.8 UN IVERSALLY ACCEPTED MORAL


VALUES

Figure 1.9 lists down several universally accepted basic moral vaiues, among many
others, as a reference in our study ofethics.

. Compassion . Cheating
. Courage . Cowardice
. Honesty . Cruelty
. Integrity . Deceit
. Respect for human life . Greed
. Self control . Lying
. Selfishness

Figure 1.9: Universally accepted basic moral values

Let us elaborate on the good n-roral values or virtues. Note that many of these
values have been identified from Aristotle's Virtr.re Ethics Tl-reory. They are also
promoted by Islam and other religions.

1.8.1 Compassion
Compassion is the virtue of empathy for the suffering olothers. Ivlore often, it is r-rsed
interchangeablyrvith empathy, altruism, kindness and love. Othervalues that manifest
compassion are caring, concern and friendship. Compassion transcends religious.
ideologicai and national differences. In support oi unir.ersalism, compassion is also
a virtue identified by the Golden Rule-'Do to others ,,vhat )tot.t would hove thent do to
you.' Lack of compassion, by contrast, tnarks a per son as cruci.
Quoting from the words of the Buddha:
'Compassion is that which mt.Lkes the heart of' tlte yood nr.t t' LrI lltc parrt oi
otl'ters.lt crttshes and destroys the pain o.f otl'ters; thus, ti is tolled compassior:
It is called compassion becouse it shelters and enrbrtce s the distresscd.' i
,

1.8.2 Courage
i
-1
J
3

Courage is doing the right thing despite the cost. It is the ability to face danger, pain
I
and other tests of life without showing fear. According to Aristotle, courage is the .j
virtue of responding to fear with a reasonable amount of darrng (Boatright, 2007)" It
is always associated with bravery and doing the right Lhings desp,ils the cost (Khalidah
e.t a1.,2010). A courageous person will not hesrrate to uphold justrce and faiiness in
all situations. He or she normally has commendable drive and rvill positiveiy face the $
$
a
)
l

a
3
c
I
I
Ethics and lts Conceptualization in Life '19

challenges of life with a hope for a better future. He or she will also take calculated
risks and act lvith prudence. Certainly, a courageous person is one who displays high
perseverance and will never give up!

1.8.3 Respect for Humans and Non-humans


This is a sub-trait of integrity. Respect, also considered as a synonym for politeness fc""d m-d *r*t
or manners, is basically an attitude that is shown towards any individuai's feelings . Compassion
or interest" It is acknowiedging another's feelings in any kind of relationship. lt may . Courage
not necessarily be feeiings shared between individual human beings only. It also
humans and non-
relates to how we treat non-humans/other creations of the Almighty. Moreover, it also
humans
covers one's positivity, tolerance and understanding of the differences between the . Self'control
perceptions, viervs and diversity of the various people of the world. Respect therefore . Honesry
has relevance to a famous pirrase 'treat others the way you want to be treated'. It is . lntegrity
also implied by Emrnanuel Kant's second categorical imperative 'act so that you treat
humanity, whether in your own person or in that of another always as an end and
neyer as a means only' (Boatright, 2009). An individual should respect the different
interests and opinions of others sincc human beings are diverse and non-homogellous
(Hyman, 1996).
In Malaysia, respect for the elderly and hierarchy are central to society (Abdullah,
1992). Oonsistcnt r,r,ith this value, small and young children are taught to obey and
listen ic, their eiders and ar-rthority figures. Those ,,r,ho do not respect other people,
especiallv the elderl1,, are considered rude. In the business environment, an individual
should not reduce the leyel of respect of other employees b'y not giving recognition
rthen it is ri'arranted. An indir.idual should also not refuse the input of other employ.ees
or displal,rude brehavrour torvard others (Stanrr.ick and Stanu,ick, 2009).

1.8.4 Self-control
Self-control refers to ol)e's ability to control desires thror-rgh strong r,villprou,er. A
person rritl-r se11-control rvil1 display patience and caimness, and will alnays strive
to control iris or hcr temper as anger is a bad moral value. He or she will consistently
display emotional strength and stability when faced with uncertaintv or tests in life.
Seli-control also refers to one's ability to avoid wrongdoing and promotes rightness
in actions. In Islam, the fbr:ndation of self-control and good behaviour is solaf i.e.
praying five tiirres a day. So/af in itself promotes one's commitmenttowards antar
makruf nahi rLungkar (t.e . doing good cleeds and forbidding eviiiav.,rding bad
b, e1"r avior,r r).

1.8.5 Honesty
,\onesty is telling the truth, not lying, cheating or stealing. Honesty and truthfulness
mean keeping one's commitments and transparency in life. Honesty is a sub-trait of
integrity. It is among the most emphasized qualities in Islam (Haneef, 1979). Absolute
honesty in al1 personal relationships and interactions, in business dealings and
transactions, and in the administration of justice are the most fundamentaj ethical
.oircepts arrd principles. The Al-Quran repeatedly stresses the values of honesty and
frutlrfulness. For instance, in Surah Al-Maariiverses 32 and 33:
'The virtuous are those *,ho honour their trusts tmd promises and tL:LtSe who
stand Jirm i:t their testimonies.'
20 Business Ethics

Next in Surah Al-Isra'verses 34 and 35, again we read:

'Anrl keep your commitment, verily concerning commil.ments you will be


questionicl. Filt the meas'ire when you measure, weight witl't a right balance.
'l'his is good and right in the end'.

In addition, the Prophet SAW also most emphatically said:


'There are three characteristics oJ a hypocrite: v,hen he speaks he lie"s, when he
ntakes a promise he breacltes it, and when he is trustecl he betrays'.

It is self-training that makes honesty a culture and habit ol people at all levels of
society (Sayed Sikandar, 2006).

1.8.6 lntegritY
Integrityis being upright and honest (Khalidah et a\.,2010). A person of integrity will
ul*u:ys uphold good ,rulr"r and principles in life. A renorvned Malayslan motivator,
Dr. Danial Zainal Abidin, defines Iniegrity as Taqv'a' a Quranic termiirology for
'God consciousness or fear of God'. Donald Zavderer listed thirteen (13) specific
behaviourai traits that can help identify the ievel of integrity in individual actions
(Stanwick and Stanwick,2009) (see Figure 1.10).

A They possess humilitY.


l They are concerned about the greater good'
l They are truthful.
l. fheyfulfi I commitments. t,.1:.:
.i:.-

I 'They strive for fairness.


.!tr;1'
They take responsibilitY. j i,.i:,.
.r,,t,.
ihey respect individuals.
t They celebrate the good fortune of others'
t' They deve-lop others.
I They ieproach unjust acts.
l

I They are forgiving.


'Thel extend
lhernselves, to others.

!i3*-i.

Figure 1.10: Behaviour o{ people with high integ; tv

Integrity is among the list of values of a virtuous business Persol] as identified


by Profe*ssoi Robert Solomon in his book, A Bt'tter Wa,v to Think about Business'
(fennings, 2006). It has also been adopteC as a, code of ethics b1' manv trusiness
Ethrcs and lts Conceptualrzation in Life 21

organizations including Malaysian muitinational companies like PETRONAS as


well as the civil ser\zice sector. The development of the National Integrity Plan (NIP)
and establishment of Institut Integriti Malaysia (IIM) have certainly justified the
importance of integrity, a value to be internalized among the Malaysian community
as the country aspires to be a developed nation by 2020.
Following our detailed expianations on the main universally accepted moral
values to be internalized by all humans in all situations, let us now focus on other
virtues as hsted in Figure 1.11, which may be applied in business or n()n-business
situations as we play our diverse roles.

Virtue: Standards and definitions

Getting things done despite


Fostering agreeable social contexts
bureaucracy

Attentiveness

Being admired by others

\ Doing what it takes to do the right


thing

Doing the right thing despite the cost

Giving others their due, creating


Approaching the ideal in behaviour

Establishiqg a congenial
Fuffi lling one's responsibilities
environment

Doing the right thing desp the job done'i'ighi;

(Source: Jenninqs, 2009)

Figure 1.1 1: Standarrjs and def initions of vii-.tue


22 Business Ethies

1.9 ETHICS AND ITS IMPORTANCE IN


BUSI N ESS

This introductory chapter has so far outlined the concepts of ethics in life, the factors
contributing to ethical development, role of religion in shaping ethical values and
virtues that are universally accepted as good moral vaiues to be intern alizedby ail of
us. Before ending this chapter, let us now link the concept of ethics with the business
world and briefly discuss its importance in the challenging global environment of
today.

1.9.1 The Business Environment in a Global Context


il;'*s,ffi;-] The term 'business' or business organization refers to an organization whose
objeci,ve is to provide goods and services for profit. Business people are those
fearure ofa trusiness
organization is who participate in planning, organizing or directing the work of businesses" One
irs economic distinguishing feature of a business organization is its economic character. Because
characcer-to make of its uniqueness, there is a branch of Islamic knorvledge called Muamalat, which
profits. lndividuals oniy focuses on the art of conducting businesses according to Islarnir principies.
aiso assume Muslim students may want to do their own research on this to enhance their
different roles in
business ethics knowledge.
rhe organizational
The workplace in itseif may be rega rded as a family or corlmunity. Employees and
hierarchy to realize
employers interact rvith one another to achieve the organization's vision, mission and
rhe organization's
vision and mission.
objectives. Although the workplace is a family or colnmunity in itself, we interact u'ith
There are also many each other not as family members or friends but as buyers and sellers, empioyers and
stakeholders in a
'
employees, etc. We assurre different roles in the organizational hierarchy to realize
busi ness. the organization's.,ision and mission. There are also many stakeholders in a business.
They include shareholders, competitors, suppliers, custotners, bankers, government
agencies, non-governmental organizations and the community where the business
is operating. The bigger the business operation and tl"ie more global it becotnes,
the more the number of stakeholders and the greater the challenge to baiance their
needs, pertinent for business sustainabilitl,. This is where ethics becomes a critical
component in the conduct of any business activitv.
We have eariier noted the collapse of giant Ar-nerican corporations when ethrcs is
compromised in business operations. The lessons learnt frorn the collapse of Enron,
Arthur Anderson, etc. and the consequences of unethical behaviour and unethical
business institutions such as San Lu Corporation are too serious to be ignored
(Desjardins, 2009; Khalidah et al., 2012a). By nol', we should be fuliy convinced
that ethics is not only important in private life but also in the world of busines.s. It is
important for business people to be ethical as being ethical in business is actualiy no
different than being ethical in private life. Aptly, ethics is not an oxymoron but a must
in businessl
The issue is how do business people conduct themselves ethically. How do we
manage businesses effectively without comprornising on ethics? This is the real
Ethics and lts Conceptualization in Life 23

challenge because it requires courage, respect for humans and non-humans, honesty,
integrity, etc. We all know these values up front but how do we translate them into
actions? It definitely requires conscience and altruism because we are conducting
businesses not only to maximize profits for the organization's sustainability but for the
well-being of the ummah as a social responsibility and as a matter of accountability-
as a khulifah!
Today, business people have many reasons to be concerned with the ethical
standards of their organizations. One of the main reasons is that values and societal
norms have somewhat undergone a lot of changes in the past few decades (Khalidah e,
al.,2Al2a), especially among the younger generation. For example, at the'workplace,
Generation Y ernployees who grew up in the information and communication
technology era are more likely than others to see unethical behaviour as justifiable in
pursuit of their goals. They are more liberal. They typically want instant rewards and
gratification. They may believe it is sometimes necessary to cheat, plagiarize or lie in
order to succeed (SnapComms, 2010).
Realizing this challenge, most established business organizations have formally fc"d. ,h*
deveioped either compliance or integrity-based code of ethics as well as business "r.,h.r
been developed by
ethics guidelines to remind employees of the importance of ethics at the workplace. many organizations
For example, PETRONAS has not only developed its Shared Values and Brand Essence ro remind employees

i as shor,r'n in Figures 1.12 and 1.13, but it has recently published a booklet entitled of rhe importance
PETRONAS Code of Conduct and Business Ethics. It is distributed to all employees in of ethics while
performing rheir roies
an effi;rt to emphasize ethics in the conduct of its global business.
at Llre woikplare.
Code of ethics may
be compiianct'basccl
or inregrity-based.

Loyalty
Loyalty to nation and corporation

Prttfessionalism
Committed innovative and proactive and always
striving for excellence

lntegrity
Honest and upright

Cohesiveness
United in purpose and fellowship

f ,ri'-rre 1.12: Shared values of PETRONAS


L4 tsusiness tthcs

Petronas Brand Essence

Figure 1.13: Brand esserrce

1.9.2 The lmportance of Managinq Businesses Ethieally


k -,;i;,,,.,., -, -1 While code of ethics remain a con-irnon featurc. orgrniz.rtiorrs of today have realized
ccrrr(lLt( i l-rus!ie ., the importance ol rnstitutionalizing ethics at the workplace and the need to manage
etirrcailv iir ker:p businesses ethically for the foliowing reasons:
existiirg cr.rsiontc! s,
t To keep extsting customers-reputable organizations rvill maintarrr customer
lo avoici iawsuts, io
loy.alty and business sustainability.
r-ecluce cnrpir.,),ec
trrrnover arrd
t To attract new customeis-good business or corporat,-'itnage lvill attraci rrerv

to pleas0 main
customers and increase profitability.
stakeholders. t To avoid lawsuifs-reputable organizations r'r.,iIl not hesitate to comply rvtth
laws and regulations to maintain their good irnage and dignit1,"
t To reduce employeeturnover-reputable orsanizations will bc able to maintain
employee loyaity, thus reducing employee turnover. 'fhis u,ill subsequentlv
iricrease organizational effectiveness.
t 'lo please customers, employees and society-goocl organizations
wiil strive
to fulfil the ireeds of main stakeholders, r.e. custorners, employees and the
community they serve.
We shall conclude this chapter by re-emphasizing thal ethics is important ir 1ife,
be it in business or non-business organizations. 'lhe cost of compromising ethics tcr
fulfil seif-interests in this challenging global environrnent is far too expensive to incur.
Truly, the bad consequences will outweigh the good consequences; be it rn the short
term or the long term. We certainly cannot refel to ourseives as civilized societies if
we do not internalize ethical values in our livesl
As we move along in our study of business ethics, we n ill take a broader iook
at work place issues that iink empioyees and tn-rployers together, as stakeholders
in a business. For example, discrimination, rvhrstle-blowinq, unjust dismrssal,
occupational health and safety hazards, etc. '.4/e shali look at the impr-rrtance of
ethics in the conduct of marketing, an essentral function in any business" We shall
Ethics and lts Conceptualization in Life 25

integrate ethics lvith typical business issues such as the need to preserve trade
secrets, avoid conflicts and conduct sustainable business with good governance as a
social resPonsibil itY.
Sureiy, we shall apply ethical principles and moral reasoning in this process. Our
next chapter will further examine the issue of internalizing ethics in the conduct of
bu siness.

To consolidate your learning, the learning outcomes are summarized beiow:

l. Define and differentiate between ethics and morality.


Morality is concerned rvith the norms, values and beliefs embedded in social processes which
define right or wrong for an individual or a community. Ethics, in contrast, is the study of moral
standards whose explicit purpose is to determine, as far as possible, whether a given moral standard
or judgement based on that standard is more or less correct (Velasquez, 2006). This therefore
denands for analyticai thought and appiication of reason to determine specific rules, principles
or ethical theories that determine right or wrong for a given situation. in addition, these rules
and principles must give an account of the rights or entitlements rve have and u,hat is just or fair
(Boatright, 2007)"

2. Understand hon, ethics is developed in an individual.


Ethics comes trom our inner feelings u,hich subsequently translate into our moral behaviour.
Ethics thus begins with each one of us. As humans, we are fully responsible for our ethical or
unethical behaviour. According to Griffin and Ebert Q0A7), ethical behaviour conforms to ethical
beliefs and social norms about what is right and good. Conversely, unethical behar.iour conforms
to individual beliefs and social norms that are defined as \vrong and bad.

List and explain the various factors that influence ethical values of an individual.
Several social, cultural and environmental factors infiuence one's ethical values.
'fhey include:
. Upbringing
. Socialization process (i.e. the behaviour of surrounding people)
. Experience and critical reflections on those experiences
. The explicit and implicit standards of culture
. Religion

4. Compare and contrast between ethics and Iegality.


Ethics covers a broader scope. It relates to questions of right and wrongdoing, rights and justice.
Ethics reflects people's relations with one another-how should people trcat others? What
responsibility should they feel for others? Legaiity carries a narrower scope. It refers to iaws that
we have written to protect ourselves from fraud, theft and violence. No doubt, an ethical person is
someone who obeys the larq. However, obeying the law need not necessarily justifv that a person
is ethical. Many irnmoral and unethical acts fall n ell within our laws (Nickels et al., 20AB). They
need not necessarily drive one's conscience to internalize good values, reflective of an ethicai
person. Ethics therefore rests upon one's colrscience and commitrnent to do gooC deeds as a social
responsibility under all circumstances.
26 Business Ethics

5. Compare between Western and Eastern perspectives on ethics.


There are apparent differences on how the West and East perceive ethics.
. The West has somewhat compromised religion as a factor influencing ethics in support of'
secularism and universalism. The East still sees religion as an important contributing factor to
shape one's ethical values.
. The West has placed emphasis on secularism and universalism as ideologies to shape not
only individual ethical values but to construct the state. These form the foundation of human
rights, freedom of thought and rational thinking of the West.
. In resolving ethical issues, the East has been seen to fall back more on religious and cultural
principles, much as the East respects the'liberal/universalistic'views of the West. Man-made
ethical theories and principles such as Utilitarian Ethics, Theory of Rights, |ustice, etc. which
are practically based on rational thinking and objectivity seem to be applied more by the West
compared to the East.

6. Relate the role of religion as an important contributing factor in shaping ethical values of
individuals.
All religions teach their followers good ethics to lead rewarding lives. Refer to the explanations
on how ethics is taught and embedded in the foliowers of the various religions as outlined in this
chapter-Islam, Christianity, Buddhism and Hinduism.

7. Identify universally accepted moral values.


. Compassion
. Courage
. Respect for humans and non-humans
. Self-control
. Honesty
. Integrity

8" Recognize ethics and its importance in the global business world.
'Ihe global business world opens to a lot of challenges. Apart from luifilling the profit maxr rnizatrr ,rr
objective which drives aggressive competition in a free market system, businesses have to face
another challenge-managing the global workforce. Society is undergoing a dramatic change
in values and societal norms. There has been concerns on the decadence of moral values among
the younger generation, especially Generation Y, born between tlte year 1982-2000 (Farnsworth
and Kliener, 2003; Freestone and Mitchell, 2004; Daily Express, 2004; i{usnah, 2005; VietnamNet
Bridge,2008; Srivasta,2010; SnapComms,2010; Khalidah et al.,20lA). Generation Y employees
who grew up in the ICT era and represent the bulk of today's workforcc are more likely to see
unethicai behaviour as justifiable in pursuit of their goals.
While codes of ethics and business ethics guidelines remain as references for employees at the
workplace, businesses have realized the importance of upholding ethics lbr the follorving reasons:
. To keep existing customers-reputable organizations will maintain customer loyalty and
business sustainability.
. To attract new customers-good business or corporate image will attract new customers and
increase profitability.
. To avoid lawsuits-reputable organizations will not hesitate to comply with laws and regulations
to maintain their good image and dignity.
. To reduce employee turnover-reputable organizations will be abie to maintain employee loyalty,
thus reducing employee turnover. This will subsequently increase organizaticnal effectiveness.
. To please customers, employees and society-good organizations will strive to fulfil the necds
of main stakeholders, i.e. customers, employees and the community they serve.

--l
I

i
Ethics and lts Conceptualization in Life 27

Compliance-based code of ethics It stresses the prevention of unlawful behaviour by fbrmulating rules and
regulations and imposing penalties on wrongdoers.

Ethics A set of principles that contains behavioural codes to determine what is right or wrong.

lman Anlslamic term for'faith', i.e. pious and complete adherence to A Ilah's rules, which is a highly regarded
religious ideal in the Al-Quran. An individual who has iman (faith) rs a nru'min (believer)"

lntegrity-based code of ethics It defines the organization's guiding values, creates a workplace environment
that is supportive of ethical behaviour and focuses on shared responsibility among employees.

Kantian Ethics An ethical theorywhich emphasizes that the rightness of human actions depends on one's
goodwill or intention out of a sense of duty to fellow humans.
Khalifah A concept by early Muslim scholars which focuses on the status and quality (free will) ofhumankind
vis-a-vis other creatures in the universe-leadership, responsibiiity and accountability.

Legality Statutory laws, rules and regulations set by the government or local authority.
Morality The norms, values and beliefs embedded in sociai processes u,hich define right or wrong for an
rndividual or a conrmunity.
1 Malaysia concept A concept introduccd by thc currcnt goycrnmcnt of Malaysia to harmonizc citizens of
the different races in the spirit of respect, sincerity and trustwc:thincss.

Quality of life The general lveli-being of a society in terms of political freedom, a clean natural enl ironment,
education, health care, safet1,, free time and everything else that leads to one's happiness and satisfaction.

Rukun Negara The Nationai Philosophy of Malaysia, which u,as officiali). introduced on 31 August t970 with the
objective to strengthen nationai unity in Mal:ysia's multicultural society. The five principles are: (1) Belief in God,
(2) Loyalty to the King and country, (3) Supremacy of the constitution, (4) Rule of lan, and (5) Mutual respect and
moralitl
Secularism An ideology which separates religious issues from worldly aft-airs. The objectir.e is to ensure that
freedom of thought and conscience will apply equally to all believers and non-believers alike.

Stakeholders All the people or parties that stand to gain or lose by the poiicies and activities of a business. They
irtclude shareholders, customers, suppiiers, bankers, employees, government agencies, non.governmental
organizations (NGOs) and cornpetitors.

Standard of living The amount of goods and services people can buy based on their purchasing porver.

Sunnah The practices or tradition of Prophet Muhammad SAW.

Taqwa An Islamic term for 'piety', i.e. protection or shield from what is harmful.

Ummah An Arabic word which means 'community' or iration'. In the context of Islam, ummah is used to
mean'Community of the Believers' {ummat al-mu'minin), and thus, the entire Muslim world,
Universalism A theses or principle of Utilitarian Theory of Ethics. The c.nsequences to be considered are
those oIeveryone.

ritilitarian Ethics An ethical theory which emphasizes on our obiigation or dutv in any situation, which is to
perform the action that wiil result in the greatest balance of good over evil.

Virtue A good character trait or value that a person displays in the conduct of life. This value will be
rnanifested through habitual actions. For example, honesty, sincerity, trustworthiness, etc.
10
LA Business Ethics

1. I)iscuss some ethical issues that you have faced as a student in a higher learning institution.

2. Provide your own examples to differentiate between ethics and morality.

3. Several factors influence ethical values. Select ANY one factor and jristify its intportance in shaping
one's ethical values.

4" Explain why ethics is important in life.

5. Is ethics applicable in the world of business? Provide justifications for your stand.

Time is of the Essence...


.jenny is a private college srudenr. She has been working extra hours at her part-time
job in a clorhing store.
The srore needs her help to promore sales because rhe Mega Sale rush for rhe coming Eid Fitri festival is
starting.
She also needs rhe money ro pay her tuition fees nexr semester and to fix her car so that she can drive
home for rhe long semesrer holidays. The coming holiday season also means rhe end of the semester, and
unforrunarely, frnal examinarions. Jenny simp[y does nor have time to study for ali of her examinations as well
as work the exira hours she needs. .il.
Something has to be sacrifrced, and she decides to prerend being sick on the day of her Business
Managemenr final examination paper so rhat she can take the make-up examinarlon the next week, giving
her more rime ro srudy.
She knows rhat it will nor be hard ro gei a medical certificate (/,AC) from the busy college health clinic
saying ihar she's roo sick ro rake the examination. Her friend, Dennis, works there and pan 'borrow'a page of
rheir lerrerhead stationery.
"Even if I have ro lie iri fair rhar I ger exrra rime to srudy," Jenny tells herself, "because I have to work, and
I can'r study all the time like studenrs who have cheir parents to pay for everyrhing."

Questions:
1. Jenny seems ro see her lie as a simple case of manipulating an unfair system. ls there anyrhing wrong with
manipularing ihe sysrem? ls her srraregy fair ro the other students in her business management class?
2. Jenny seems ro jusrify her behaviour with a vague idea that 'unfair' differences between people (such as
wealrh) thar have norhing ro do wirh efforr or intelligence should nor be reflecred in rheir grades. Whar
do you rhink about her claim rhar she deserves more time ro srudy rhan other-students because they do
not have to earn rheir own money?
3. Lying is a universally accepted bad moral value. Jusrify why lying is immoral and unerhical.
' @ffiffiiffigismijtr:.--4r. -'
Ethics and lts Conceptualization in Life '?,:q

Abdullah, A. (1992). The influence of Ethnic Values on Managenal Practices in Maiaysra. Malaysian
Management Review, 27 (1): 3 -lB.

A.G. Abduilah and A. Mohd ZainolAbidin (2011). Business Ethics. Selangor: Oxford University Press.

Al-Quran.King Fahd Complex: Madinah Munawau,arah, K.S.A. For the Prrnting of the Holy Quran" <www.
qurancomPlex.org>.

Al-Maududi, Abu Ala. (1978). The Meaning of The Quran, VolumeX. Lahore: Isiamic Publishing, p. 36.

Blackburn, S. (2001). Ethics: A Very Short Introduction. Oxford: Oxford University Press. p. 9.

Boatright, i.R. (2007). Ethics and the Conduct of Business (5'h Ed.). New |ersey: Prentice Hall.

Boatright, J.R. (2009). Ethics anC the Conduct of Business (O'h Ed). New |ersey: Pearson International Edition.

Bob,Tammie(2009). ACulturalPerspectiveontheDffirencebetweentheEasternandWesternWaysof Dealing


with a Complex Problem. <http://www.cod.edu/people/faculty/bobtam/n ebsite/a_cultura1_perspective_on_
the_di.htm>. Accessed on 3 August2A12.

BuddLr,'Net (n.d). <http:llrvu,rv.buddhanet.net/e-learning/5minbud.htm>. Accessed on 28 Augu st2012.

Daily Erpress. (2004). Moral decadence an'Long Malaysians sad4ens Dr M. <http://u,rvrv.dailyexpress.com.


m-vlpn nt.cfin?Neu.sl D -2 8857>. Accessed on 5 ]anuar1, 2009.

Dantal Zainal Abidin. Public Lecture at Universiti Teknologj PETRONAS .leljverecl on 29 July 2008 in
conjuncricrn rvith the 9'h PETRON AS Tilawsh Al euran asseibty (2g-2g )ul,v 2008).

Desjardins, t. QO09). An Introduction to Business Ethics (3"rEd.). Singapore: Mc(]rarv-Hill Higher F.ducation.

Lhert, R.]. and Griffin, R.W" (2007) . BusirLess Essentials (6'h Ed.). New ]ersev: Prenrice llall.

Freestone, O. and lv{itchell, v.w. (2004). Generation Y attitudes towards e ethics and internet-related
r"nisbehaviovrs. Journal of Business Ethics,5a (2): l2l-128.

Greerr, K' (2008). Wltat is Taqwa? <http:/iislamicbeliefs.suitel0l.con/article.cfm/rv;rat rs taqwa>. Accessed


on 11 August 2010.

Haneef, S. (1979). \\rhat Everyone Should Know about Islam ctnd Muslims, i.ahore: Kazi publications.

llumplrreys, C- (n.d.). Twelve Principles of Buddhism. <http://wu,w.astepback.cgrl/bLrdclhism.htm>. Accessed


oir 28 August 2012.

lj,vman, D N" (1996). rlconomics (4th Ed). united states of America: Irwin.

lbn Manzur, Abu al-l:adl (1990) Lisan al-'Arab,yol.l3. Beirut: Ilar Sadir. pp. g6.

islanriCity. Al Quran, Yusuf A1i. <http:l/www.islamicity.com>. Accessed on -i Augus t )012.

Isiam Todav (n d.). <en.islamtoday.net>. Accessed on 12 ]une 2014.

ienirings, M.l. (2006). Business Ethics 15"'Ed.;. United Srates of Amei'ica: 'fhomson/West.
30 Business Ethics

Keown, D. (1992). The Nature of Buddhist Ethics. London: Macmillan-

Keown, D. (2000). Buddhism-A Very Short Introductioiz. Oxford: Oxford University Press'

Harvey, P. (2000). An Introduction to Buddhist Ethics. Cambridge: Cambridge University Press.

Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2009). A Study on the Level of Ethics of Final Year
Engineering and Technology Students at a Malaysian Higher Learnir,g Institution. ln Ptoceedings of the
Regional Conference of Humanities 2009 (RCH 2009), Seri Iskandar, 18-19 February 2009.

Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2010). A Study on the Level of Ethics at a Malaysian
private Higher Learning Institution: Comparison between Foundation and Undergraduate Technical based
Students. lnternational Journal of Basic and Applied Sciences, (10) 35 49.

Khalidah Khalid Ali, Satirenjit Kaur )ohl, Lai Fong Woon, Rohani Salleh, Sofiah Molek l,ope Aman Shah,
Rahayu Abd. Rahman and Ilmiah Ibrahim (2012a). Business Management: A Malaysian Peripective (2'd Ed).
Shah Alam, Selangor Darul Ehsan, Malaysia: Oxford Fajar.

Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2012b). Ethical Values of Final Year Students at
a Malaysian private Higher Learning Institution, 2012 (l).,In Proceedings of International Conference on
Applied and Social science (ICASS ZOtZ),Kuaia Lumpur, 1-2 February 2012 (pp. 119-13i)" USA: [nforrnation
Engineering Research Institute (IERI).

Maisarah, M.S. (2008). Can Ethics Courses Improre Students' Ethical Sensitivitl'and Ethical |udgement? A
preliminary Study in Universiti Teknologi Mara. /n Proceedings of the 3rd International Borneo Business
Conference (IBBC), Kota Kinabalu, Sabah,lr4alaysia, 15-17 December 2008.

Mauro, N., Natale, S.M. and Libertella, A.F. (i999). Personal \ralues, Business Ethics and Strategic
Deveioprnent. lournal of Cross Cultural Management,6 (2):22-28.

McDonough, S. (1984). Muslim Ethics and Modernity. Canada: Wiifrid Laurice University Press'

Miqdad Yaljin (1973). Al-lttijah al-Akhlaqifi a;-Islaru. Egypt: Maktabah al Khanji.

Morgan, G. (1986). lmages of Organization.Beverly Hills: Sage.

Munusamy, K., Arumugam K. and Fitria, A.B. (2010). Perceived Differences in Valr-res among Baby Boomers,
Gen-X and Gen-Y: A Survey of Academicians. Iru Proceedings of the lrrternational Conference in Business
and Economic Research (ICBER), Kuching, Sarawak, Malavsia.

National Secular Society (n.d.). What is secularism? <http:llwrr.rv.secularism.org.uk/u'hat-is-secularism'


html>. Accessecl on 3 Augusl2012.

Nicki:is, WG., McHugh, I.M. and McHugh, S.M. (200S). 'rJnderstanding Business (B'h Ed.). New York: McGraw
HilliIrwin.
Nor Azzah Kamri and Khairiah Salwa Hj. Mokhtar (2004). The Role of'Islarnic Ethics in Organizations:
An Experience in Malaysia. Paper presented at 6"'ASEAN Inter-{Jniversity Seminar on Social Developrnent,
organized by School of Social Sciences Universiti Sains Malaysia (USM) and University of Singapore at
Universiti Sains Malaysia, Penang, Malaysia, 14-16 May 2A04.

Notes t'rom Khalifalz Method of Parenting Seminar, 11 Apr 2009, Uni.,.ersiti Teknologi Petrr:nas" Organized
by PET'RONITA Perak Branch.
Ethics and Its ConceptLralization rn Life 31

Onlslam.net. Ethics Between lslam and the West. <http://www.onislam.net/engiish/ask-about-islam/islam'


and-the-world/worldviewlL6Sg82-ethics-between-islam-and-the-west.html>. Accessed on 3 August 20t2.

Rahman, A.R.A. (2003). Ethics in Accounting Educatio'r: Contribution of the Islamic Principle of Maelaiah"
ilUM lournal of Economics and Managemen, 11(1): 1-8.
Redding, S.G. & Wong, G.Y.Y. (1986). The psychology of Chinese organizational behaviour. In M.H. Bond
(ed.), The psychology of the Chinese People. Hong Kong: University Press.

Rusnah, M. (2005). Religiosity and Perceptions of Unethical Practices among the Malaysian Muslims: An
Exploratory Study. Proceedings of the UM FBA Asian Conference. Kuala Lumpur, Malaysia, April 2005.

Sayed Sikandar, S.H. (2006). Ethics and Fiqh for Daily Life: An Islamic Outline. Kuala Lumpur; Research
Centre,IiUM.

Shaw, W"H. (2008). Business Ethics (6th Ed.). California: Thompson Wadsworth.

Shaw, WH. (2011). Business Ethics 1Z'h fd.;. California: Thompson Wadsu,orth.

SnapComms. Communicating with Gen Y Employees. <http://www.snapcomms.comlsolutions/


communicating-with-gen-y.aspx>. Accessed on 8 ]une 2010.

Srivasta, R.K. (2010). Effect of Cross Culture on Ethical Behavior ofY Generation - is it changing? International
lournci af Indian Culture and Business Management,3:323-332.

Stanrvick, P.A. and Stanwick, S.D. (2009). understanding Busincss Ethics. New lersey: Pearson International
Edition"

Syed Othman Aihabshi and Aidit Haji Ghazali (1994). lslamic Values and Managentent. Kuala Lumpur:
Institute of Islamic Understanding Malaysia (IKIM).

TeachingValues.com (2009). The Universrty of the Golden Rule in the \\rorld Religions. <http:/iwww
teachingvalues.com/goldenrule.html>" Accssed on 12 iune 2014.

Velasquez, M.G. (2006). Business Ethics Concepts and Cases (6'L Ed.). New iersey: Pearson.

VietNamNet Bridge (2008). SOS: Student's morals declining. <http;//English.r,ietnamnet.vn/


education/2008107 1794887>. Accessed on 1B December 2008.

Ying Zhang (2012). Taboo Differences and Cultural Roots between English and Chinese. Iir Proceedings o{'
the Internationai Conference on Applied and Social Science (ICASS 2012) Kuaia Lumpur, 1-2 February 2A12
(pp. 280-285). USA: Information Engineering Research Institute (IERI).
CHAPl-ER

Internali zlng Ethics in


the Conduct of Business

LEARNING OUTCOMES

At the end of this chapter, you should be able to:


r ldentify and discuss the common ethical dilemmas faced by business
people.
x ldentify and explain the three levels of decision-making.
r Differentiate between ethical managemerrt and management of ethics.
r Explain the concept of role in ethics.
r Outline the role of leadership to inculcate an ethical cultrrre in a
business orqanization.
r Discuss the role of managers as economrc actors, company leaders
and community leaders.
n Compare and contrast between compi:ance-based code of ethics
and integrity-based code of ethics and recognize their application to
inculcate an ethical corporate culture.
a Discuss the importance of integrating eccnomic, legal and moral
dimensions to make effective and fa,r business decisions.
r iderrtify and explain the three check questions that one has to ask and
self-assess when faced with an ethical dilemma.
r Discuss the role of religion in resolving ethical issues in business.
lnternal;zing Ethics in the Conduct of Business 33

INTRODUCTION

In Chapter l, we conceptualize ethics as a field of study, differentiate bctween ethics


and morality and identify factors that contribute to the shaping of one's moral/ethical
values" We also see hon' the West views ethics compared to the East. The chapter
continues to discuss the role of religion in shaping one's values. It then introduces
readers to the universally accepted moral values that must be internalized by all
humans irrespective of social, economic or cultural differences. Justifications are
drawn as to why ethics is important in life, what more in the competitive global
business environment. At the end of the chapter, we seriously note that the cost of
compromising ethics to fulfil self-interests in this challenging global environment is
far too expenslve to incur since it will affect the sustainability of the business itself in
the short and long run.
Chapter 2 rvill further deliberate on internalization of ethics in the conduct
of business. It first introduces readers to common ethical problems faced in a
corporate environment. It continues to elaborate on the three levels of decision-
x,,'
h making-individuai, organizational and business systems, Foilowing this, it will
$ differentiate between the concepts of ethical management and management of
,st ethics and eramine the role of leadership to inculcate an ethical culture wrthin an
-
organization. Nert, it looks at the two types of code of ethics that orgairizations
deveJup to rernind employees of the importance of demonstrating good conduct and
behaviour at the lvorkplace-cornpiiance-based and integritv-based code of ethics"
It then rationalizes the importance of considering the three dinrensions ec()n()mic,
,s: legai and moral-in any business decision-making as a social responsibrlity. Flnally,
*t this chapter rvill end rt,rth the three check questions that one has to ask and self assess
-f- e.
i!: when faced rvith an ethical diiemma while executing his or her job responsibilities
*\
at the workplace.

2.1 COMMON ETHICAL DILEMMAS


FACED BY BUSINESS PEOPLE

\\Ie note that the business world is unique because of its ecor-romic ch;racter. Sole
proprietors, partnerships and corporations by and large strive to maximiz-e plofits in
a competitive global free market system. Certainly, this drive is justificd after taking
the risks of conducting a business and considering the opportunity costs inlolved
tn busitress set ups. However, in the quest to maximize profits, board of directors,
managers and empioyees at all levels are bound to face ethical dilemmas or conflicts.
They rnclude, arnong others, balancing profit maximization with ethics in tire conduct
of business, exercising justice and rights to please stakeholders as well as fulfilling
individual aspirations and organizational needs.
Let us outline and critically examine five common ethical dilemmas faced by
those involved in business, as shown in Figure 2.1.
34 Busrness Ethrcs

Balancing the economic charac[er or


organizarions with justice and fairness

Conflict of inrerest

Common ethical dilemmas


Personaliry traits
faced by business people

Responsibility to stakeholders

Level of openness

Figure 2.1 : Five common ethical dilemmas faced by people involved in business

2.1.1 Balancing the Economic Character of


Organizations with Justice and Fairness
The economic character of organizations, chasing afier profit maximization as a
primary objective, may pose ethical conflicts. For example, lo sustain high protit
levels, Company A has to cut down on operatins costs. It may even decide to retrench
at wili workers who are still ioyai and committed to providing their sen,ices to the
organization. Is it ethical to maximize profits for the organization's success.rt the
expense of retrenching workers who depend on their survival as emplo,vees? lVhat
r,r.ill happen to their families after being retrenched? How much of conrpensation
should the organization offer to these peopie befbre retrenching them in the context
of industrial harmony, justice and fairness? Should emplol,ees be dismissed or should
the organization give them the option to accept the'golden hand shake'or otlierwise?
The competitive 'free trade' giobai scenari,; poses more business opportunities as
well as ethical challenges to businesses. Organiza.tions reap opportunities by setting
up businesses in countries rvith lorv labour costs hut when they find other better
*:
!
l
places with even lower labour costs, they may ciose cior.vrr their existing operatron to
set up another new business, leavrng behind jobless local employees to look for new
jobs. Much as organizations may undertake this as a matter of survival or to stay
competitive, is it ethically justified for taking sucir decisions, which are detrimental
to human survival and well-being? Aren't these actions seen to display greed and
selfishness among businesses? Certainly, such actions are conflicting with justice and -n
I
human rights principles in the conduct of business although it maybe economically
justified.
lnternalizrng Ethics in the Conduct o[ Btisiness 35

2.1.2 Conflict of lnterest


This involves morality and economic trade-offs whereby there is constant
tension in trying to separate the 'person' from the business decision. This is
also referred to as the agency problem in the study of management. In other
words, the challenge is how to set aside.personal interests when executing job
responsibilities. For example, being the branch manager of a commercial bank,
Mr. A has the power within his authority to approve customers' loans. He is also
expected to comply with the loan application guidelines as a responsibility within
the bank's governance mechanism. However, a personal agenda arises.when Mr.
A is obligated to approve Mr. B's loan application that does not meet the bank's
guidelines after accepting a kickback or token money from Mr. B. This is certainly
a clear case of breach of trust and an abuse of power. Mr. A is already paid a
salary by the bank to perform the task effectively. Being an employee, he should be
responsible for ensuring that the organization benefits from the loan transaction
instead of gaining personal interests by accepting kickbacks. However, he chooses
to be opportunistic and use" his position and power to his personal advantage.
We shall deliberate in greater detail on conflict of interest cases when we cover
workplace issues in Chapter 7 of this text.

2.1.3 PersonalityTraits
This relates to relationships, personal values and characteristics of individuals. In
many situations, the personai issues or individual personalities cause the dilemn-ra.
To create a scenario, a job vacancy is present in a firm. The human resource Inanager,
u.ho has the power to select a suitable candidate for the job, appoints his orvn relative
u,ho does not har.e the proper academic qualiflcations and skills to match the job
requirements.
His 'caring' attitude or rather nepotism is not displaying justice and fairness to
other qualified candidates, what more to the firrn. Aptly, the firm requires qualified
and skrlfui ernployees to stay efficient and competitive. Such actions wili consequently
lead to poor performance and inefficiency in the organization. f'he human resource
manager clearly does not fulfil organizational needs because he puts personal
relationships and self-interests above organizational needs.

2.1.4 ResponsibilitytoStakeholders
In the study of business management, vre note that businesses hirr,e many stakeholders.
They range from employees, suppliers and consumers, to the government, non
governmentai organizations and many other parties. The bigger tire business
organization, the greater the number of stakeholders; certainiy, there rvill be nrore
chalienges to please ali of them.
However, businesses must be socially responsible and empioyees must effectively
play their roles and fulfil their responsibilities. For example, a recruiting executive
should not be gender or racialiy biased when recruiting potential employees as it is not
fair to treat people differentlywhen there is no good reason to do so. Recrurting should
be on the basis of competency to ensure organizational effectiveness and efficiencl
In another scenario, businesses must fulfil the needs of consumcrs, being the main
stakeholder to secure business survival. However, much as consumcr scivere;.gnty is
recognized and consumers are regarded as'king', they are being nanipuiated through
deceptive markcting strategies to reap high profit margins. Certainly, businesses need
.Jb tsusrness tthrcs

to incorporate managerial rationalization and emphasis on code of ethics to fulfil the


needs ofstakeholders by and large.

2.1.5 Level of Openness


Business people may ask themseives to what extent they should reveal infbrmation
about their business since there are also trade secrets to be protected for healthy and fair
competition. While the need to protect trade secrets is justified from property rights
arguments, they must also be 'transparent' or public about their values and expectations.
They must be honest and uphold the value of integrity in their business dealings. For
example, as marketers, they should not withhold or manipulate any information which
may influence consumers' rational buying decisions. There must be proper labelling so
that consumers will be well-informed on the ingredients or compositilrn of products
purchased. Consumers'freedom of choice, well-being and other rights must be protected
as a social responsibility over and above business sustainability.
Having discussed the five commorr ethical dilemmas faced by business people
and realizing the need to apply ethics and imbue virtues, we shall next differentiate
the three distinct levels of decision-making-individual, organizational and business
system.

2.2 THE THREE LEVELS OF


DECISION.MAKING

The follorving figr-rre depicts the three levels of decisrort-making. tdentifying the
appropriatc level for a decision is important, because an ethical problem may l-iave no
solution on the level it is approached (Boatright, 2009).

+ -l
[--!q'.*
Figure 2.2: The three levels oI decision-making
D..r"rt t"d. *
-I
an individual level Organizations are made up of individuals from difft'rent personalities and
more ofren are meant
backgrounds. Businesspeoplehaveto make decisirns at individual Ievel, organizational
to fulfil personal
level and business system level. Decisions made on individual ler.,el more often are
needs and i.nterests-
meant to fulfil personal needs and interests. For example, Mr. A may decide to come
Managers also make
to rvork late since it suits his convenience. Horvever, as a manager, he also has to make
organ izational-level
decisrons since they
decisions to fulfii organizational needs. He is expected to uphold policies, rules and
are acting on behalf regulations. Considering his role and obligation torvards the organization, Mr. A
of the or"ganlzation. will decide to come to work on time since he has to uphold organizational rules and
lnternalizing Ethics in the Conduct of Business 37

regulations" As a manager, he is also a role model to his subordinates. In this case, Mr.
As decision to come to work on time is based on his organizational considerations
although he may prefer to come in late if his decision is made on the individual level.
Many ethical issues occur at the organizational level since the individual is rrur*,r''".il--
making decisions on behalf of the organization or placing himself as a responsible be prudenr in
and loyal employee. Suppose an employee reports to his manager that a co-norker making decisions
is forging signatures for contract documents. Coincidentally, the co,worker is by identifying rhe
a close friend of the manager. At the individual levei, perhaps, the manager may appropriare level of
not take any action at all, but on the organizational level, he has to play his role to decision-making.
ldenrifying the
investigate the matter and report to the human resource department for a domestic
dppropriare level
inquiry. He must ensure that such unethical practices may not occur again. Thus,
is importanr for a
having obligated to make a decision at the organizational level as a matter of job
decision because an
responsibility and loyalty to the organization, he decides to report to the human ethical problem may
resource department accordingly, acting in impartiality, all for the benefit of the have no solution
organization. Of course, this is not an easy decision to make. It takes a lot of courage on rhe level ir is
and a strong conscience to correct wrongdoings, in this case, out of a moral concern approached.
to fulfil organizational needs as a matter of responsibility.
Having seen the differentiation between decision-making at the individual
and organizational levels, we look at decision-making at the business system ievel.
Assume Mr. A receives a request from a male subordinate for a salarr. revision.
Being a responsible and caring manager, he would like to help his subordinate by
recomrtending him fbr a salary revision through the human resource department.
Hotvever, such requests will most likely be on hold or possibiy rejected because there
iS aned to do a comparative study on salaries and compensatiorr of employees r.r,ithin
the same industry for equity and fairness.
This decision is made at business system level, considerirrg that there n-ra,v be mauy
other people in the organization r,r,ho are in the same boat. Mr. A may then explain
to his subordinate the real situation and perhaps console him by fonvardrng tire
i.:tter to human resource department with recommendations to look into the matter.
}{e knou's that his sr-rbordinate's case lvill only be considered after a comprehensive
, omparative study at business system level, conducted by the human
resource
,-epartment. Certainly, he has to be skiifulin maintaining the motivation Ievel oit|e
said subordinate rvho is expecting a salary rise. Perhaps, he can negotiatc rvith the
subordinate to set more challenging but realistic key performance indicators to entitle
'.im to be considered for better salary increments through the annual performance
appraisal exercise. -fhis, in fact, will be a decision made by Mr. A at organizational
,.:ve1l
To srtnlntarize, identifying the appropriate ievel for a decision is pertinent
because an etl-rical problem may have no solution on the ler.el it is approached
iBoatright, 2009). For example, the solution to the forgery issue may
not be resolved
lt the individual or departmental levels. It has to be solved at the organizatronal
levei by rcporting to the human resource department. Similarl,v, the salary ret,ision
lcquesi cannot be fulfilled at organizational level until a comparative compensation
:tudy of the entire industry is conducted at business system level to ensure jr-rstice
and fairness, but a salarv increment may be given after assessing individual
irerformance at organizational level.
Considering the abor.e, managers must be prudent in rnaking decisions. They
must have tlle skills to identify the appropriate level of decision-making because
an ethical probiem may have no solution on the ievel it is approacheci. Next, rve
shail differentiate between the concepts of ethical management and nranagement
cf ethics.
38 Business Ethics

Erhical manag.*.rul 2.3 ETHICAL MANAG EM ENT VERSUS


rherefore relates
to the undertaking MANAGEMENT OF ETHICS
of managemenr
functions in an
erhical manner by In the study of general management, we learnt that management involves four
doing the right thing inter-related functions-planning, organizing, leading and coordinating Ethical
for individual success management therefore relates to the undertak;ng of managelnent functions in an
, and organizational ethical manner by doing the right thing for individual success and organizational
effecriveness.
effectiveness. Certainly, it requires individuals involved in the management
function, especially section heads, managers and those in the leading roles to
M*-r-.'*;;;i-l practise ethical management in the conduct of business. It has to begin from the
echics refers to individual's values, displayed through his actions while perlormirlg management
managers acting duties and responsibilities. High-level managers have a responsibility for creating
effectively in and maintaining an ethical corporate climate that protects the organization against
situations rhat unethical and illegal conduct. In Chapter 1, we have highlighted real cases of'ethical
have an erhical
misconduct that have caused severe harm to many individuals and organizations. You
aspect borh in rhe
may recall the classic cases of the collapse of Enron Corporation due to the unethicai
inrernal anC external
behaviour of top management and the tarnished image of San Lu Corporation for
envrronnrent of
bu srness.
supplying tainted miik to its Chinese customers.
However, the irony is there are managers who belrer.e that rn buslness, ethics is
only applicable to a certain extent. Most managers think they are ethicai but it only
provides some degree of relevancy to their work" Perhaps, the reasott Lrehiltl LLis view
may be due to the obsession rvith niaximizing profits within the rules of the game
since business entities must make profitsl
\\rhile we n-)ay agree that the manner in which ethics is applied in br,isiness
may be varied from horv it is applied in nornral dail,v life, practically, there is no
difference between being ethical in business or in privati:1ife. Organrzations after
all are made up rf people with values and characters.'l'he same people are running
the organization and ieading their private lives. It is unlikely that their characters
will change drastically due to a change in the environment, i.e. the b'"tsiness
environment and private life. Core universally. accepted virtues such as honestl',
respect and compassion are bound to reflect in similar characters as they play their
leadership roles in the organization.
We have just conceptualized ethical management. What is then management
of ethics? It refers to managers acting effectiveiy in situations that have an etlircal
aspect both irr the internai and external environments o{'business. I'hey normally
apply the internai policies, rules and regulatrtrns as well as stipulated government
laws to manage ethical issues. For example, as a production manager at a MODENAS
manufacturing plant in Gururr, Kedah, Mr. A has to follow the organization's human
resource policies, quality control standards as u,ell as the guidelines of Occupational
Safety and Health Act (OSHA) 1994. He also has to ensure that his suborCrnates
comply u,ith the policies, procedures and guidelines as rveI1.
Organizations in fact internally bind their member.. through a myriad of
policies, rules and regulations. Holtever, they musi be fairly managed. Ilow does an
organization er-ISure that employees wiil follow tiie rules and regulatrons?
Certainly, the process of management of ethics does not refer solely to developing
policies and regulations for employees to be coerced or forced to follow blindlrr
Knowledgeable employees look forward to feeciback sessions to justify the introduction
lnternalrzing E-thrcs in tl-re Conduct of Bustness 39

of specific policies, rules and reguiations developed by the -management. They <1o
not like to be forced to comply u,ithout rational grounds. Therefore, policies and
regulations must be effectively communicated to employees to gain their acceptance
before compliance is expected. Certainiy, employees' acceptance and commitment to
comply with these policies, rules and regulations require a perception and assessment
that they are just and fair.
We have just differentiated between ethicai management and management of
ethics. Figure 2.3 summarizes the two concepts.

Difference between Ethical Management and


Management of Ethics llft hrrchrrmil,,,,,,,,,,,,,
being leaders, are
responsible to
manage employees
o Ethical Management-acting ethic"lly as a Manager by ensuring rhat
by doing the right thing for rndividual success and organizational
rrEa rrizational ei [eci ivencss policies, rules and
regularlons comply
wirh the management
e The Management of Ethics-acring effectively in of erhics, they nrust
gain rhe acceplance
situations that have an erhical aspect
of employees
through consistent
engagemenr
and effective
co mnr r,rn icarion
channels.

Figure 2.3: The dif{erence between ethical management and management of ethics

Next, ive sha1l discuss what it takes for managers to practise ethical management
and management of ethics at the rvorkplace. Aptly, managers must possess specialized
knolvledge to appiy and practise etl-rical management and management of ethics. T'his
is where the study of ethics becomes relevant as a field of knorvledge to be studied,
applied and internalized by managers. Chapter 3 of this text n,il} dui1, outline the
ethicai theories and principles for reference and application ofreaders.
IUanagers must aiso have the necessary skills that corne with experience
and training to make sound ethical decisions and implement them. The nee,1 for
fT" pracil..rh"il -
management and
specializ-ed knonledge and skills is especially acute when a business is conducted managemenr of ethics
abroad. Managers must possess knowledge of the legai system, as well as statr:tory at the workplace,
rules and regulations of the country rvhere their operations are conducted. Over and managers must
above these, they must have knorvledge of the culturai differences and appiy tireir possess specialized

skills to handle a diverse globai r'vorkforce with respect and compassion to maintain knowledge and
an ethical and harmonious working environment, a prerequisite fbr high productivity. skills rlrat come

Certainly. they have to demonstrate their leadership roles as effective and virtuous wirh experience and
decision makers. But what is a role in the first place? training.
4A Business Ethics

2.4 ROLE AS AN ETHICAL CONCEPT


A rr. **,r*,*.d I ln ethics, a role is a structured set of reiationships with accompanying rights and
ser oI relarionships obligations that are sometimes added to those of ordinary morality over and above
wrth accompanying those of er.eryday life. Roles are created in order to serve society better as a whole
rights and obligations since everyone is contributing or taking some responsibiiity to accomplish something
rhat are somerrmes for the well-being of society. Thus, roles are directly related to social responsibility.
added to rhose of Individuals in certain positions have responsibilities to many different groups and
ordinary moraliry must consider a wide range of interests. The higher the position held by an individual
over and above those
in a business or society at large, the greater the role he or she has to play. Business
of everyday life.
people have a role to play for a nation's economic growth, prosperity and well-being.

2.4.1 The Role of Leadership for an Ethical Culture in


a Business Organization
The top and senior management in any business organization play a very important
role in ensuring ethics is gii,en priority and institutionalized accordingly at alJ
levels. In corporations, the board members are role models in the shaping process
of an ethical organization. After all, they themselves developed the code of ethics"
ll'herefore, they har.e no choice but to demonstrate good ethical values, being stervards
in a corporation.
Figure 2.4 iists dor,vn the noble values to be internalized by board members. You
may realize that they are not any different from the universally accepted virtr-res that
we have learnt in Chapter 1.

Becag;g che board members are sLewards for noi oniy rhe assets of rhe company bur also rhe
inteiieits of all stakeholders, Schwartz, OJnfee and kline recommend s,* .ore values ro guide
. :"a " board
.,qh9'[b9ffiriour.as
'{{-+r}1+,&.*& members: ].
, ..:. . .. r
'eiii*.Ii*t --
riih1,u1ina,fur'rhrighi., :rrre1:deci!io1i..,,ii::, , .:., ,::.-:: ,i:;.,t -.,.,,,;,1 ,..,,
;

2.. fnt*iitv:act,wjth,honoui: and iletiqio,n,will,,always-coiilcide wirh the,ethrcal vision and


standards of the firm
3. Loyalty-avoid all deals rhar fulfrl rheir 'sellri;6erescs.'Mu5r fulfill,rhe interests of
stakehoiders. Objective in their decision and hold classifred any confidenrial and/or
prop ,.' ry.
j rmari o n
',.] n fo
. r.i.era
'r
4. Responlibiligy-Fulfill all rheir assrgned respogsib.i]lirgi and rheir actions,would be

Figure 2.4: The ethical values o{ board members

Vien ing leadership from a n,ider perspectir,.e, you may also recall from Chapter 1
that Islamic woridview recognizes humans as special creations of God (S1,ed Othman
Aihabshi and Aidit Haji Ghazali,1994). We have been directly rnforrned of our role as
lnternalizing Ethic.s rn the Conduct of Business 4'1

a Khalifah-to be a leader in the universe. Aptly, the role of a Khalifah is not confined
to the top management but everyone in the organization. Certainly, the values listed
in the above figure should be emulated by employees irrespective of hierarchy being
Khalifahs. Of course, the expectation to imbue and internalize ethics among the topr
management is highly expected in the manifestation of a role model.
Let us next focus on the three specific roles of business managers.

2.4.2 The Three Roles of Business Managers


In this section, we discuss the main roles of business managers-as economic actors,
company leaders or trustees and also as community leaders (see Figure 2.5).

. They must manage assets prudently. They must also fulfil the needs of srakeholders and
balance any conflicting interests being trustees.

As community leaders, rhey must exercise powers given upon rhem ihat denronsrrate
rheir corporate leadershrp/cirizenship

(.5c u r c e: B oa r r t glt t, 2 0 1 2)

Figure 2.5: The three roles of business managers

Managers as economic actors


As economic actors, they are expected io make effectir.,e economic decisions, balancing
costs and benefit considerations for the profitability and sustainability of the business.
Certain11,, this fulfils the expectations of sharehoiders, be it n-rinor or major. Brri, they
are alst, fulfilling the needs of other stakehoiders, for example ernployees, consumels,
suppiiers and so forth. A firm's sustainability wili give positive externality effects to
societl, at large.

Managers as company leaders/trustees


Managers are also expected to play the role of company leaders or trustees. Corporate
rnanagerl especially are entrusted to iead the corporation, owned by shareholders lvho
have taken the risk to invest in the business. They rnust therefore do their best to
42 Business Ethics

manage the company's assets with prudence since they are made accountable for their
actions, being holders of critical positions of high responsibility" They must also fulfil
the needs of other stakeholders who will either gain or lose in the business, depending
on how it is being managed. Sustainable businesses will build long-term relationships
with stakeholders which will contribute significantly to organizational success in the
short and long term.
More often than not, some of the interests of stakeholders are conflicting with
one another- For example, the shareholders' maln objective is to maximize wealth or
profits. This would mean that the business may have to charge consumers highly or
reduce employees' compensation and benefits which form a major part of operating
costs. However, rational consumers look forward to affordable prices of" goods and
services. Employees on the other hand look forward to increases in salaries and benefits
to cope with the rising costs of living. Yet, for the company's survival and expansion- it
must be able to have retained earnings for busincss expansion. No wonder companies
resolve to cost cutting measures and offer consumers highly priced products to gain
more profits. But such actions may not be favourable in fulfilling the needs of the two
main stakeholders i.e. consumers and employees. Managers must therefore strive to
balance the needs of all stakeholders for long-terrn sustainability.

Managers as community leaders


We have just covered the two roles of manag,ers; as economic actors and company
leaders /trustees. Managers must also play the role of community leaders. Milton
Friedman, an influential economist in the 1960s once advocated that business people
should focus on making profits only within rules and reguiations and ieave social
issues lor the public civil servants to resolve. By doing so, they are contributing to
the society by providing employment for job seekers. While this may be true from
a narrow viewpoint of social responsibility, businesses owe their existence to the
societies they serve. Furthermore, the success of businesses depends on the provision
of labour services and natural resources that every mcmber of the communitr., has a
stake in (Khalidah et. al,20l2a).
They must therefore be socially responsible as corporate citizens, given power to
make strategic decisions in their leadership roles. While sorne projects may generate
high profits for the company, if it is going to negativeiy affect the community,
managers must be sensitive enough to consider these implications and decide for the
best alternative decision to maximize the positive impacts and minimize the negative
impacts on society.
C*p,,il;;--_l Corporate managers must be seen to play bigger roles as corporations' activities
rhe largest forrn have great impact on the community due to their high capital investments"
of business in Corporations are the largest form of business in any ('ommunity. Whatever they
any community. do in the production of goods and services will significantly affect thc community.
Therefore, corporate Pollution, depletion of resources and other sustainahility problems have occurred
managers musi play largely due to the irresponsible activities of corporations. The cost of pollution for
bigger roles as the example, an outcome of corporations'mega manufacturing activities, creates negative
corporations' activiries
externalities to the community in terms of promoting health-impairing illnesses
have great impact on
arising from pollution, safety and health hazards, etc.
rhe community due
I'hese corporations must be seen to be offering society some forru of assistance
to their high capital
investments.
or compensation, such as paying pollution taxes, subsidizirrg medical bills at public
hospitals, sponsoring health campaigns to create public awareness on diseases
lnternalizing Ethics in the Conduct of Business 43

and so forth. At the very least, these corporations should be committed to operate
premises alvay from residential areas although they may have to incur extra costs on
infrastructural development such as building secondarv roads and employees'living
quarters.
Corporate managers must therefore piay their role as corporate citizens, much as
they are equally required to play their roles as economic actors and company leaders.
However, these three roies by and large are appiicable to all managers. Irrespective
of business forms, managers must play a balanced role as economic actors, company
leaders and community leaders for the well-being of the community.

CODE OF ETHICS FOR AN I A ,rd" ,f rrh*


ETH ICAL CORPORATE CULTURE is a statement of
principles, policies
or rules that guides
Inthe earlierparts of Chapter 2, whiie expiaining managementofethics as a concept, we behaviour.

recognize that organizations develop policies, rules and regulations to institutionalize


lA compln,rce-kred
ethics at the workplace. One of these initiatives is through the development of code code of ethics stresses
of ethics. A code of ethics is a statement of principles, policies or rules that guides on the prevention of
behavicur. It may also be defined as a social, religious or civil code of conduct that unlawfui behaviour
is considered right or correct, especially Lhose of a particuiar group, profession or by rncreasrng
individual. control ihrough rl.re
Althoueh code of ethics will vary among organizations, it may be classified into formulation of rules
t\vo tvpes-compliance-based and integrity-based code of ethics. A compliance- and regularions and
based code of ethics stresses on the prevention of unlalr.ful behaviour by increasing rmposing penahies

control through the formulation of rules and reguiations and imposing penalties and and punishments on
wrongdoers.
punishments on lvrongdoers. integrity-base 'l code of ethics defines the organiz-ation's
guiding values, creates an environment that supports ethical behaviour and focuses ll,rr"grty-fuKd r"fu
.ln shared responsibility among emplolees (Khalidah et al., Z}t2a). oferhrcs defines rhe
Related to code of ethics is corporate cuiture. Every business organization organ ization's guiding
has a corporate culture fashioned by a shared pattern of beliefs, expectations and values, creates an
meanings that influence and guide the thinking and values of its members. The environment rhat
ilevelopment of good corporate culture begins with the top management. Good supports ethical
behaviour and
Sovernance and leadership by example shor'r,n by rnanagers rnay positively contribute
focuseS on shared
towards shaping organizational corporate vaiues and culture. Emplovees have the
responsibility among
tendency to emulate the character traits of their superiors since t1-rey are rcgarded as
employees.
roie models. Therefore, it is critical for those in the leadership roles to demonstrate
ethicai behaviour and fulfil job responsibiiities through ethical management. Thus, f c"rwrr"*l-rr,5
they must uphold and internalize the organization's code of ethics based on their a shared partern of
own acc0i.rntabilit1,. beliefs, expecrarions
Next,lve shall examine the three dimensions tl-rat managers must consider in the and meanings ihat
process of decision making-economic, legal and moral. influence and guide
the thinking and -

values of irs members.


44 Busrness tthrcs

2.6 ECONOMIC, LEGAL AND MORAL *i I

DIMENSIONS FOR EFFECTIVE I

BUSINESS DECISIONS

It is pertinent for managers to look at three dimensions while rnaking effective t


business decisions, as illustrated in Figure 2.6. I
l

The Three Dimensions of Effective Business Decisions

Thinking abour what is rhe besr rhing ro do so as nor ro


harm others

Figure 2.6: The three dimensions of effective business decisions

The economic and legal dimensions have eariier been outlined in Chapter 1"
By non, yoll must already be familiar with these two perspectives. It goes lr.'ithout
saying that a business is generated to make profits within the rules of the game; it
needs to comply with statutory laws and regulations to ensure it is legal in practice.
However, effective business decisions will also equaliy consider the importance ol
the rnorai dimension.
Eff..*^ b***t;-l The rnoral dimension requires an individual to be rvilling to seek out and acl on
decision-making reasons. It also suggests one to think about doing the best for the comrrlon good and
involves an integration weli-being of others. It expects an individual to be impartial and regard the interests
of economic, legal and of everyone including himself or herseif as equally rvorthy of consideration ivhile
moral viewpoinrs. deciding what to do. In other words, one has to place himself or herself in the shoes
of others before acting. Certainl-r,, one's level of cthical knolr,ledge, consciousness arid
internalization of ethics will describe the extent of application of the moral dirnension
in business decision-making as a matter of social responsibility.
!
Aptly, effective business decision-making involves an integration of all three
dimelsions. Business people must therefore integrate moral viervpoints x'ith economic
--i
and legal viervpoints to make effective and ethical decisions &

1t

1
I
Internalizing Ethics in the Conduct of Business 45

Business ethics is the attempt to think clearly and deeply about the ethical
issues in business and to arrive at conclusions that are supported by the strongest
possible arguments which r,r,ill benefit all parties involved. Both economics and law
are essential to business decision-making. However, it is critical to observe ethical
standards in profit-rnaking initiatives.

: 'r:: "l,l MANAGING ETHICAL DILEMMAS

\{e have duiy recognized the importance of integrating business, legal and moral
dimensions to make effective and ethical business decisions. However, business people,
in their quest to make profits, are bound to experience ethicai conflicts or dilemmas.
\4re have seen some of the common ones at the beginning of this chapter. Having
recognized these di1ernr113S, rrow cio u,e go about resolving them? When business
people are in an ethical dilemma, they should prudently self-assess themselves and
ask three,check questions before making decisions (Khalidah et al.,20l2a), as shown
in Figure 2.7.

Figur"e 2.7: The three check questions for assessing ethical dilemmas

If
these questiolts are answered u,ith a good conscience and clarity, business
people will act accordingly in good faith. Ethical decisions will then be made for the
conlmon good and lr.ell-being of the community.
4b BuErness Ethrcs

2.8 THE ROLE OF RELIGION IN


RESOLVING ETHICAL ISSUES IN
BUSI N ESS

Sr..*;'.1,ffi1 Obviously, the three check questions, though developed through rationai thinking,
embody rhe idea of a are holistically consistent with religious beliefs and principles to resolve ethical
Transcendent Realiry dilemmas. All believers of religion have their own principles to uphold such as doing
which has some good deeds and avoiding evil acts, to be just and fair, compassionate, shou, respect for
bearing upon the others, etc. Since most religions embody the idea of a 'lranscendent Ileality which has
purpose and meaning some bearing upon the purpose and meaning of iife, how onc lives on earth and what
of life how one lives lies beyond this finite, mortal existence, it also shapes one's perception of ethics and
on earth and what
determines one's actions in resolving ethical issues in business.
lies beyond rhe finite
Internalization of ethics comes from within, out of one's conscience to be ethicai
mortal existence,
as a sociai obligation and as a commitment to obey God's rules and larvs above man-
it also shapes one's
perception of erhics made laws. After all, He is watching and He reads what is in our hearts! From an Islamic
and derermines one's perspective, it certainly requires one to assess, reflect and relate to the fundamental
acrions in resolving principles of iman (faith) and taclwa (piety) as Khalifah (leader) on earth. The Prophet's
ethical issues in traditions are exemplary to Muslirns. Lile is a jihad (inaking sacrifices) and jannalt
business. (heaven) is the ultimate goal or destinyl Thus, as mukmins (believers), Muslims will
strive to please the Creator abor.e all other rvoritlly interests and obligations.
h*rr.fi;"" --_l For the Hindus, the dharma or righteousness consists of individuals directing
ethics is a social
"f their possessions and passions to a spiritual end. Hou,ever, it is a constant battle both
obligarion ar.rd internally and externally to practtse dhttrna. Quoting fronr l{ajenciran Nagappan's
commitmenr ro obey words:
Cod's rr-rles and laws
'The worldly li.fe is full of choices, both good crnd evil.'
above man-made
laws.
As stated in the Bhagavad Gita:
'The. deadly sins are three in number: lust, anger and gre ed, ttntl tLre1, Le ad n'rart
to hell.'

Other vices that are mentionecl are self-conceit, stubbornness, ostentation,


arrogance, excessive pride, harshness, ignorance and force. it is the responsibility of
the individual to choose the right path to govern his relationship rvith others and tl"ri'
environment (Chandra Muzaf{ar, 2009).
At the heait of the Buddhist philosophy is the profound respect for the inherent
dignity of all life. It also emphasizes the immense potential energy in life, or lile force,
r,vaiting to be tapped. Buddhism has ahvays placed great emphasis on compassron and
to give happiness, sharing the suff-ering of another out of hurnanity and creiiting a
network of genuine friendship and trust. The basis of such an endeavour is heart to
heart dialogue with freedom of expression. The extraordinarv character of Gautarna
Buddha who had the strength to overcorre hardship and misfortune is a role model
fcr Buddhists to emulate. He was known to have lived the greatest possible life of
happiness, courage, compassion, wisdom and huinanism.
Last but not least, Christianity, just like other Abrahamic rehgions (Islam and
|udaism) beiieve that justice and freedom are possible only if the human being is
internally goverired by the norms of God. The human being has to consciousiy fulfil
his role as God's steward. To do this, he abide; by the ethical prine iples reve .rled by
God to humankind such as the Ten Commandments. The Christian who is faithful to
lnternalizing Ethics rn the Conduct of Business 47

his religion would demonstrate an abiding commitment to God and to ]esus who had
extended his love to all with justice and mercy.
We have partly reiterated our earlier discussions on the role of religion in shaping
one's ethical values in Chapter 1.
To conclude this chapter,let us summarize the salient points. The internalization
of ethics in a business environment, amongothers, rationally calls for an appreciation
of the common ethical dilemmas, understanding of the three levels of decision-
making and differentiation between ethical management and managemerlt of ethics.
It also transcends the role of leadership to inculcate an ethical culture, integrating the
economic, legal and moral dimensions in decision-making and recognizing the three
check questions to be asked when resolving ethical dilemmas, Certainly, one's level of
knorvledge, conscience and commitment to upholding religious values and principles
do influence his or her internalization of ethics although the degree of reiigiosity of an
rndrvidual is not for us to assess. As fellow humans with limitations, we humbly leave
this cornplicated task to the Greatest-Our Creator!
Having said the above, and recognizing the need for iifelong learning, business
people must be fully equipped with ethics, knowledge and skills to enable them to
assess situations and make effective and ethical business decisions. Thus, Chapter 3
, will introduce readers to the various universally accepted ethical principles in this
global scenario foliowed by a special emphasis on religious principles as highlighted
in Chapter 11 i.e. Islarnic Ethics. It is hoped that the myriad of knowledge in the
correroonding chapters will give business peopie an insight to appiy and internalize
;'thrcs as they play therr roles under all circumstances.

To consolidate your iearning, the iearning outcomes are summarized below:

l ldentify and discuss the common ethical dilemmas faced by business people.
Business people will face five (5) common ethical dilemmas or conflicts as follows:
. Balancing the economic character of organizations with justice and fairness.
. Conflict of interest
. This involves morality and economic trade-offs rvhereby there is constant tension in trying to
separate the 'person' from the business decision.
. Personality traits
. Responsibility to stakeholders
. Level ofopenness

2. ldentify and explain the three levels of decision making.


There are three levels in the ethicai decision-making process*-individual, organizational and
business system. Identifying the appropriate level for a decision is pertinent because an ethical
problem mayhave no solution on the }evel it is approached. For example, the solution to the forgery
issue in this chapter may not be solved at the individual or departn-,ental levels. It has to be solved
at the organizational level by reporting the case to the human resource department. Similarly,
the salary revision request cannot be fulfilled at the organizational level until a comparative
compensation study of the entire industry is conducted at busincss system lcvel to ensure justice
and fairness but a salary increment may be given after assessing individual perforrnance at ihe
organizational level.
48 Br:siness Ethics

J. Differentiate between ethical management and management of ethics.


Ethical management relates to the undertaking of management functions in an ethical manner by
doing the right thing for individual success and organizational effectiveness. lt has to begin from
the individual's values, displayed through his or her actions while performing management duties
and responsibilities. High-level managers have a responsibility for creating and maintaining an
ethical corporate climate that protects the organi zalion against unethical and illegal conduct.
Management of ethics refers to managers acting effectively in situations that have an ethical
aspect both in the internal and external environments of business. They norrnaily apply the
internal poiicies, ruies and regulations as well as stipulated laws by the governlnent. For example,
as a production manager at a MODENAS manufacturing plant in Gurun, Kedah, Mr. A has to
follow the organization's human resource policies as well as Occupational Safety and Health Act
(OSHA) i994. He also has to ensure that his subordinates comply rvith the ruies and procedures as
well.

4. Explain the concept of role in ethics.


In ethics, a role is a str uctured set of relationships with accompanying rights and obligations that
are sometimes added to those of ordinary morality over and above those of eve ryday life. Roles are
created in order to serve society better as a whoie since everyone is contributing or taking some
responsibility to accomplish sornething for the well-being of society. Thus, roles are directiy related
to social respor-rsibility.

5. Outline the role of leadership to inculcate an ethical culture in a business organization.


The top and senior nlanagement in any business organization play a very importarrt role in
ensuring ethics is given priority and institutionalized accordingly at ali levels. Ihc,v are the role
models. Vielr,ing leadership from the Islamic n'orldvieu,, humans are special creations of God and
are directly infomed of his or her our role as a Khalifah-to be a leader in the universe" The role
af a Khalfoli is not confined to the top management but everyone in the organization. Certainly,
virtues shouid be emuiated by ernployees irrespe ctive of hierarchy as Khalfahs.
However, the expectation to irnbue and internalize ethics among the top management is high11'
expected in the manifestation of a role model.

6. Discuss the role of managers as economic actors, company leaders and community leaders.
. Mana[ers as economic actors
They must rnake sound economic decisions, ensuring pr,rfitability fcrr the grorvth of tl-re
company.
. Managers as c()mpany leaders / trustees
They rnust manage assets prudently. They must also fulfil the needs of stakehoiders and
balance anyconflicting interests, being trustees.
. Managers as cotntnunity leaders / quasi-public servants
As community Ieaders, they must exercise po\vers given to them that demonstrate their
corporate leadershiplcitizenship.
Managers must also be seen to practise ethrcal management and management of ethics at the
workplace. They must also be role models for their subordinates and be committed to leadership
by example.

7. Compare and contrast between the two types of code of ethics adopted by organizations.
Code of ethics adopted by organizations can be classified inio two types--complianc.e based or
integrity-based. A comphance-based code of ethics stresses on the prevention of unlawful behaviour
lnternalizing Ethics in the Conduct of Business 49

by increasing control through the fbrmulation of rules and regulations and imposing penalties
and punishments on wrongdoers. Integrity-based code of ethics defines the organization's guiding
values, creates an environment that supports ethical behaviour and focuses on shared re sponsibility
among employees.

8. Discuss the importance of integrating economic,legal and moral dimensions to make effective
and fair business decisions.
A business is generated to make profits within the rules of the game; it needs to comply with
statutory laws and regulations to ensure it is legal in practice. However, effective business decisions
will also equally consider the importance of the moral dimension.
The moral dimension requires an individual to be willing to seek out and act on reasons. It
also suggests one to think about doing the best for the common good and well-being of others.
It expects an individual to be impartial and regard the interests of everyone inciuding himself
or herself as equally worthy of consideration while deciding what to do. In other words, one has
to place himseif or herself in the shoes of others before acting. Certainly, one's level of ethical
knowledge, consciousne .rs and internalization of ethics wiil describe the extent of application of the
moral dimension in business decision-making as a matter of social responsibility.
Both economics and lar,r, are essential to business decision-making. However, it is critical to
observe ethicai standards as a rleans to the end of profit making. Therefore, there needs to be an
integration of all the three dirnensions to make ethical business decisions.

9. Itlentity and explain the l"hree check questions that one has to ask antl self-assess when {hced
with an ethical dilemma.
One needs to ask three check questions r,r,hen faced lvith an ethical dilemma:
. .l-s it legal?
Am I r.iolating company poiicies or iaws including the religious beliefs and principles that I
uphold in life?
. .Is it balanced?
Am I acting fairi,v in my decisions? Am I taking into consideration the r-reeds of others whiie
fulfilling my own needs? Am I causing harm to others or are m;, actions just and thir?
. IIow will the action make rue feel about myself?
Wiil I be happy after taking such actions? Will I have a clear conscience that I have not done
anything wrong to others?

10. Discuss the role of religion in solving ethical issues in business.


A11 believers of religion have their own principles to uphold such as Joing good deeds and avoidrng
ei'il acts, to be just and fair, compassionate, show respect for others, etc. Since most religions
embody the idea of a f'ranscendent Reality which has some bearing upon the purpose and meaning
of life, how one li'u'es on earth and what lies beyond this finite, mortal existence, it also shapes
h.t.ar we perceil'e ethics in business. Internalization of ethics therefore comes from within, out of
one's conscience to be ethical as a social obligation and as a commitment to obey God's rules and
laws above man-made laws. After all, God is watching and He reads ivhat is in our hearts! From
an Islamic perspective, it certainly requires one to assess, reflect and relate to the fundamental
principles of iman andtaqwa as Khalifah on earth.
50 Business Ethics

Agency problem It happens when managers do not act in the sole interest of the principals, who are the
shareholders.

At will employees / Employment at will Employees who are willinp to continue their services based on
good faith. Employment at will is a moral doctrine related to employrnent. The moral and legal basis for a
particular assignment of rights for employees and employers i.e. two parties willingly enter into an agreement
and the relation continues as long as both parties will that it do so.

Code of ethics A statement of principles, policies or rules that guides behaviour.

Compliance-based code of ethics It stresses the prevention of unlawf'ul behaviour by formulating rules and
regulations and imposing penalties on wrongdoers.

Consumer sovereignty The recognition that consumers are'kings'in the economy. They have the liberty and
right to decide whether to buy or not to buy a product.

Economic character The characteristic of business organizations to maximize profits.

Ethical management The undertaking of management functions in an ethical manner bv doing the riglit
thing fbr individual success and organizational effectiveness.

Ethics A set of principles that contains behavioural codes to determrne vu,hat is right or \\rrong.

Governance It refers to the act, process or power of governing and governinent.

lman Anlslamictermfor'faith',i.e.piousandcompleteadherencetoAllah'sruies,nhichisahighlyregarded
religious ideal in the Al-Quran. An individual who has iman ({aith) is a mu'min (believer).

lntegrity-baseci code of ethics It defines the organization's guiding values, creates a rvorkplace environment
that is supportive of ethical behaviour and focuses on shared responsibility among employees

Khalifah AconceptbyearlyMuslimscholarswhichfocusesonthestatusandquality(fieeu,ill)ofhumankrnd
vis-d-vis other creatures in the universe-leadership, responsibility and accountability^

Legality Statutory larvs, rules and regulations set by the go\rernment or local authority.

Management of ethics It refers to managers acting effectively in situations that har.e an ethical aspect both
in tl",e internal and external environment of business. They normaily apply the poiicres, rules and regiilations
as weii as stipuiated laws by the government to manage ethical issues internally.

Morality The norms, vaiues and beliefs embedded in social processes which define right or wrong for an
individual or a community.
lnternalizing Ethics in the Conduct of Business 51

Nepotism Favouritism or biased attitude toward a certain person or group which may lead to discriminative
action.

Opportunity costs An economic concept to explain the next best alternative that has to be given up after
making a decision.

Risks The chance an entrepreneur or business person takes of Iosing time and money on a business that may
not prove profitable.

Role A structured set of relationships with accompanying rights and obligations that are sometimes added
to those of ordinary moraiity over and above those of everyday life.

Stakeholders All the people or parties that stand to gain or lose by the policies and activities of a business. They
include sharehoiders, customers, suppliers, bankers, employees, government agencies, non'governmental
or ganizations (NGO s) and competitors.

Stockholders A synonym for sharehoiders

Tagwa An Isiamic term for'piety', i.e. protection or shield from what is harmful.

Trade secrets A term used to describe the art of conducting a business. Examples of trade secrets include
sales data, product formulas, research findings, etc.

Virtue It refers to a character trait that manifests itself in habitual action. For example, honesty <-annot be
regarded as telling the trutlr once; it is rather a trait of a person nho consistently tells the truth as a general
practice.

1. Discuss the five common ethical issues faced by business people.

2. Differentiate between ethical management and management of ethics. Provide examples rn your
expl anal ion.

J. Discuss the role of leadership in the context of a business organization.

4. Internalization of ethics requires one's conscience to be socially responsible and committed to


clhical principles, including religion. Do you agree with this contention? Discuss.

5. In your view, to what extent does religion play a significant role in shaping one's ethical values? Are
religious vaiues and principles applicable in the business environment?
tr,) Business Ethics

Authentic Biscuits from Australia... To Sell or Dispose?


Helena is an MBA graduate from a Malaysian higher iearning institution. She had malored in markering and is
interested in retailing. One day, while browsing jobstreet com, to her excitemenr, she received a job offer from
a large and prestigious department chain store in Kuala Lumpur. Wirh open hands, Helena ac-cepted the job
offer. She is all set to face the challenges at the new workplace.
At point of entry, she was positioned as a trainee executive, whereby she will be roiat.ed on rhe 1ob to
all the departments ro gain exposure and appreciare the nature of rhe business Helena's frrst assrgnmenr rs
to assist Madam Marina, a qualified buyer in the Food and Beverages Departmenr. Buyers piay a crttrcal role
in rhe management of the department store. They select the goods to be offered, negotiate purchase terms
and conditions, set rerail prices, arrange displays, organize promocions, and are generaily responsible for rhe
operations of rhe departments within the store.
Helena was extremely happy on the firsr month of her employment. Madam Marina respecred her as an
employee. On several occ.rsions she received praise for good discipline. Her views and opinions have been r,veil
considered and workload is ;usr right.
However, an event occurred thar rhreatened co destroy all her contentment. According to Madam Martna,
the deparrment store has received a shipment of imported halal brscuits from Ausrtaiia wrrh an ailthentc
chocolate cream filling. They are well packed in attractive foil covered boxes, but somehow sorne of thern had
become infested wirh mouids and insecis. Nor all rhe boxes were infested, srnce only a felnr custorners have
returnedrhertemafterpurchase.ButrhepointissomepeopledidreturnLlrerrpurclrasctl parks Ol-,vrt-,usy,sarrj
Miss Marina, "We cannor continue to sell them at our deparuflflt stor- to uphold out good image Wealso
do not have rhe time ro inspect every package and keep the ones thar are not rnl'esred" Madam A4arrna went
on to discuss the cosr implications. She utrered, "What about the losses rhat we have r.o incur? We have alreaciy
commitred a caprral cost of almost RM50,000 The biscuit manufacturer rvill rror ref und us srnce ir rs doubtlul
whether the infestarion had occurred during shipmenr, or even during storage at our own tvarehouse"
After a serious discussion, Madan, Marina asked l-lelena ro get rrd cf the biscurr:s, Helena thoughr thar-
Madam Marina asked her to rhrow them away at the rubbish bns provrded by the Kl munrcipality (DBKt)
near rhe srore but Miss Marina further clarified ro Helena, "Absolutely notl Call Mr Maniam He operati, .l
mini market at the ourskirts of the Klang Valiey where the majoriry of the residents are in the low rncome
groups. We have got ro get our money backl"
Helena prorested openly, but Madam Marina further assured, "Look, rhere rs nothing wrong with our
actions. The residents of these areas have. never had high qualrty foodsiuff of rhis nature Ihese rmportecl
biscurrs wrll be sold very cheaply, and for most people who buy rhem, ir wrll be an opportunriy to rry
sornething really good Cnly a few people will ger rhe infesred roxes. They will nor be very happy, bur ai sucl-r
remote areas, ihey expect this especially when they see a lolv price on an expensive produci They make rhe
choice. We don'tl" Helena is in a ciilemma... should she follow the instruction:; of her boss?

Questions:
i. Analyse this case from economic, lggril and moral perspectives. Justify whether Madam N{arina's srrategic
views are reasonable or orherwise.
2. Assess whether Madam Marina practises ethical managemen[ and management of ethics. Provide your
reasoning.
3. lf you were Helena, what would you do in this siruation? Will you arrange for the delivery of the biscuits to
Mr. Maniam? Jusrify your acrions.
lnternalizing Ethics in the Conduct of Business 53

A.G. Abdullah and A. Mohd Zainol Abidin (2011). Business Ethics. Selangor: Oxford University Press.

Al-euran; King Fahd Complex: Madinah Munawawarah, K.S.A. For the Printing of the Holy Qurau www.
qurancomPlex.org

Boatright, ].R. (2007). Ethics and the Conduct of Business (5'h Ed.). New [er"ey: Prentice ]lall.

Boatright, I.R. (2009), Ethics and the Conduct of Business (6'h Ed). New Jersey: Pearson International Edition"

Boatright, J.R. (2012). Ethics and the Conduct of Business(7'h Ed). New Jersey: Pearson Education International"

Chandra Muzaffar (2009). Religion and Governance. Selangor: Arah Publications.

Chandra Muzaffar (2005). Global Ethic or Global Hegemomy? Reflections on Religion, Human Dignity and
Civilizational lnteractioiz. London: ASEAN Academic Press.

I)esjardins, J. (2009). An Introcluction to Business Ethics (3'dEd.). Singapore: McGrau,-Hill Higher Education"

Ebert, R.]. and Griffin, R.W' (2007) . ELtsiness Essentials (6th Ed.). New Jersey: Pearson/Prentice Hall.

Green, t(. (2008). What is Taclu,a? <http:/iislamicbeliefs.suitei0l.com/article.cfmhvhat-is-taqwa>. Accessed


on 11 .rugust 2010.

Haneef, S" (1979). Vrhat Everyone Should Know about Islam ani Muslim. Lahore: Kazi Publications.

Hyman, D,N. (1996) . F,conomics (ath Ed). lJnited States of America: Irrvin.

IslamiCity. Al Quran, Yusuf A1i. <http://wwr.r,.isiamicity.com>. Accessed on 3 Ar-rgust2012.

/ennings, M.l. (2006). Business Ethics iS'h Ect.;. United States of America: T'homson/ West.

Khalidah Khalid Ali, Rohani Salieh and lr{ashitah Sabdin. (2009). A Study on the Level of Ethics of lrrnal
Year Engineering and Technolog,v Students at a Malaysian Higher Learning Institution. In Proceedings ol
the Regional Conference of Humanities 2009 (RCH 2A09), Seri Iskandar, 18 19 February 2009.

Khalidatr Khalid AIi, Rohani Salleh and Mashitah Sabdin (2010). A Study on the Level of Ethics at a Malaysien
Private Higher I-earnii-rg Lrstitution: Comparison between Foundation and Undergraduate Technical based
Students. International Journal o.f llasic and Applied Sciences (10), 15 October 20i0, 35 ,19.

Khaiidah Khalid AIi, Satirenjit Kaur Johl, Lai Fong Woon, Rohani Salleh, Soliah Molek l,ope Aman Shah,
Rahayu Abd. Rahman ancl llmiah ibrahim (2012a). Business Management: A Malaysian Perspettive (2'" F.d).
Selangor: Oxford Fajar.

Khaiidah Khalid Ali, Rohani Saileh and Mashitah Sabdin. (2}l2b). Ethical Values of Final Year Students at
a Malaysian Private Higher Learning Institution, 2012 (1). In Proceedings of lnternational Conference on
Appiied and Social Science (ICASS 2A1D, Kuala Lumpur, 1 - 2 February2Ol2 (pp. 119 13i). USA: Inforn:ation
Engineering Research Institute (IERI).

McDonough, S. (1984). Muslirn Ethics and Modernity. Canada: Wilfrid Laurice University Press.

i'v{organ, G. (1986). lmages of Organization.Beverly Hills: Sage.


54 Business Et hics

Nickels, W.G", McHugh, |.M. and McHugh, S.M. (2008). [Jnderstanding Busine"ss (B'h Ed.). New York:
McGraw Hill/lrwin.

Shaw, W.H. (2008). Business Ethics (6'h Ed.). Californra: Thornpson Wadsworth.

Shaw, W.H. (2011) . Business Ethics (Z'h gd.). California: Thompson Wadsworth.

Stanwick, P.A. and Stanrvick S.D. (2009). Understanding Business Ethic,s. Neit,|ersey: Pearson International
Edition.

Syed Othman Alhabshi and Aidit Haji Ghazali. (1994)" Islamic Values and Managetnent. Ktrala Lumpur:
Institute of Islamic Understanding Malaysia (IKIM).

Sayed Sikandar, S,H. (2006). Ethics and Fiqh for Daily Life: An Islamic Outline " Kuala Lumpur: Research
Cenrre IIUN/i.

Velaquez, M.G. (2006). Business Ethics Concepts and Cases (6th Ed.). New |ersey: Pearson.

*i
!
I

*l
I
I

-t
i

l I

l
I
I
i
J
I
1

'
CHAPTER

Ethical Theories
and Principles

W"oA

'/Yr

LEARNING OUTCOMES

At the end of this chapter, you should be able to:


r Explain the fundamentals of moral philosophy.
r Differentiate between teleological and deontological theories of
ethics.
r Explain influential ethical theories and/or principles applied in today's
global era-Utilitarian Theory, Kant's i:thics of Duty, Aristotle's Virtue
Ethics, Carol Gilligan's Ethics of Care, Theory of Rights, Theory of
Justice and Rawls's Distributive Justice/Egalitarian Theory.
I Elaborate on the important featur.,s of each ethical theory.
I List and analyse the strengths and limitations of each theory,
where appropriate.
Apply the ethical theories to make sound business decisior-is"
56 Business Ethics

3'0 INTRODUCTION

In the last two chapters, lve emphasized on the importance of-ethics in all facets of
life, be it business or non-business, and noted that leaders have a role to play to ensure
that ethics is institutionalized in any organization for its sustainability. We also
recognized that religion, among several other factors, has an influence on ethical acts
and practices. From an organizational dimension, although a code of ethics may be
developed to promote an ethical culture, employees need to be equipped with ethics
knowledge and be exposed to ethical philosophy and principles fbr them to internalize
ethics and apply it at work.
Chapter 3 will continue to introduce readers to influentiai ethical theories and
principies. Along the way, it will highlight the features, strengths and rveaknesses of
each theory. Where applicable, it will also spur discussions on the compatibility of
th "se theories within Islamic ethics and religious contexts. The aim is to equip readers
to be famiiiar with established generic ethical theories and principles applied in the
global business world of today and criticaliy see their relevance in resolr,ing moral
issues in general. These theories and principles n,ili also be an added knowledge to
those r,r.ho are new to the study of ethics. This u,i1l enablc them to apply the useful
knou,ledge when making decisions, be it at an individual or organizational ievel, in
both business and non-business situations. It will further strengthen the readers
ability to effectively integrate economic, legal and moral dimensions rvhen making
business decisions.
llefbre we go through each ethical theorl,,let us frame our understanding of the
ftrndamentals ol moral philosophy for better appree iation.

3.1 UNDERSTANDING THE


FUNDAMENTALS OF MORAL
PH ILOSOPHY

Erl".. *rdy --l In Chapter i, we noted that the term ethics is derived trom the Grel'ii u-ord efho-s,
-, rvhich ineans character, spirit and attitudes of a group of people or cuiture (Rahman,
ofacrion and how
man should acr. 2003). Ethics is concerned witl-r what rs good or nght ir-r human interaction (Abduilah
lr relates to one's arrd Mohamad Zainol Abidin, 2C11) and deals with justice ancl rights issues (Boatright,
behaviour and in 2012). It is therefore a study of' action and how man should act. It relates to one's
order to act erhically, behaviour and in order to act ethicaliy, one is dependent on epistemoiogy of ethrcs
one is dependent knowledge. It is impossible to make choices on horv to act rnorally n'ithout knorvledgc
on epistemology of of ethics.
ethics knowledge.
Ethics is also a branch of philosophl'. Conceptually, the f ive branches of philosophy
are metaphysics, epistemology, ethics, politics and aesthetics. Figure 3.1 illustrates
a hierarchical relationship between these five branc.hes to see their links with one
another.
Ethical Theories and Principles 57

+ +
..> +
Ethics
...> Stndy'ofr __> "
Politics + gg.{y,ql.force. -.>,;
.> Srud;rof Art
,

; + What can life be like?

(Source: lmporrance of Phtit:sophy, n.d-)

Figure 3.1: The five branches of philosophy

Ethics, as a field of study, may be further sub-divided into two branches-meta- I Mrrr*thki,t rh.
ethics and prescriptire or normative ethics (Newall, 2005). Meta-ethics is the study of srudy of where
\{,here ethical concepts came from and what they mean. It is therefore the study of the ethical concepts
origin and meaning of moraiity. Meta-ethics classifies morality into two main forms came from and
morai/ethical reiativism and moral/ethical objectivism. Moral relativism considers whar they mean. It is
that what is right or wrong is not absolute. It is rather reiative and variable depending therefore the study
on the person, circumstances and social situation. it is a theory that views the rightness of the origin and
meaning of morality.
of actions is determined by what a culture or society says is right (Shaw, 2011)" What is
Mera-ethics classifies
right in one place mavbe lvrong in another, because the only criterion for distinguishing
morality into two
rightness of action is t}-re moral system of the society in which the act occurs.
main forms moral/
A..-sume that an innocent person is desperately looking for shelter to save his lifc
erhiral relarivism
f rom someone who wants to krli him. l le approached you and you are convinced that hc
and moral/ethical
is innocent. You provided him r'r,ith your home as shelter. Wher, you are approached b,v objecrivism.
the killer, ),ou denied/liecl that you had provided the person shelter for his protection.'f hc
act of lr-ing to the killer to save the life of tl're innocent is an example of morai relativisnr lir"h"t*.'r*,
Although lying is a universally accepted bad moral act, it is regarded as acceptable under considers thar vrhat
such circumstances sincc the intentron is good-to save the life of an innocent person. isright or wrong is
The bombing of Hiroshima and Nagasaki in 1945 to end the Second World War mar nor absoluie. lr is
also bc seen to be a rightful act bv moral relativists to regain rvorld peace and stabiiitl,. dependent on the
moral system of rhe
1'1rg ar t of abortion is religiously \,\,rong from the viewpoint of Islam and Christranitl,.
society in which the
but in lal-,an, it is neutrally accepted as a form of birth control. Moral relativism appears
acI occurS.
to depend significantly on human vien s and judgements to assess rightness of humair
actions relative to situations within a society's culture and environment. Utilitarianisnr
and theory of rights may well fall under moral reiativism principles.
On the contrary, moral objectivism considers certain acts as objectively right or
IM*rl.btrotrtt.
wrong, indepenclent of hrirnan opinion. Many codes/rules of objective rnorality sterr considers certain acts
from the r,ielv that moral codes originate fiom a divine eniity, either from God or flom as oblectively right or
a cosmic force such as Karma in Hinduism. Moral objectivists therefore view tl'rat wrong, independent
irrespective of cultural differences and Iluman conditions, some rules are standard from human opinion.
and must be religiouslv folloned by humans. islamic ethics, for exampie, is based on
divine cornmandrnent rather than perceptions of individuals and community lDusuki
and Abdullah.2006).
Islamic beiievers are thus moral absoiutists who live by the principle of moral
objectivism. Their actions are absoiutely guided by the teachings inthe Al-Quran andthe
Sunnah. Believers, as servants of Allah, will foliow these commandments/ruies without
question srnce they consciously believe that these rules come from Aliah, the Creator of
the Universe. With regard to the need to perforn-i prayers, a Quranic verse reads:

'When my servants question you obout Mc, tcll tlrcm that I am t,ert close to
them. I answer the pralter of every humble believer wlten he calls Me therefore
I
; :

58 Business Fthics
-$

the1, 576u14 respond to Me and put their trust in Me, so that tkey be rightly t
j
guided' - B
(Al-Quran, Al Baqarah, 2:186). ff

In another verse explaining God's creation:


'Glorv to Allah, who created all things in pairs: mankind, the plants of the earth
and other living things that they do not rno*'
,^r_ouran, Su.rah ya_sin, 36:36).
Concerning one's claim on ownership of property, wealth, power, etc., Muslims
are reminded that:
'To Allah belongs everything in the earth and heavens. Allah encon?pas,(es
euerything'
(Al- Quran, Suroh An-Nisa, 4: 1 26).

While religion-based principles are morally objectivistic, man-made theories *


a
such as Kant's Ethics of Duty and Aristotle's Virtue Ethics may somewhat fall under
this r.a ssification too.
P-;,lpr,* * ----l We have just elaborated on meta-ethics, the first branch of ethics study'. Next, we
normative ethics shall focus on prescriptive or normative ethics, the second Lrranch of ethics.It rs a set
provides general of principles that guide or regulate human conduct (Rahavu, 2AD). It also provides
guidelines for general guidelines for deciding r'r,hat is morally right or wrong. In the stud.v of
deciding whar is prescriptir.e ethics, moral philosophers have classified tlvo types of ethrcal theories
morally righr or teleological and deontological.
'wrong_ Teleological theories hold that the rightness of actions is determlned solely b). thc
antount of good consequences they produce. These are aiso ref-erred to as consequential
theories.
Deontological theories deny that consequences are relevant to deterrnining lr,hat n,e
ought to do. Rightness of an action is because of the natr,ue of these actions or tlre rules
from which they frllorv. These wiil include dir.,ine commands from God i.e. religious
principles. Deontological theories are also referred to as non conscquential tl'reories.
Figure 3.2 summarizes diagrammaticaliy morai philosophl, anci its conlpl;rtnts
in conceptuaiizing ethics as a field o1 study.

-t a

-!

i
:

r
{F

; :

(Source: lbrahim, 2000; Rahayu, 2012) tr


&
Figure 3.2: Moral philosophy and components
E
$
re
E
Ethrcar Theories ar,l Pnncrples 59

One of the most influential and prominent teleological ethical theories that has
survived through the centuries is Utiiitarian Theory of Ethics or Utilitarianism. It
is a theory applied widely by economists to make rational economic decisions for
a society's well-being, defined objectively in material contexts, rather than from
spiritual perspectives.

3.2 UTILITARIAN THEORY OF ETHICS

This theory was first developed in the l8th Century by Ieremy Bentharn and further
for-ilrrb" *
refined by his student, lohn Stuart Mill in the 19th Century. Utilitarianism is a theory dury in any siruation is
to provide an answer to a basic practical question-what ought a man do? Its answer to perform the acrion
is that he ought to act so as to produce the best consequences possihle for the common rhar will result in
good i.e. utiiity. Utility mearrs satisfaction or pleasure that people receive fronr the grearest possible
consuming a good or service (Tucker, 2005). According to this theory, our obligation balance of good over
or duty in any situation is to perform the action that will result in the greatest possibie evil.

balance ofgood over evil.


r Goodness is human weli-being. Whatever makes human beings generally
better off or provides some benefit is good, and whatever makes them worse
off or harms them is evil.
r Utilitarian Tl'reory attempts to v,,eigh/assess all of the good ancl bad
consequences of an action lr,hether the consequences arise after tl-re act has
been perlbrmed or during its performance.
r in tJre process, Utilitarian advocates wil! develop several alternative actions
to rveigh the good and bad consequences of each action before decicling on
the best action to take.
: The more the good conseqliences for the majority, the more ethical rvill he
the decision or action. I{owever, if the diffcrcnce in the consequences of
alternative acts is ilot great, some utilitarian advocates do not regard the
choice between them as a moral issue.
r This theory seems to support moral relativism. The rightness of actions thus
depends on the good and bad consequences of the actions and situatiorrs that
prevail in the process. Morirl right is thus defined in terms of an objective; for
the material good.

3.2.1 The Roots of Utilitarianism: Bentham and Mills


This theorl, originated from two scholars, jeremy Bentham (1748-1832) and hrs pupil,
John Stuart L,1i11 (i806-1873). They rvere followers of Adam Smith, the Father of
N'Iodern Economics. T'hese trvo scholars defined the theses /principies ofUtilitarianism
although it was Adam smith's tutor at Glasgorv University, Professor Hutcheson, who
first coined the phrase 'the greatest happiness af the greatest number',the furrdamental
principle behind Utilitarianism
According to iohn Stuart Mill:
'An ttcLiort is right to the extent that it inclines to promote thc .qre o.test,Eodd/r)/
the greatest nrtnilter.'
60 Business Ethics

Utilitarianism therefore evaluates moral action on the basis of consequences


and goal orientation on how far a decision maxinrizes the net utility that everyone i:
,:
affected by the action may exf ect. I

3.2.2 The Four Theses of Utilitarianism


The utilitarian principle involves four distinct theses:
r Consequentialism-the rightness of actions is determined solely by their
consequences.
r Hedonism-utility in this statement of the theory is identified with pleasure
and the absence of pain. Hedonism is the thesis that pleasure and r:nly
pleasure is ultimately good. This principle relates to inclividual happiness and
Th" f"* ,h"*t I satisfaction in the consumption of goods and services"
of Urilitarianism: r Maximalism-a right action is one that has not merely some good
conseq uentialism, consequences, but it also has tire greatest amount of good consequences
hedonism, possible when the bad consequences are also taken into consideration.
maximalism and r Universalism-the consequences to be considered are those of everyone" We
universalism. have to consider the impacts of our actions on the masses or rnajority"

Figure 3"3: The four theses of Utilitarianism

3.2.3 Forms of Utilitarianism


Tliere are two forms of Utilitarianism:
r Classical or Act Utilitarianism developed by Jeremy Bentham
r Rule Utiiitarianism deveioped by Iohn Stuart Mrli

l^ Cl**rl ---l Classical or Act Utilitarianism


Uillirarianism, an In Classical Utilitarianism, an action is judged to be right by virtue of the
aciion is judged ro
consequences of performing that action. Pieas'rre is taken to be ultimately the
be right by virtue of
oniy good and evil is the opposite of pieasure or pain. Classicai theory requires
the consequences
consequences to be measured in some r!ay so that the pleasure and paln of different
of performing that
action. Pleasure is
individuals can be added together and the results of different courses of actton
raken ro be ultimately compared.
rhe only good and 'An action is right if and onU) if it produces the greatest balonce oJ pleosure o1'er i0
evil, or pain, is rhe "g
pain far everyane'.
opposire of pleasure.
r
L
Ethrcai Theories and Principles 61

In Ciassical Utilitarian principles, an action is judged to be right by virtue of the


consequences of performing that action. It is silent on iompliar,."1o codes and rules.
As a result, telling a lie or breaking a promise is right if it has better consequences
than any alternative collrse of action (Boatright, 2009). T'his theory appears to support
moral relativism rather than moral objectivity. It depends greatiy on human judgement
and rational thinking by rveighing the good and bad consequences of an action. lt also
seems to set aside estabhshed religious principles that are embedded in society since
there is no need to follow established rules or codes in determining the rightness of
actions other than the four theses earlier mentioned.

Rule Utilitarianism
Bentham's classical theory received controversiai comments duringhis time. Tl-re'over-
freedom' and rationalization of moral actions seem to challenge established religious
ruies and cultural norms within the conservative English environment at that time.
John Stuart Miil, in trying [o save his teacher, refined Bentham's principles after being
chalienged by the community. Mill tried to clarify the limitations of Bentham's theory
by referring it as Rule Utilitarian Theory:

"An action is right rJ and only iJ it corrfonns to a set of rules the general acceptanc(
of which w,ill produ.ce the greatest balnnce o.f pleasure aver pain for eyeryone".

Tl,is principie relates to the importance of complying with rules while assessing
the rightness of actions. it seems to give firmer ground to the ruies of morality and
role obligations. Horvever, it does not specify nhat rules one should conform to.
Presumablr', it includes man-made rules as rveli as God-made rules and principles.
Again, individuals have to rnake their olr,n moral judgements to determine the
rightness of actions, an inclicator of moral relativism.
Comparing between Act and RLrie Utilitarianism, both focus on the consequeilces
or results to determine the rightness of an action. However, Act Utilitarianism puts
k"n,.p*-g-
between Acrand
emphasis on results only regardless of compliance to rules as iong as the conseqlrence Rule Urilirarianism,
of the action gir.es happiness for everyone. both focus on rhe
con5equences or
results to determine
3.2.4 Bentham's Theory: Calculating Utility the rightness of an
action. However, Acr
Unlike Rule Utiiitarian Theory, Bentham's Ciassical Theory requires one to be able Urilirarianism purs
to determine the amount of utilit1, (r.e. the balance between pleasure and pain) for emphasis on results
each inciividual irfiected by an action as rveil as the amount of utiiity for the r.vhoie of only, regardless

societl', measured in monetary terms. of compliance to


rules as long as
Horvever, hon, do we then calculate utility?
the consequence
r irconomists calculate utility by deveioping the consumer choice theory', profrt of the acrion gives
maximization theories, cost and benefit analysis, marginal analysis, etc. happiness for
r These theories assist in making objective and rational individual and L,usiness everyone.
decisions.

You may recall these iheories lvhen you study economics as a course. Holever,
there are critics over horv \{e can actually calculate the amount of pleasure each course
of action produces as it is impossible to calculate in terms of quantity, what more
with quality. Moreover, happiness and satrsfaction are intrinsic human values that arc
beyond measurements, They also differ berween individuals.
62 Business Ethics

Nevertheless, Utilitarianism has 'scientific' and practical pretensions. [t allows


for right and wrong to be based on calculating the elements in a situation. We can
calcuLte and choose the actiot-r giving the greatest utility. The decision is rationalized
and supposedly clear. To recall, moral right is defined in terms of an objective; for
material good. One will use cost/benefit analysis as a method for reconciling empiricai
fact against subjective, value judgements.
Another issue arises on the application of'cost benefit analysis in the world o{'
business, apart from the difficulties of calculating the pleasure and pain"

3.2.5 Cost-benefit Analysis in Business: ls lt for the


Majority?
Businesses usually calculate the anticipated costs and benefits only for their interests
i.e. profit seeking. Only legislators, social planners and regulators use cost-benefit
analvsis to analyse the positive and negative effects of an actton or decision on everyone
affected. The issue is how far cost-benefit analysis is applied by busine.ss organizattons
to ensure social justice. Private business organizations usually do cost-benefit analysrs
to maximize profits and fulfil economic goals to benefit the organization itself rather
than society at large.
While *. q.,.itio, the objectivity of calculating utility, a must under Bentham'"c
Classical Theory and application of cost-benefit analysrs in business, in summary,
there are six points about Utilitarianism:
r When deciding which action will produce the greatest I'rappiness, rve t't-lt-rst
consider unhappiness or pain as weli as happiness.
r Actions affect people to some degree. However, rve add up the various pleasures
and pains, and act on the action that brrngs the greatest net happiness.
I Because Utilitarians evaluate actions accordrng to therr Cotlse!uelrres, ancl
actions produce different results in different circumstances, aimost everything
might in principle be moraliy right in somc particular circumstance. This i:
true for ClassicallAct Utilitarianism.
r Utilitarians wish to maximize happiness not sirnply immediately br,rl in the
long run as weli. All the direct impLcations of an act har.e to be crrnsiclere<l
rn the process.
r Utiiitarians acknowledge that we often <io not knort rvitlr certainty rvhat the
future consequences of our actions will be. Accordinglr., we must act stl that
the expected happiness is as great as pr:ssible.
r When choosing an)ong possible actions, Utilitarianism does not rt'quire us
to disregard our own pleasure, nor should we give i1 added weight. Rather,
our o\vn pleasure and pain enter into calcultts eclually lvith the pleasures
and pains of others. \Are try to assess the goocl and bad cottseqLrenct'. f t'om
our actions before taking an action or decision. The action must create mote
happiness/pleasure than unhappiness/pai ir.
Let us try to apply Utiiitarian Theory of Ethics to resolve the foliowrng short case"
I
,

I
{

I
Ethical Theories and principles 63

Million XY Berhad is a small and medium enterprise, based in Langkawi lsland The CEO, Mr. Aminuddin,
has been approached by a giant forergn corporation to merge his food processing bLLsiness, wir-h an
objective to gain competitive advantage. The rerms offered by the (-ol'porarion are simply Iucrarive
to the CEO, who would receive a large sum of severarrce/separarion package. I he shareholders of rhe
firm would also benefit, because the offer for their shares is substanrrally above rhe currenL rnarkei
price. Mr. Aminuddin realizes thar the merger plans call for a closure of his food processing planr
The plant currently provides jobs for rhe majoriry of rhe local residenrs He is now unsure of how ro
balance his employees'welfare, who woLrld be thrown our of work and rhe cornmunrry where rhe
planr is located against the interesrs of rhe shareholders. He is also in a dilernma abour how much he
should rake his own inreresis inLo accounr

Assume you are Mr. Aminuddin. Should you support the merger plan? lustify
your position from utilitarian principles.
Next, we shall look at the strengths and weaknesses of Utilitarianism.

3.2.6 The Strengths of Utilitarianism


l.tilitarianisi-n is ir-r accordancc with much of our moral reasoning. The fact that an
. iion rvould pror-ide some beneflt or cause some harm is generally a moraliy relevant

i e ason for or against perfcrrming it.


It is result-oriented. It provides a relatively precise and objective method for moral
ciecision nraking since r,r,e are trying to evaluate/assess the good and bad consequences
helore ae I iug.
Act Utilitarianism is simple to appiy and provides an easily understoocl decision
procedure. Assr-rming that the goodness of consequences can easiiy be measured and
compared, a teleological decision-maker needs only to determine the possibie causes
ofaction and calculate the consequences ofeach one.
Rule Utilitarianism gives a firmer ground to rules of morality and to role
obligations, r,,']-)ich are problems to ail teleological theories. It also eliminates the
dilficult task of calculating the consequences of each individual act.
Utilitarian reasoning has also found.favour among economists, who use the
.issurnptiotl that individuals seek to maximize their utiiity or welfare to explain
,,nd predict a wide range of economic phenomena, such as prices and allocition
''f resources. Many of the micro-economic theories have been developed based on
IJtilitarian principles. For example, profit maximization, marginal anilysis, T'heory
oi Cornparative Advantage, elc.

3.2.7 The Weaknesses of Utilitarianism


While there are substantiai strengths seen in Utilitarian Theory, it has its weaknesses
ioo- The theory does not give an account of the rights we have and what is just and fair
,r'hich an ethical theory is expected to give. More criticisms on Utilitariair Theory of
Ethics have been listed by Abdullah and Moham adZainolAbidin (2011) revealing its
l;mitations as anv made-made theory.
64 Business Ethics

Individual happiness and satisfaction cannot rationally be the main objective


or sense of purpose in life. Critics list a number of noble people who sacrificed
their own happiness in order to do good deeds.
The theory is degrading to humans" It degrades human beings to the level of
animals because the theory suggests that people's only goal in lif'e is attaining
pleasure. .

Utilitarianism encourages selfishness. It propagates that one should be


concerned only with maximizing one's own happiness.
Utilitarianism is unattainable. It is almost impossible to act alrvays for the
sake ofthe generai happiness ofsociety.
Utilitarianism is self-serving" The principle will be abused in order to serve
particular interests of the person making the decision.
The theory is too time-consuming. It is impossible to calculate the amount of
pleasure and pain implied by each alternative course of action, and then come
to a conclusion based on the Utilitarian calculus.
'Ihis theory promotes objectivity rather than subjectivitl. it is silent on the
spirituality aspects to be objective and scier-rtific. It only emphasizes on
humans'physical needs since its emphasis is material well-being. Holvever,
humans are unique creations of God with intclligenr-e, feelings and emotions.
i-luman needs are not only physical, but splritual. Moralit1, certainly revoives
not only within physical contexts but spiritual aspects of a human life as well
since human beings consist of the bodl'ancl the soul. Their essence is the soul'
Before rve end our discussion on Utilitarian 'i'heory of Ethrcs, let us criticall,v
make some inquiries for discussion purposes.
r Is Utilitarianism really workable?
r Are some actions wrong, er.en if they produce goocl consequences?
r ls Utilitananism unjust? Is it wrong to fulfil seif-interest and promote utl[ity?
Does fulfiiling self-interest create happiness for soctety as a whole?
Next, we shall discuss Immanuel Kant's Ethics of l)r-rty, a deontologtcal theorv
rvhich insists that moral action requires conferrnrity to inorerl principles.

3.3 KANT'S ETHICS OF DUTY THEORY


Immanuel Kant (1724 - 1804) was a renowned German philosopher" FIis influential
rvork on ethics is entitled Fundamental Principles o-f the Metaphysic of Ethics,iirsi
published in l7B5 (Boatrigl-rt, 2009; Abdullah and lvfol-rarnard Zainol Abidin, 2011)
before the rise of Utilitarianism in England (Boatright, 2012). T he opening rvorcls
of Kant's work reads:
'Nothing can possibly be conceived in the u,orltl whicJl t dn be good v,ithottt
qualification, except a Good Will.'
ffirrg -*dtl
t
Tl* Will is the uniquely human capacitl,to act from principle. It is the power of the
of Kanr's work reads,
'Norhing can possibly
mind to do something and to make things happen. Kant is convinced tl'iat our morai
-3
actions cannot be guided by our practical experience. In other \,!,ords, it is impossible N

be conceived in che I
world which can to determine what people ought to do by studying r,'hat thc), in fact do (Abdullah and
be good wirhout Mohamad ZainoTAbidin, 2011). Human actio,rs must therefore be rationalized based
-1
q ual ifi c ation,' exce pt a on human intelligence and wiil power. According to Kant, we hr.ve a dutv to play
I
Cood Will.' torvards feliow human beings.

x
*
a
Ethical Theories and Prrnciples 65

'An Actiot't rs rnorally right if and onl1, if the actor is motivated by good will.'
It is not a matter of the individuai weighing the consequences" Thus, according to
Kant, the basis of a moral act rests upon a duty that one has to perform for the purpose
lAri;;, "
m",rtty
righi if and only if rhe
ofgood lvill. Irrespective ofthe consequences, an act has to be intentionally good, as a acror is morivared by
duty to be performed lor fellow human beings. good will.'
Nothing is good in itself except a good wili. Goodness of the will thus depends on
the use of them. For example, some students lvho are smart in using computt:rs hacked
through the universitr"s security system to acquire the final examinalion papers in
advance. Such acts are intelligent and courageous, but are done for the wrong reason.
It is not motivated by good will; it is an act of cheating, so it is a wrongful act.
Only an action done for rational principled reasons from a sense of duty has
moral worth, according to Kant. In other words, if our act is from a sincere obligation
to perform a duty towards others, our act has moral north. For example, FELDA
Global. in late November 2013, contributed RM 132000 to support the Fiiipino
T1'phoon Hair-an victims. Another example is the continuous contributes of Uiriversiti
Teknologi Petronas (UTP) to r''lei:ted orphanages and old folkt homes in Perak as a
social responsibilitr-to genuinely heip the needy.
An important point has to be emphasized here. The purpose or intent of an act
seems to differentiate it betrveen a good and bad action from the perspective of Kant's
ethics.If the purpose is ior good will out of a sense of dutyto heip others, it has moral
rr-orth. I{ou,ever, if these initiatives are primarily aimed at popularizing the organization
in the er-es of the public as a corporate business strategy, its moral worth mav be
questionable since the main intent is not to promote good will or help feilorv human
beings as a dutr'. Rather, it is to build a corporate image with a purpose of increasirrg
profits to fulfil orqiinizational interests. It is interesting to note that according to Kant,
if an act is orit of self interest, it has no moral rvorth. lVhile Kant had viewed from an
rndivldual perspective, the issue remains whether acting for organizational interests
, ma1'be perceived as fuifilling self-interests within an organizational context.

3.3.1 Kant's Categorical lmperatives


\\-c have just utrderstooci the basic features of Kantian ethics i.e. acting based on gooci
rvi11 out of a sense of duty. There are still grey areas in determining rightness ol'aciions
here. \\,'hat then determines one's duty? Hor,v does one determine whether an act is
morally right? Utilitarianism states that consequences or results wili determine the I Fl,t*-rg"t*l
imperarives-Act
moral judgernent but I(ant believed that reasons alone can give us the absolute moral
only according ro that
truth and discover our sense of dLrty. He championed the two categoricai inrperatives, maxinr by which you
the basis of his moral principle, stated as follows: can ar rhe same time

r lst Categorical Imperative-Act only according to that maxim hy which 1,su will rhat it should
become a universal law.
cqn at the sane tirne will that it should become a universal law.
r 2nd Categorical Imperative
-Act so that you treat humanity, whether in your
own person or in that of another, always as an end and neyer as a means only. I k*rd rr*g*kil
imperative-Acr
An'imperative'is a command or duty whereas'categoricai' means'that is r,r,ithout so that you rreat
exception'. In understanding the First Categorical Imperative, maxim is clefined as humanity, wherher in
'a saying that expresses a general truth' or ;rule your own person or in
of behaviour'. The first categoricai
imperative seems to reinforce that our moral actions should not be guided by our own thar of another'always
inclinations, but guided by a sense of duty to the universal law. An action is moraily as an end and never as
right for a person in a certain situation if and onlv ilthe person's reason fbr carryilg a means only.

out the action is a reason that he or she would be lvilling to have every pcrson act on
in any similar sitrration.
I
I
66 Business Ethics
-n
a
i

rE
r{

An acr is morally
--l An act is morally right if and only if we can u,ill it to become a unlversal law of i

conduct. One's absolute moral truth must be logically consistent, free from internal
I

right if and only &

contradiction. For example, the act of Robin Hood, stealing from the rich and giving
T
if we can will ir to
I
become a universal to the poor is wrong beiause stealing is a universally accepted wrongful act. Also,
law of conduct. One's if Robin Hood were to place himself in the shoes of the rich whose things had been
absolure moral trurh stolen, certainly he would not have committed such an act because he would not like r
must be logically his own possessions to be stoien by others" ;

consistent, free from Let us create another simple business scenarit-r for f'urther illustration. Mr. A, the
General Manager of GAP Corporation, needs a job to be done by Mr. B within-one
H
inrernal conrradicrion. E
t

week. Mr. B wants to impress his general manager so that he will be considered for I

promotion in the short term while competing with his colleagues. H9 delegatcs the
(i.e. Mr. C) to complete the task within :
lob to Mr. C, his subordinate, and forces him I
one day at the sacrifice of Mr. C's famiiy obligations and prior commitments. If Mr.
B places himself in the shoes of Mr. C, he wouid realize that his act is unjust and
i

-
therefore u,rongful. Human beings do not like to be exploited so an act of labour I
K*lt Fi"a expl^itation contradicts the universal law of conduct. Mr. B's action also seems to
Categorical -1 reflect greed. Therefore, according to Kant, we should not act in such u'a]'s since it has _!
lmperailve simply ':
no moral worth.
requires us ro place
Kant's First Categorical Imperative simply requires us to place oursel-u'es in the
ourselves in the
shoes of the receiving-purtybefore acting. If the action rs goir-rg to bnng pain rathcr
shoes of rhe receiving
party before acting. than happiness to the ieceiving party, then the actiotr is not ethical. We should not
lf the acrion is going commit such an act on others. it calls for us to put asidc our sclf-interests. It also
ro brir.rg pain rather requires us to reason out and assess whether orlr act is universally accepted as good
than happiness to trs, To reiterate, an act is morally right if and only rf we can u,r11 it to becolne a ilnivers:r1
then ihe action ts nor 1aw of conduct. The action that we are going to take cannot be olclouble standards too.
erhical. \\/e shoLrlci If we commit an action on a certain person or situation, a sinlilar actiori lnust be taken
not commit such an on another person or circumstance. The acts of favouritism, discrimination ancl lying
acr on others. under all circumstances are wror-rgful acts according lo Kant's elllics"
We har.e just eiaborated on Kant's First Categorical lrlperative. i'Next. acc-ording
to the Second Categorical Imperative, an action is ntoralh'right for a irers()rr if end
a

oniy if in perforn-ring the action, the person do,:s not use otirers nrerel\' AS a 'rleans
for'advancing his or her interests, but at the same time respects and dcvelops therr t
capacity to choose freely what they want" {

'Never treat human beings as a ftteans but as on end.'

'^k;' *; hr;;-l Kant's view is that people, unlike things/objects, ought nn'er to bc merelr- usetl
For example, empio,vees may be hired for theii labour, skills, knou'ledge ancl abtlities,
berngs as a nteans but
as an end'. Kant's view
but must alr,vays be treated rvith respect as huntans. Relating lci the same business -r
ls tlrat people, unlike scenario discussed earlier, obviously, Mr" B is treating N{r". C as a means to an end. Mr.
I
rhings/objects, ought B has used Mr. C as a nleans to fulfii his ambition tc., be promoted in the short term. Mr.
never to be mereiy C is forced by Mr. B to complete a one-week job within orte day, an act of injr-rstice irnd
used. disrespect and therefore unethical according to Kant's Second Categorical Impei ative .

Kint's theory has survived ihrough the centuries due to the following strengths.

3.3.2 The Strengths of Kant's Ethics


I The First Categorical Imperative provides fir m rules to follow in moral
decision-making' No matter lvhat the collsequences ma)/ be lrr rvho docs
'lhis view
il, some actions are always wrong e.i:. iying, cheatinq, greed, etc.
is certainly congruent with religiorl:i dimensions and supporters of morai
objectivism.

$
Ethical Theories and Prrnciples 67

n The Second Categorical Imperative emphasizes on the importance of the


to an
humanrstic dimeniion, not using I treatingothers (humans) as a means
rights
end but as an end themselves. This principle is consistent with human
principles.
r The theory also highlights the importance of motivation and acting on
than
principles out of u r""nrJ of duty towards fellow human beings rather
fulfilling one's self-interest.
Kant's duty principles are certainly consistent with the Islamic concept
of
r
a Khalifuh o,, Man is directiy informed of their role--to be a leader/
"urtir. to
guardian in the universe. He has specific duties and responsibilities
accomplish as a vicegerent on earth'
Despite, the strengths, K"ant's theory had also been critici zedby
moral scholars'

3.3.3 The Weaknesses and Criticisms of Kant's Ethics


r what exactly has moral worth? Kant advocated that an act based on self
interest has no moral rr.-rrlh, which Seems to be too extreme a vietr''
It seems
emotions and
to suggest that the theor,v requires us to disregard personal
feeiirgs. Many moral theorists, especially advocates of moral reiativism,
feel

t}-rat Kant is too severe on this point. Humans practically wili always r'vant to
fuiiil self-interests since they are individuaiistic by nature.
r .is the categorical imperative an adequate test of rightness?
Kant said mr ral
rules are ivithout exception when, in reality, humans may not foilorv them
and act on the contrary. The categorical imperatives nay not holisticall,v
cover all asPects oflife.
I \\rhat does it mean to treat people as means? It is not clear tn'hen people are
re aliv being treated as ends or merely as means. Because
at times' irrdi"'iduals
freely choose to do it to fulfil commitmetrts without being forced b,v other
peopie. It is therefore not right to saY that under such situations, they
are

expioited and treated as a means rather than as an end'


L)espite the criticisms, Kant's ethics yield two important findings: I K-,i.,h"t )^kl ,-"
r It iirtroduces the principle of universalizability and emphasizes on respect for unportant findings:
.
pe rsoils. The universalizability principle states that as a matter
of logic, rve lr introduces
not be double the principle of
must be consistent in the judgements we make. There should
universalizabilitY
standards in our actions for it may lead to bias and disrespect towards others' and emphasizes on
r Kant's ethics provides a strong foundation for rights. Individual hunan rights respect for persons.
must be acknon'ledged and inviolable. . It provides a strorlg

Kant's Ethics certainly complements Islamic ethical values, especially thosc foundation for

r-elated to iltsan (i.e. benevolence and being kind), respect and adl
(i'e' justicel' righrs.

\Ve shail next look at Aristotle's Virtue Ethics Theorv, another deontoiogical
theory.

3.4 ARISTOTLE'S VIRTUE ETH ICS


THEORY
Aristotle lived long before the birth of ]esus Christ, what more Prophet Muhammad
SA!V. He was a renowned Greek philosopher. His theories are mainil' foulid in a
collection of writings called Nicomichean Ethics, compiled by his son, Nichomachus'
68 Business Ethics

in Century B.C.
4th
Arrs.rh3,h.-y---1 Aristotle's theory focuses on the virtues of humans. t,iterall1., virtue is a good
focuses on the virrues moral vaiue or character trait that manifests itself in habitual actiori (tsoatright,
ziloz).
of humans Lirerally, Virtue Ethics Theory recognizes the need for one to emuiate virtues such as honesty (a
virrue is a good moral sub-trait of integrity), courage, self-controi and respect for humans and non-humans
value or characrer to lead a rewardi4g life (Khalidah et al.,2010). The virtue of honesty, for instance,
rrait rhar manifesrs cannot consist of teiling the truth once; it is rather a trait of a person who consistently
irself in habirual
teils the truth as a general practice.
action.
Aristotle's Virtue Ethics Theory begins with a basic assumption that morality
is
both necessary and vital for human beings.
1

'ltis impossible to live with human dignity u,ithout beu.rg a de,velopecl rnoral
1
being. Morality is not aluxury that one can choose to Ltut,e or not to haye . It ts I
a pre-condition
Ar-r"d. r V-r* | Jor a li_fe with human digrLity..
rheory begins wirh ?
(Abdullah and Moham ad Zainol Abidin. 201 i)
a basic assumprion
A ccording to Aristotle,
rhat moraliry is both
- people who compromise rnorality are degraclng
necessary and viial themselves and they have missed their goal
in life. Aristotle strorigly believed that 1
for human beings ethics enable mankind to lead successful, rewarding lives.

3.4.1 The Foundation of virtue as a character Trait


Ar*"rk b.l.".d;;;I Aristotles theory throws back at each ir"rdividual a fundamentai questron, 'lthal
everyrhing in life has a
kind of person should we be?' The indlridual himself nrust rerlson this oLrt based,rr
or intelligence. Aristotle believed that everytl.ring in life has a sf_recific goal
specrlic goal, rcy'()_t or felo-s rn
in (,reek. llniy alsir Greek. It may also perhaps be referred as 'objective or purpose'. In or-cler to
iive as a
peritaps be refr:rr..'ci .ts human rvith dignity, one should strive to achieve the te /os fbr a rern,ardipg iife
'obiec t ir,,e Lrr pLr r.pc)se'. Accordrng to Aristotie, in order to achieve a rewarcling life, firstl,v, on" h"s
to live
in a society n'hich promotes justice. It is the responsrbiliiy of politicraps a1d social
t*"d;;t*;l scientists to develop a just society and ensure sociai order to atlain et.rcjairnottLa,
a Greek
a rewarding life, rvord to signify ultirnate happiness or overall wcll being. Secontlil,,
inclir,idgals rrcr.ci
firstly, one has ro live to engage themselves with good friends to support thenito achieve
lheir eyclairTtoTtLa"
in a sociery which These tu'o conditions clearly suggest that humans are socrai berngs
promores jusrice. li
rvho clepencl
is on others to develop themselves for a rewardir-rg 1ife. T'hirdly, ArisLtle
rhe responsibiliry of note<l that
individuals need material or physical provisiom fn. a good [ife. Irinal]r,.
poliricians and social irrdrvicluals
need to develop and cultivate their potential. The firsl tliiee con.litiorrs
scientisrs ro develop nrentioned arc
c'xternal factors, whereas the last one is an internerl ancl intrinsic
a just sociery and iactor for rnciir.idual
sllccess and happiness. The last factor thus throlr.s back to tl-re inclir..icltral
ensure social order to as responsible
anain eudaimonia,
beings' He or she is accountable for his or her own cler.elopmcnt, inilepenclent
a of the
Creek word to signrfy three external factors. Aristotie's Virtue Ethics Theorl, fo.ur., on
this internal thctor
ukimare happrness or 'n,ithin the individual self.
overall well-being. For Aristotle, morality begins with oneself-. it i-, tl're characrer t,i a
pcrsorr. It
begins with seif-love-one's love for his individual self. For exanrple,
if A loves
himself, he will strive to improve in all aspects, be jt physical, rnteilectual,
ForArilb,n.o,.lrl emotionai
or spiritriai. He will not involve himself in destruitive activities rvhich chalienge
begins wirh oneself lr
his dignity as a human being. Self-love is therefo- e a pre-coni-lrtion
is the characrer ofa fbr a yirtuous
person. k begins wirh Person according to Aristotie- Morality requires pcople of good character. Only then
self-love i.e. one's love can they do good deeds. Self-love, in facr,p.ori.1.r"the c.ltiilyst to
develol-r hurnan
for his individual self. potential to the fullest.
Ethicai Theories and Principles 69

3.4.2 Moral Virtues within Aristotle's Definition


Aristotle defined a virtue as 'an activity of the soul', implying a ratiorral principle.
filr.d.d.fr.ra
Underlying the definition of a virtue is a very specific view of human nature. Aristotle virtue as'an acrivity
distinguished two dimensions of humans-the rational and the irrational dimensions. of ihe soull in-rplying
The rational dimension should be dominant. it distinguishes humans from non- a rational principle.
humans. Aristotle refers to our natural desires and inclinations such as appetite, He disringuished
breathing and sexual desire as natural dispositions. Tl-rese dispositioirs should be rwo dimensrons of
controlled by rational thinking and prudence. Natural desires and inclirrations should humans, the rarional
not be left uncontrolled. Once these desires are controlled by one's rational thinking and the irrational
ormenslon_
and intellect, his or her acts will be virtuous. Aristotle admitted that virtues cannot I ne

rational dimension
be developed instantaneously; they should be enhanced and maintained throughout
should be dominant.
an individual's life.
Onc may ask,'What are moral virtues?'According to Aristotle, moral virtues are
habits that enable a person to live according to reason. He also introduced the concept
of 'mean' or 'moderation' in actions. He does not assume that there is a universal
standard that applies to ali pecl Ie (Abdullah and MohamadZainol Abidin, 2011). It is
therefore relative in scope and differs between individual persons.
'\\'herr a person lcnows and chooses a reasonable middle ground between going
too -far or nol enottgh irr his actions, ernotions and desires, "moral t,irtue . .. is a
mean betv,eg71 {tyo vice s, one oJ excess and the other o.f deficiency ond .. it aims
at !,itting a n'Le(ui in fe eling (desires) and actions.'
(Boatright, 2006)
For exatnprle, rvitll respect to ti-re einotion of fear, courage is the virtue of
responding to fear ivith a reasonable amount of daring, whereas being con,ardly is
a r.ice of not being daring enough in response to fear, and recklessness is the vice for
being too daring in response to fear.
One may'ask,'f churacter troits are relative, hoy,does one determirte yuhot is
fPrrd.*. -,h.
reasonable?'According to Aristotle, prudence is the virtue that er-rables one to linou,
virtue thar enables
rvhat is reasonable in a gir.en situation. Prudence literally means'being cirreful and one to know whar is
sensible' in ;ndividual actiot-t. In today's life, certainiy, one has to be knorvledgeablc in reasonable in a grven
the fields aitd are as of decision-rnaking to be sensible. situarion.
Let us recall from Cl-rapter 1 the moral values that are universally accepted as
good, u,hich in fact covered many of the virtues identified by Aristotle:
r Honesty, sinccritl,, reliabiiity, trustr,vorthiness, dependabiiitl,, patience,
prudence, bencvolence (kind and helpfui), compassion, courage, courtes,v-,
f riendliness, moderation, self-control, toleration.

I Interestingly, Aristotle also included pride as u'ell as shame as virtues. !\re


fA...dr.g * Arb.d.,
a 'vtrtuous man' rs rhe
should be proud of our accomplishments (not arrogant) and ashamed of our man who has taken
railures.
rational control of
One may ask, 'l{/ro is the virtuous man?'According to Aristotle, he is the man his life, cultivated his
rvho has taken rational control of his life, cultivated his naturai dispositions int.r moral natural drsposirions
virtues, and has ahvays throughout his lifetime found happiness/pleasure/satisfaction into moral virrues, and
in his actions based on these developed virtues. This description, though ab::tract and has always throughoui
his lifetime found
descriptive, has been used to define a rational man in the legal profession. Likervrse,
happiness/pleasure/
since this definition is legaliv accepted, it is therefore appropriate to use this definition
sarisfaction in his
for a virtuolrs person, as a guide in the development and conduct of indiviclual rnoral
aciions based on these
action.
developed virtues.
70 Business Ethics

3.4.3 The Strengths of Virtue Ethics Theory


Virtue Ethics Theory suggests that one is assessed by his or her moral character; not
specific actions. An individual who has developed good character traits (virtues) is
perceived to be a morally good person, and vice versa. It therefore provides a criterion
for evaluating right or wrong actions of individuals based on character traits" It is thus
a value-based theory
This theory offers harmony between hur.ran intellect and desire, the actual
physical make up of human beings. It identifies what is the right course of action to lead
a rewarding life" Human desires have to be conlrolled. Virtues have to be developed
and enhanced through repetitive training and they will harmoniously foilow by habit
in the process. Moral virtues are well explained in an intellectual manner, though not
objective but logical to describe the actual human nature which performs right and
wrong acts in life"
This theory acknowledges that humans commit wrongfui actions due to natural
disposition. To develop virtues, one has to control his or her desires through rational
thinking and wisdom. He or she must be prudent in action, a practical observation in
human behaviour as a way of life.
Virtue ethics also provides a useful criterion for evaluating sociai institutions and
practices. Besides connecting thevirtues to the conception of a fuller li{e, it reminds
one to examine how character traits are formed and conditioned by the environment.
(Please read more elaboration under sub-section 3.4.5--Applying \rirtue Ethics
'I heory rn Business).
It offers a more holistic understz,nding of iife wrtl-rin business" Apart from simply
describing people as good or bad, right or wrong, virtue ethics encourages a fuller and
detailed description of an action through human characters. For example, relating tcr
a conflict of interest scenario, a person involved in such a situation lacks self-control,
honestl, and integrity. He may be greedy as wel1l

3.4.4 The Weaknesses of Virtue Ethics Theory


Virtue ethics does not seem to have room for basic concepts such as rights and
obligations, so as a theory of ethics, it seems inadequate in dealing nith big issues" It
does not always have a view about what makes an act right or wrong frorn institutional
dimensions.
Aristotle's 'mean'principle does not easily apply to all r'irtues. Compassion, fot
example, at its extreme may become vice. But horv do lr,e determine that it becomes a
r.ice at its extreme?
It may be seen as a 'selfish' theory by morai scholars since the focus is or-r inclividual
development rather than the effect of one's actions on others.
Aristotle was writing in the context of the 4th (lentury BC Greek city state, in
which inequalities between noblemen and the slaves were the norm. The whole of
human life underwent transformation. Today, people have reasonable incomes and
open slavery is no longer a common feature. Cultr-rral differences may also influence
characters.
i
Aristotie's virtues such as bravery and honour may be regarded as mascuiine,
ignorrng feminist character traits such as humilrty and ernpathy. Aristotle regarded
humility as vice during his time, whereas humility today is ;r noble character of people -
I

with integrity. It is a virtue to be consciously en-ruiated and internalized fiom religious


dimensions.
a
t

L,
EthrcalTheoriesandPri.nciples 71

Some philosophers have argued that virtue ethics is not consistent with the
findings of -od"i, Psychology (Harmon, 1999; Doris,2002).In a study invoh'ing
it .oto[y students at Princeton University Divinity School, a conclusion was made
"p..ror', is determined by his external situation, not by his moral
that a behaviour
character (Velasquez, 2012) -
As with anytth.. man-made theories, there are weaknesses as wellas strengths.
until
interestingly, Virtue Ethics has survived for centuries and has been dorninant
scholars have argued on
today (Ab-duilah and MohamadZainolAbidin,20ll). Some
the exient of applicability of Virtue Ethics in the world of business because
of the
peculiarity of it . busineis world (You may recall that we discussed this in the last
section of Chapter i). However, it is still relevant and applied by people who are

conscious aboui the internalization of virtues for a good life as convinced by


Aristotle
during his giorious davs. How can we apply Virtue Ethics in business?

3.4.5 Applying Virtue Ethics Theory in Business


In business, Virtue Ethics Theory couid be applied directlyby holding that the virtues
of a good businessperson are the same as those of a good Person'
ifter all, we have noted that business is a part of life. Therefore, it goes lr'ithout
saying that business people have to emulate virtues as part of thelr character
t.rlt, ihut more rvithln a healthy organizational culture context. \Ve note that
are
businesspeople neecl to engage themselr,es in tjusiness-reiated areas since ti-rey
,"pr.r"nting their organization. They need to achieve basic organizational goals
s',.,.1, u, proiit making. Horvever, organizations are made of
humans r^"ho have the
intelleci to assess rightful and rr,rongfui actions, while baiancing with their own
desires a1d interests. So, as humans, they have to consciousl,v ernulate virtues. For
exampie, good business managers must care for their employees and customers
although they hare to make decisions from various dimensions and ievels. We
discussed this in Chapter 2.
Business actions must be seen to be fair and just and refiect a high sense of
respecr for others as a human right and social accountability. A ristotle's Virtue Etirics
is universall,v relevant from business contexts, what more from humanistic
itill
dimensions.

3.4.6 Virtue Ethics from lslamic Perspectives


Aristotle's principles are certainly relevant from Isiamic ethics dimension,
u,hich integrates the inner and outer aspects of an individual's life and promotes
rationalization through human inteliect; moderation and balance betu'een physical
and soul developrneni (lU" Manzur, 1990; Miqdad Yaldin, 1973; Al Maududi, t978).
In lslamic Ethics, there needs to be balance between individual physical devcloprnenl
and soul development, although priority is on the soul development; crucial to the
indivrdual's behaviour and character development (Norazzah Kamri, 2C10; Ibn,
Manzur, 1990).
Aristotle has defined a virtue as'an activity of the soul'. Aristotle's Virtue Ethics
theory thus emphasizes on soul development, compatible with Islamic ethics, which
concerns nkhlaq, i.e. hlman nature, attitude and habit (Ibn Manzur, 1990).
Virtue Ethics, as a value-based deontologicai theory, seems to har:monize well
wrth ilm al-akhlaq in Islamic ethics; the building of aqidah (i.e. the cotrviclron and
beliefs of islamic faith) and one's character as a foundationfor itnan (fanh) and ihsart
(bener.olence; being kind and heipful). Ilm al-okhlaq, as a branch of knor'vledge, is a

I
I
I

I
I
72 Business Ethics

science which deals with the ways to maintain virtues at the optimum level, i"e" to
avoid wrongdoing and do what is right and desirable (McDonough, l9B4). Aristotle's
theorywas no doubt silent on human submission to God but his rational theory gained
keen interest among influential Islamic philosophers such as Al Farabi and Ibnu Sina.
ri
Al Farabi was known to be an expert on Aristotle's moral philosophy.
In addition, Aristotle's theory was also intensely studied by Imam A1-Ghazali, 4
who noted his logical thoughts with epistemology of knowledge. Despite the contrast ?

and different ideologies and viewpoints of both scholars, AI-Ghazali in f'act built i{ ---
t
di
his Sufism principles from Aristotle's logical thoughts on the natural disposition of
humans. Al-Ghazali even made full use of the Aristotelian theory of the golden mean s

to expiain the balance between the human body and soul clevelopment. In fhct, Al-
Ghazaii composed three works on Aristotelian logic i"e. Mi'yar ctl-'ilm (The Standard
Measure of Knowledge), Mihakk al-nazar f'l-mantiq (The 'Ibuchstone of Proof in '4
.l
Logic) and al-Qistas al-mustarlim (\'he |ust Balance). ,}
Aristotle's Virtue Ethics has been one of the most influential contnbutions rn the *
study or philosophy. Virtue Ethics has survived for centuries as an ethica] theory for *!

reference despite criticism from moral philosophers. *.*


Following the Virtue Ethics T'heory, we shall cover another deontologrcal theory
which reiates to the virtue of caring for others-Ethics o1 Care.

3.5 ETHICS OF CARE

Many ethicai tireories assume tha,t one has to be impartral to nrake ethrcal decisjons"
We should detach ourselves frorn an issue to be resolved, put aside our emotions
to make objectir.e and effective decisions. Consequentll,, u'e should set aside any
speciai relationships that we have with particular indir.iduals, relatives and lrrends in
determining what we should do, especially at the r'r,urkplace .

As a supply and material services manager, responsible tor negotrat urg Lontracts
for the organization, Mr" A should avoid any possibility of oflering contracts clirectiy
to relatives, friends, etc., which is unfair and nepotistic, and tl"rereftrre uncthical. A
utilitarian advocate lr,ould assess from the good and bad conserlr:ences of such actions,
especially on issues related to efficiencp Kant's first calegorical irlperative mav share
the same view since it does not seem to follow a r,Lniversal lar,r,of justrce anci fairness.
Perhaps, Aristotle's Virtue Ethics ma1, require further anaiysis to justify the rishtness !

or wrongness of such actions based on the reasoll or purpose and r.irtues oi l1're person
himself, such as honesty, compassion, etc. Ei

Erh., G;;;-1 Interestingly,, contrary to these theories is Ethics ,rf Care, developed 1-,v *i
h
"f
eth,c thar emphasizes psychologist, Carol Giliigan, seen as a feminist theory by the West, a ner,r. approach to k
moral development, though not quite in eastern dimensions as caring is a value in a s
caring for the
concrete well-being society u.hich promotes collectivism rather than ir-rdividualism. fhis theory requires
of those near to one to be partial in resoiving ethical issues. Ethics of Care is an ethic that emphasizes
us. lr emphasizes caring for the concrete lvell-being of those near to us. Tt emphasrTcs on preservirrg and
on preserving and nurturilg concrete valuable relationships.
nurturing concrere
We shouid care for those who are dependant and related to us. A moralit1, of care
valuable relationships.
rests on an understanding of relationships as a response to another in their terms (Lyons,
Also, this rheory
i983). According to this 'care'view of ethics, the nr:,ral task is not to fbllow universil anC
requires one ro be
partial in resolving
impartial moral principles, but instead to attend ancl respond to the good of particular
ethical issues. concrete persons with whom we are in a valuable and cJose relatronship (Blum, 1994;
11
Ethical Theories and Principles /J

Dillon, 1992). Compassion, concern, love, friendship and kindness are all sentiments or
virtues that normally manifest this dimensron of morality (Velaquez,2012).
In applying this ethicai theory, it is also irnportant not to restrict the notion of t---.--
I A communrtarran
relationships between two individuals or a relattonship between an individuai ethic is an ethic
"oncrete
and a specific group. Advocates of Ethics of Care have emphasized that it should that sees concrete
encompass the larger system relationships'that make up concrete communities. It communities
is classified as a communitarian ethic, an ethic that sees concrete comtnitnities and and communal
communai relationships as having a fundamental value that should be preserved and relarionships as

:iraintained. For example, in an organization where employees suPPort the employer's having a fundamenral
value rhat should
business r.entures, the'caring' culture should be cultivated and nurtured since there is a
be preserved and
.oncrete relationship between the employer and employees. The organization's success
mainrained.
ivould not have been made possible without the invaluable contribution of the employees
aithough the emplove. has pioughed in capital and taken risks to spin the busitless.

3.5.1 Justification to Support an Ethic of Care


The identity of oneself (i.e. rvho i am) is based on relationships with other people.
rn indir.idual human being cannot exist in isolation from caring relationships rvith
'fo start r'vith, we u,ere born and cared for by our parents; we were taught by our
'rthers.
teachers in schools, lecturers in higher learning institutions, etc. We join the Iabour
mark:t and lvork in organizations as part of the workforce. We live in a community
sharing the same language, tradition, cuiture and other benefits that define our
,hr,sica1 and spintual needs. We emulate a culture and tradition, derived from people
,rtlr-rnd us. lt is also these concrete relationships that make us understand our ort'l.t
sr-1f. 1n i'act, the value of oneself is uitimately derived from the value of the comnrunity.
, heretbre, it is pertinent for us to nurture a caring t alue among those who havc
pported us to be nhat 1.,,e are toda1,, not only fro,.r an individual dimension but fronr
.' r,ocietal dirnension, inciuding the business arena.

3.5.2 Distinguishing the Three Forms of Caring


.hics of care classifies three forms of caring-caring about something, caring after
:.0rreore, and caring for someone.

3.5.3 The Difference between the Three Forms of


Ca ring
.{ccortiiris to Ethics oiCare, there are three forms of caring, as rllr:stratecl in Figr-rre
\,-r- rvi1l discuss thern in the following sections.

i ...,:re 3.4: -Ihree forrns of caring according tc Ethics o{ Care


4 Business Ethics

Caring about something


T'his relates to the kind of concern and interest that one can ha\re for things or ideas
where there is no second person i:r whose subjective reality one becomes engrossed.
For example, the'care'seen in bureaucratic service institutions such as the gr:r,ernment
social and rvelfare departments, water works departments, etc. 'Ihough they 'care' for
the needs of the people concerned, the'care' remains'objective' and'distant'. There
is an element of impartiality since as long as the sen,ice is provided, the'care' is seen
and 'delivered' to the appropriate people or parties who need such services" However,
caring after people in this manner is not considered as 'caring' from the Ethics of Care
perspective.

Caring after someone


This relates to caring for someone who requires our supporl or services because of
some limitations that the person is experiencing. For example, Miss A is sick and
requests that we send her to the hospital. Wc offer our help out of syrnpathy. This is
seen to bc caring, no doubt, but we are helping because the person needs he1p. Ethrcs
of Care does not classify this as'caring'too.
Th" krd;f .*. I
promoteci by Erhics
of Care is 'caring Caring for someone
for someone'. lr is 'I'he kind of care promoted by Ethics of Care is 'caring {,rr soineone'. It is the kind
engaging and deep
of care shown by a mother to her child. It is engaging and deep, r'r,itir feelings and
wirh feelings and
emotions. The'caring'is not'detached'br.rt 'engrossed' rn the person and atlempts to
erlotion. The values
see the norld through the eyes and values of the person (\relacluez, 2012). 'Ihe values
rhar maniiesr rlrt
r,rirtLre of 'carir-rq' in
that manifest the virtue of 'caring'in this situation arc c()nlpassion, concern, [ove,
f riendship and kindness.
rhis situarion are
cor-npassion, concern. Aptly, the caring is for the persons'general nell-being. It involr,es a tu,o way
love, friendslrip and process of nurturing for personal individual development" Ihe caring process; should
kind ness. not, however, develop or foster over-dependence on ()ne another.

3.5.4 The Moral Demands of Ethics of Care


rh" Ek;;;i;;-1 Ethics of Care theory emphasizes on two moral demands:
theory emphasizes on
two moral den-rands. r We exist in a web of relationships and we should preserve and nurture those
. We exist in a rveb concrete and valuable relationships.
of relationships and r Each one of us must exercise special care for ihose r,r,ith u,hont lve are concretely
rve should preserve related by attending to their needs, vaiues, desires and concrete rvell-being"
and nurture
Hou,ever, there are two important issues to note under this theor1,.
those concrere
and valuable 1. Not all reiationships have value, and not all would re sult in the dutics of ca'c
relationsh ips. towards others. The following reiationships lack the value that an ethic of
. Each one of us musr
care requires:
exercise special
care for those
r Relationships in which one persoil attempts to dominate, oppress or
with whom we are harm another-
concretely related o Reiationships characterized by hatred, violencc:, disre specl and
to by arrending viciousness.
ro their needs, o Relationships characterized by injusticc, exploitat ion and harm to others.
values, desires and
Therefore, wc are not obliged to maintain or nurtrlre these relationships A
concrete well-being.
relationship that exhibits the virtues of compassion, love, concern, friendship
and loyalty should be maintained and nurtured.
Ethical Theories and Pr-inciples 75

2. it is important to recognize that the demands of caring are sometimes


conflicting with the commands to uphold justice. E.g. Amy is the human
resource manager of ABC Sdn. Bhd. By offering a job to her relative out of
being caring, it may be in conflict with the demand to be just and fair i"e" by
offering the job to someone who is better qualified than her relative"

3.5.5 Ethics of Care Theory from lslamic Contexts


Although the non-caring demands and reasoning based on Ethics of Care (as
highlighted in the first issue above) seemsvalid from rationai thinkingand judgements,
it is conflicting with Islamic ethics. Isiamic ethics totally beiieves in rnaintaining a
harmonious relationship based on peace and compassion. Caring is preached even
tor enernies. The classic story of Prophet Muhammad SAW visiting a sickly |ewish
o1d ]adv, his neighbour who used to throw human waste in front of his house, clearly
suggests that in Islam, there is no relationship that is free from care of others" In fact,
believers are encouraged to e..en patch up relationships lvithin three days after a
conflict. Faiiure to do so is a sin in the eyes of God.
Another episode was how the famous Islamic military leader, Salahudin Al
Ayubi treated Richard the Lion Heart and the Crusaders during the Battle of ArsLir to
capture ]erusaiem from the Muslims in 1192. When Richard was suffering frorr fever,
his appeal to his enem),, Salahudin Al A1.ubi, to send fresh water and fresh fruit was
an,su-eretl as a religious obligation to help those in need out of care, even for an enemy.
Salahudin's positive response to send frozen snow to the crusaders, to be used as u,ater
and fresh frLrit during the war is another proof that the yirtue of care is promoted rn
lsian under a1i circumstances (History Learning Site, n.d.).
Believers are nell reminded in a Quranic verse:
'l.l one tltnong the Pctgans ask thee
for as1,lum, grant it to him, so that he tnay
hear lhe \\rord of God; and then escort i,im to where he cart be secure . ?-,lrl.s i-s
becttLse they are men without knowledge'
(Al-Quran, At Taubah, Surah 9 Verse 6)
The sprrit of caring is beyond bad relationships and enemies in Islam. These
sentiments are aiso reflected by the emphasis on promoting ukhuwrtft among the
ummah, despite cultural diversity and other demographic differences.
The second conflicting issue between caring and justice seerrs to bc an ethical
tlilemma but may be resolved by being honest and transparent in the process.
I{elating to tl-re above scenaricr, perhaps Amy, the human resource mana!'.er of AB(l
Sdn. Bhd. could still help her relative to be considered for the job out of care by
encourasing her to apply for the vacant position with other interested candidates.
,o!{ver, Amy rvill not get invoived in the shortlisting process or eyen sit in ihc
irttervieri'session with panel members. She will choose to be an independent party
, : the decision-making process as a professional employee. If her relative turns out
to be the raost suitable candidate to fill the position, it is the decision of the rnterview
panel by which Amy is not a member. Amy still displays a caring attitude by giving
a chance for her relative to be considered for the vacant position. However she does
iiot use her power to directly appoint her relative into the position to uphold justic.e
, r the recruitment process.
Ethics of Care seems to focus only on the virtue of care, much as there are many other
i:rod values that hrimans need to internali ze in life. Certainll,, as we had noted eariier,
lhe vaiue of caring encompasses several other sub-values such as love, conrpassion, etc.
Let us next understand some of the strengths and weaknesses of this theory.
/O Busrrtess tthics

3.5.6 The Strengths of Ethics of Care


It forces us to focus on the moral value of being partial towards those concrete persons
u,ith whom we have special and valuable relationships. fhe closest are our parents,
immediate family members, neighbours, colieagues at the wr.rrkplace, etc. 'fhey are
those who have made.us what we are today. This is certainly a ctvil and humane action,
deeply rooted and supported by all religious principles, irrespective of differences in
the fundamentals of beliefs.
It obligates one to realize the moral importance of responding tn such persons as
particular individuals with characteristics that demand a response to them that we do
not extend to others. It reminds us of the moral obligation to care fbr these peopie who
are speciai to us in all ways.

3.5.7 The Weaknesses of Ethics of Care


2:

Ethics 'f Care can degenerate into unjust favouritism. As favouritism is an act o{ i
injustice,the.over-caring,behaviclurmay1eadtoinequa1ityoftreatmentzrmongthosc
we are fond of, leading to unfair treatment towards others. For exaurple, ii Amy, the
human resource manager, becomes too engrossed in wanting to hclp her niece to get a
iob in the same organization, she may directly offer her niece ..r.tthin the porver given
to her and not consider the applications of all otlrer caudiclates; an act of injustrce
and lack of professionalism since it will violate organizational polrcies ancl guidelines,
nhat more justice and rights principles.
The Ethics of Care demands can lead to stress and 'burn-out' I his ethic seems to
deniand that people sacrifice their orvn needs and desires to care for the r,vell-being of
others. While we may {ocus our cnre on immediate farnilv members, neighbclurs, etc.,
since this theory requires one to care like 'carir-rg for sorteone' a.,. earlier described,
over-caring may lead to stress in the process of balancing the myriad of needs oiothers.
Assuming that over-caring rnay lead to 'burn-out', it may bc minimized by settrng
priorities and by being honest and sincere in the relatrorrship in the spirit of carins. \\'e
need not be extreme in the caring process. \4re certainly have to exercise jr-rdgement
and prudence in our actions. For example, our parents rvish to see Lls visiting them
this weekend, If we are very bus1,, rve just har,e to say so aircl suggest other ways to
shorv that we care for them. We can call them often, e-mail a note or evrn suggest
another day to visit them out of the caring feeling and obligation. \\re do not have to
endure the stress of maintaining the carrng feeling, seen to be a sigr-r of insrncerity 1r-r
our relationship.
Despite its weaknesses, Ethics of Care reminds us of the rmportance of ,

ir-rternalizing the virtue of caring from not oniy an inclividuiri perspective but also ,.

from communitarian dimensions. As socialbeings, we are obligated to complement


one another as a two-way process to nurture harmonious relationships, especrelll'
arnong those who are closely a.ssociated with us, be it irnmediate family members, ;
business colleagues, etc. It is certainly a call from ali rclieions fbr humans to develop
nobie values such as coinpassion and caring, universaily accepted moral virtues"
Perhaps, we must continuousiy remind ourselves rvith this slogan, 'Caring is sharing'.
Tire extent of caring is no doubt subjective and relative since it is dependent on the
rviilingness of oneself to reach out to others, the lol,ed oiles as lvell as e.,reryorle else in
the webr of relationships that we sustain in life.
Let us examine the following business case before we go on to the Theory of
Rights. 1
Ethical Theories and Principlesr ,,77

Rayland lnrernarional, a mulrinarional corporation, has been operating at Senawang lndustrial Area
for rhe lasr 15 years, producing microchips for the export market. The company provides employmenr
opporruniries for 1,000 Malaysians, holding execuiive and non-executive positions. lr has been
providing a competitive compensation package to all employees.
High performance employees are further rewarded with performance bonus over and above
rheir yearly salary increments to moiivate them ro continue performing well for murual benefits. The
company has also been paying bonuses to all employees for rhe last five years due ro commendable
bLrsiness performance. The microchips have been extensively used for rhe prodr-rction of mobile
phones anC computers, highly demanded in today's global market
To everyone's shock, on 31 August 2010, Rayland lnternational, Senawang caught f rre The whole plant
was burnr down and losses incurred were massive. En. Ridzuan, the chief linancral controller, esrimared
rhe losses ro be RM30 million. The chief execurive officer (CiO), Mr. Andrew Leong, r.vhen con[acted was
srill in a stare of dilemma, rrying ro find out what led ro the plant's fire. However, he felt greatly relreved
afrer realizing rhat the company had secured a fire insurance policy from Allianz lnsurance.
,: Following rhe frre incidenr, rhe Board of Directors (BOD) immedrately met to discuss the
nexr steps ro be raken. Should rhe Senawang plant be rebuilt or should rhe operation of Rayland
'lnrernarional be shifted ro other ASEAN nations such as Vietnam or Thailand where labour cosl rs
comparatively lower? After all, business has to continue since there is a readv matl.er lor rnrc.rochips.
Furrhermore, Rayland has esrablished a strong network and good reputation all rhese years However,
should ihe company also consider some other related busrnesses as a diversil'rcalion straiegy . nce
ihe Senai,vang planr has been forcibly shut down due to the fire?

AssLrme you are N{r. Andrelv Leong. What will be your immediate steps to addrcss
the prc,blerr-r after the plant caught fire? As a CEO of Rayland Internation?l}, yg11 or.
also a men'ber of the BOD. According to the Utilitarian Theory of Ethics, should the
piant be rebr,riit or otheru'ise? Will your decision differ if you were to apply Aristotle's
\-irtr.ie Ethics and Ethics of Care?
-r"e-rt, u,e shali cover the
'Iheory of Rights.

3,6 THEORY OF RIGHTS

i:.iqhts plar. an important role in business ethics; what more in moral issues. The
political struggles in Egypt and Syria, the survival of Rohingya Muslims in Myanmar,
the future of Gaza Paiestinians, the cries of women activists to promote gender equality
and the recognition given by the West for the rights of homosexuals are i'nough to
explain the emphasis placed on human rights in today's global environment.
In the husiness environment, employers, employees, consurrlers) the generaipublic,
etc., each have their own rights. Employees have their right to be treaied fairlv bv
,'nployers for the services pror.ided in the production of goods and services. irrnployers
also har.e their rights to minimize cost of production by retrenching re,iiurdant staff
!r 1irl1
'.;ring an economic crisis to sustain business. In the marketing arena> consumers have
7B Business Ethics

their rights to enjoy quality and safe products. Likewise, producers and manufacturers
also have their rights to produce the kind of goods that reap rnaximLrm profits for the
high risks taken. Practically, everyone is claiming for their rights nowadays.
I'he concept of rights, though humanistic, can be confusing and manipulative if
not well-understood because everyone claims that they have rights. We may realize t'
that rights can be conflicting and the claim of a right by a party is frequentiy the
beginning of an ethical debate rather than an end (Boatright, 2012). Nevertheless,
'right' is an important ethical concept that needs io be appropriately understood E

within individual as well as social contexts. *


ia

*i

3.6.1 Conceptualizing Rights


Al1 religions acknowledge that humans and non-humans have rights. The c-oncept of
rights is certainly closely linked to justice and fairness. Horvever. in order to fbcus on
h
rights as an ethical concept, ethics scholars have attempted to separate the concepts
of right" and justice although they are ciosely related. \{e shali firstly examine the
Theory of Rrghts" ff-.
*
R,ghrr.r. b. --1 United Nations [Jniversa] Declaration of l{uman Rights in 1948 set forth
explaineci as basic human rights for all people. But what are rights? ltights can be explained as
entiiiemenrs t,-, entitlernents to something. To have rights is to be cntitled to act on our owtl or to be
scrnethrng. To irave treated by others in certain rvays without asking permission ol anvone. T'o have rights
rights is ro be er.rrrrled is to he free and independenf of someone's good r.vill" In r:ther u,ords, it gir.es a person
to act on our own freedom to act in the manner he or she deems fit r'r,ithout lravinq to follol Some terms
or ro be treared by
and conditions laid down by others.
orhers in cerrain
ways wi:hout askirrg
Although today's rvorld promotes standarclization and Lrnilbnnity at the
per inission 6f 2nyr;ne.
workplace, an employee has a right to 1\'ear any outfit that si-rit,c hi-c or her taste and
colour as iong as it is decent and suitable lbr work. It i'nav be r,iolating rinc's right if
another person or colleague comments on one's dressrng because ever)'one has a right
to dress up in the Inaniler he or she u,ishes as a cir.i1 hr.tmart being.
Conceptually, rights may be classified into legai and moral rights, spec"ific and
general rights, and negative and positive rights (Boatright, 2009 aiid 2012; \relasquez,
ti
2012). Figure 3.5 summarizes the various types of rights.
*!

Negacive and
posirive righrs

Figure 3.5: The various types of rights


Ethical Theories and Principles

3.6.2 Legal and Moral Rights


Legal rights are those which have been recognized and enforced as part of a legal f t"grl tighu^*-
system or law. For example, the Employment Act 1955 (r ith revisions) in Malaysia lays those which have
down provisions to protect workers from being exploited by employers. Tire detlned been recognized and
legal rights of employees are out of a legal system which states employees' rights to enforced as part of a
ensure justice and fairness. legal system or law.
On the other hand, moral rights are those entitlements that we ought to irave out of
general ethical rules or principles. Moral rights do not have to depend on the existence of
lMr"hqht*r*h"*
entirlemenis rhar we
a legal system to determine the individual right. For example, the right to be treated with
oughr ro have out of
respect by others is a moral right of any human being. Although Mr. A is a floor sweeper
general erhical rules
in the streets, he has a moral right to be respected as a human being. We treat hiin well or principles.
bv acknorvledging his contribution and supporting him in any way. It challenges his
right if rve \r,ere to mistreat or humiliate him because he is undertaking a low income job
in the streets. It is a moral right to act fairiy towards everyone irrespectir.,e of differences
out of respect for human dignity. Moral rights is synonymous with natural or human
rights which shall be covered i,- greater detail in Section 3.6.5.

3.6.3 Specific and General Rights


Specific rights reiate to and involving identifiable individuals or parties e.g. in lSprofl-Eh"
contrarts and agreements. It creates mutuai obligations, duties and commitrnents - relare ro and
between the parties. For example, when we sign a sales and purchase agrcement to rnvolve rdenrhable
buv a house, there are specific rights that are defined for both parties, be it the buycr individuals or parties
rr seller'der.'eloper. One of the rights of a buyer is the ou,nership of the property n ithin e.g. in conrracrs and

: stipulilgd perlod of 18 months. Failure of the de'r,eloper to fulfil the buyer's right rvilJ agreements.

obligate him to pay corrpensation to the buyer for the inconvenience caused. '1'hrs is a
specific right of the buyer, clearly written in the contract through mutual agreement
that is binding between the two parties. lcrrrrrk,gh"
involves claims
General rights, on the other hand involve claims against everyone, or huntanity
againsr everyone, or
in gencrai, e.g. freedom of speech, the right for survival, the riglrt to be resl'rected as a
humanity in general,
PerSon. etc Relating to freedom of speech, if Mr. A stops Mr. B frorn givine his viervs e.g.freedom of
Lr\'.r a concern or issue of interest, such an act is seen to be vioiating Mr. B's riglrt to speech, rhe righr for
erpress ]rimself as a civil human being. In fact, enforcernent of general rig]'rts rests survival, the right to
'rith the n-hole community. be respected as a
person, etc.

3.6.4 Negative and Positive Rights f Nrgrr-, tghtt^"


correlared wirh
Negative rights are correlated with obligations on the part of other people or parties
obligations on rhe part
to conscit-rusly refrain themselves from acting in ways that interfere u,ith one's i)\\.11
of orher people or
rreedon-. of action. It relates to the right of human beings to
be free from outsirlt, parries to consciously
interference. Examples of negative rights are individual right to property ar"rd rvealth
refrain from acting
accumulation, one's choice of religion and beliefs, freedom from injury or tl're right in ways rhar interfere
lbr survival, and the right to individual privacy. Negative rights, thus, requir-e another with one's own
person or party to respect the rights of others by not interfering in their pcrsonai life freedom of action.
\)r undertakings.
Positive rights, on the othe; hand, impose obligations on other peopie to provide fP"t.r,r, ,',ch*'^p
us with sorne good or service and thereby act positively on our behaif. It ref iects the obligations on other
vital interests that human beings have in receiving certain benefits f.om son',:one or people to provide us
society. For example, the right to be provided with adequate health care, provisron of with some good or
child education, the right to a decent standard of iiving as proclaimed by the United servrce and thereby
act positively on our
lrlation's 1948 Human Rights Charter, etc. In other words, it closely relates to the rights
behalf
0 Business Ethics

of society members to enjoy social benefits provided by the priblic sector through
government expenditure to fulfil one's basic physiological needs.
We have elaborated on the types of rights. Let us focus on naturai rights or human
rights.

3.6.5 Natural or Human Rights


N*r;;EG;-l In the classification of types of rights, we had earJier explained moral rights. A sub-set
rights rhat belong of moral rights is natural rights. This type of rights had been prominently covered in
ro all persons, being historical literature. These are rights that belong to all persons, being humans. it also
humans. covers general rights that society has to enforce to respect an individual being.
The idea of natural rights has long been debated in history, going back to the
ancient Greeks, who held that there is a 'higher' law that applles to ai1 persons
Th; U.ir.d Nr""* I everylvhere and serves as a standard fbr evaluating the larvs of the states. Both
Universal Declaration Roman law and the medieval church adopted this idea and developed it into a
ofHuman Rights ' comprehenslve legal theory.
in 1948 sets forrh The United Nations Universal Declaration of Hurnan Rights in 1948 sets forth
basic human righrs
basic human rights for all people. This declaration covers natural rights. Horvever,
for all people. This
they call it by a different term i.e. huinan rights. These are rights that belong to all
declararion covers
persons purely by virtue of being humans, rrrespective of race, gender, nationality and
natural righrs.
However, they call it
othcr diflercnces.
by a differenc rerm i.e.
There are two main features of human rights i.e. universality and unconditionalitl li:

human rights. r Universality refers to rights that are possessed by everyone, rrrespecttve of )'

demographic differences such as race, religior-r, gender, nationality and so


T*" .rrj.;t.t I forth.
human righrs'.
"f r Unconditionality refers to rights thai cio not depend {)n any particular
. Universaliry r.e. practice or institutions in society. It is therefore not conditronal, and noi
righis rhat are dependent on situations or circurlstances. It also means tirat there is nothing
possessed by
we can do to deprive ourselves or others of these rights.
everyone, and
Examples of natural or human rights are the riglrt to be treated u,ith justice and
. Uncondirionaliry
fairness, the right for freedom of speech, the right to choose one's way of life, religior,
i.e. rrghrs rhar do
etc.
not depend on any
panicular pracrice t
or instirurions in
society.
3.6.6 Natural Rights Theory
g

I
The most influential natural rights theory is the theory presented b.v Iohn Lercke
0633-1701) in his famous Second Treatise o_f Goyernv'tent (1690).l,ocke began rvith the
assumption of a state of nature, rvhich is the condition of a free human being, in the
absence of any government. According to lohn Locke's Natural Rights Theor1,, human
beings have rights, even in the state of nature, and the justification for uniting into a state
is to protect these rights. In other words, a society or nation tbrms a go\rernment as a
representative of all members to protect their individual naturai rights as human beings.
The most important natural right fcrr Locke is the right to property. Although the
borrnty of the earth is provided by God for the benefit of everyrine, no one can nrake
use of it without taking some portion as one's orvn. Each of us has a right to a fair share
of the bounty of the earth based on our efforts and contributions to the society that
we iive in. T'his is done by means of our labour, which, to Locke, is a fornr of propertl,"
As he writes,

'Etery man has property in his own pet s0t1, so Jllte Labour of his bady and thr
work of his hands.. ... . cre praperly his.'
(Boatright, 2012)
o4
Ethical Theories and Pnnciples ot

Man survives by reason and in order to do so, he must be free from the ignition
of force, as required by his rational nature. Society can be greatly beneflcial to the
individual because of mutual protection, division of labour and economies of scale. Q u.i-i5 t4 rtsn
aS A{gh'c belt
However, it is only beneficial to the extent that the individual is free to act and survive cn46-Dl,ts
according to his olvn reason"
A right is a moral principle defining a man's freedom of action in a social contexi. @ eqJuAl;\X as q
(rx&t'aen+a]
Individual rights state explicitly the requirements for a person to benefit rather than
e
sufter from living in a society" Rights are absolute requirements of iife within a society hr no']at
(lmportance of Philosophy, n.d.). By the rational nature of humans, rights are not & -t;q t+ h'ewtcrn
arbit rari' or negotiabie. YqLe
It appears that the Natural Rights Theory very much complements capitaiistic
teatures such as individualism (i.e. pursuance of self-interests) and freedom to CD re\$iow
q
G-c"dn""

accumulate t'ea1th. The Theory of Natural Rights has in fact spurred the development O .;51*t -$ auoners'kf
of more rights-based theories such as the Libertarian/ Entitlement 'fheory and the
Theory of Egoism. Horvever, we shali ieave readers to do their own research on these 6 ^t* d i'c[i.adt^<\
theories in the knowledge seeking process. FsJa115
Let us examine the concep. of property rights from the Islamic ethics dimension. O"lU* a-Q +o honourltk'
Islamic ethics recognizes that man has the right to own property and weaith. and this lrt<
right is protected as long as the means of acquisition is lawfui and within the ethical
@ 0*=drr- -t ax?,*"r:o
Irar-rerr'trrk devised by Allah (i"e" based on the commandments in Al-Quran and the e'"{ i^-\r"v.a\q
Stinti,iit;. The rieht to use and benefit from one's wealth and property rnust not be
)
ayr *" qeL.crrt-.r\
exercise -i at ti-re expense of the interest of the community (Gaafland et al., 2006'). As
a vicegererrt orr carLir, rnarr is required lo acl as lrustee and depuly of AIIah SBT, in
@ eorrrrco.\ ;31"+
dealing r.r-ith the univcrsc and its environment, wealth and othcr creatures (Zinkin
and \\-illiams, l0i{-ll. In this sense, man's right is not absolr,rte but subject to the ruies
.rithe Alrrqhir in all aspects of lif'e.
Let us 'brieflv discuss the strengths and weaknesses of the Theory of Rights.

3.6.7 The Strengths of Theory of Rights


r It defines and confirms that ali humans have rights by virtue of being an
jndir.idual being. In social relationships, we have to respect this right as one's
.'iriitlement oui of respect for human dignity.
r ii rs aiso a concept that is relevant from religious dimensions and interhnkcd
rvitl-i justice principles, a virtue to be emulated by all humans.
r f'he Natural Rights Theory acknowledges that every person has a clairlr or.er
his efforts to accumulate property. As long as he uses his onn efforts, body
and hands, he has an ownership/right towards his wealth and propert,v. This
is a capitalist principle, well accepted based on social justice.

3.6.8 The Weaknesses of Theory of Rights


r 'I'hrs theory can be confusing to the mind, especialiy if everyone claims for
indl.'idual rights. The issue will be whose rights are we going to fulfil?
r If any rights rnaybe conflicting rvith one another (refer to earlier explanations).
r i\{ore oflen, Theory of Rights cannot be seen as an independent theory
without linking to justice principles. It may not also be justifiabie to be
applied independently ivithout relating to other ethical or religious principles
because it is a theory based on rational thinking and human judgement.
i.et us elaborate further on the;rbove point b1 correlating the concept of rights
with justice ancl religion. In Islam, rights are no doubt duly recognized to uphold
)Z Business Ethics

justice. However, the context of uphoiding justice has to be done by referring closely to
the divine commandments/verses of Al-Quran and the Sunnah.In Islam, adherence
to this ethical code is part of faith (Haniffa and Hudaib,2002). For example, the cry to
legalizehomosexuality as a human right in today's world will not appeal to believers of
Islam who will stand by the Quranic verses, Surah Hud, t2:77-83 that homosexuality
is an outright sin although from human rights principles, it is rationaily iustified"
Muslim readers may want to refer to these Yerses in Al-Quran.
Interestingly, similar views are shared by believers of other religions in Malaysia
on this controversial issue. Aptly, all religions recognize that homosexuality is rnoraily
wrong. It is clearly violating the rules of God from Shari'ah princ.iples and all other
religious principles. Even from Kant's Ethics, such an act is in conflict with the
uniyersalizability principle; what more the acts and rules of natLrre.
Certainly, the homosexuals have a right to live and based on justice principles,
one cannot discriminate them in en-rployment or in other areas. It is also noted that
we cannot control peopie's lives. Humans are given the free will and right to decide for
themselves how they are going to conduct :heir personal lives as a responsibility but
they will be accountable for their actions; right or wrong'
Jnstitutionally, we cannot legalize wrongful acts by compromising religious
principles although from human rights principles, homosexuality may be rationally
justified since it has somewhat been accepted as a norm tn the \\rest. Malaysia, with
Rukun Negara as its guiding principle, is a nation ivhich upholds belief in religion.
With Islam as the main religion, it will be appalling to legalize hotnosexuality as
a human right although the West has long recognrzed rt. Wi: believe that human
judgements have iimitations indeed. Certainly, thr: degree of ttne's religiosity and in-
depth knowledge lvill determine hrs or her actions in exercising inriividual rights to
fulfi1 social obligations.
Finally, we shall discuss the Theory of iustice.

3.7 THEORY OF JUSTICE t


E
fts*
!
t
h
E
r
3.7.1 Justice.as a Concept r-
I!

F
|ustice is another important moral concept witir a wide range of applicatrons. ]ustice a

is also a religiousiy accepted fundamental concept tbr a good human li1e. Buddhism
asks us to; t
a.
!,
'Treat all creatures as you rvould like to Lte tre cLtcd.' t
1:
!
Hinduism reiterates: {'
r
f
'This is the essence of Moraiity: Do rrot do to otlrer tt'htch 11 Joie to yrtu would *
r
cause you pain.' '-. E

*&
In Christianitl., i1 it tutd' H

'Whatever you wish that others would do to yott, do -so lo thcrn.' &

s
Islamic believers are also well reminded to uphold justice rn all aspects of life" A
K
Quranic verse reads:
&

E
g
sa
I
IT
I
Ethical Theories and Principles 83

'Oh you y,ho believe! Be L/[aintainers of justice, witnesses


for the sake of Allah,
and though ii is against l.,otLrselves, or yoLtr parents, and your relations, be he
rich or poor, tlrcn Allah is nearer to them ( than you), therefore follow not (your)
lou, desires lesi vott do not do justice. And if you distort (the evidence), or keep
away fhgn, sureit' AIlal'L knctx,s well what you do.'
1 6t-Quran, Surah An I'lisa 4:35)
In fact, the Isiamic ethical s,vstem is underpinned by two core valucs of unity
(tathid) and justice (adl) (Alhabshi, 1987). These corevalues have a tremendous impact
on how Islamic ethics guide economic activities and business dealings (Rahayu, 2012).
Today, justice is listed as a unir.ersally good moral value to be internaiized by
everlrone, irrespective ofdemographic differences and cuitural diversity. Conceptually,
:i is used to er.aluate not only individtial actions but society as a whole. The 1 Malaysia
ancept, introduced by the Malaysian Prime Minister, YAB Datuk Seri Najib Abdul
.' rzak, rs aimed at addressing sociai justice within the diverse multr-culturai society.
Justice relates to equality of treatment. We often hear this phrase,
'Do me Justice,l willdo Sotrr'!
trrr,.. "h"t ,"
It is literaily fairness" Justice and fairness have been used interchangeably although equality of treatment.
,..,r serious cases, we always use the term 'justice'. It is literally-falrness.
|ustice is associated rvith probity
To uphold jusrice,
ii,;. con-rplete uprightness, honesty/integrity) and virtue, legality and the erxerclse of
the good ones
r:r.is.rs sen'ing the administration of rights, rewards and punisirments (Roget's
must be recognized
'-lesaurls). To uphold justice, the good orres rrrusl be recogrrizeci and ren,arcled. The
and rewarded. The
.-j on.s n'Lust be punished. bad ones must be
punished.

3.7.2 Justice as a social process


I
We earlier note that justice is also a social process. It refers to the qr.ralit,v of being
morally
,r,1 andlor demonstration of righteousness, fairness and equity in just conduct when
t*r,.."b.h"rt*d
process. lt refers to
.1e aling r"ith others. One's self-interest is balanced with altruistic (i.e. concern for needs
rhe qr-rality of being
.l ietirngs of others above one's orvn)regard, respecting rights of others. For example, nrorally jusr and/
. a marketer, I1r. A has to fulfil his self-interests to achieve iris key perfbrmance or demonstration
:.ircators (KPIs) as lvell as meet his employer's profit objectives. Hor.r'ever, he also has of righteousness,
--: fulfil the expectations of his customers to ensure justice andfairness out of a social fairness and equiry in
r ,:1r6n5iSili1y. Failure to do so wili result in biame for his unfair treatment. just conduct when
Over and above this, in executing justice, there has to be the maintenance of 'right' dealing wirh others.

' lt an exercise of authority or power so that the right can be vindicated (i.e. clear of Ones self-interest
l-'lrme or suspicion) rvith distribution of equitable rewardlpunishment. is balanced with
altruistrc (i.e. concern
N{ore often, the process of ensuring justice constralns action by rules,
})rocesses for needs and feelings
' procedures. It also defines dutiesiimperatives to act accordingly. For examl.,ie, of others above
Llolr' Qurarz clearly states the importance of upholding justice as a virtue:
one's own) regard,
'l) t't'tu n'ho believe! Stand out respecting rights of
firmll, for Allah as jttst tttitnesses; and let not the
ei,,nit)'ttndhalred of others make you avoid justice. Be_just: tl'tat is nurti to others.
piety; and fear Allah. Verily, Allah is Well-Acquainted u,ith what you tlo.'
(Al-Qurcn, Surah Al Moidah, 5: Yerse B)

'Allah has promised those who beliet,e (in tlrc onenes: oJ Altah - lsrantic
Monotheism) and do deeds of righteousness, tl'tat for tl'Lem there vvill be
forgivencss and o great reward ( i.e. Paradise)'.
(Al-Quran Surah Maidah, 5' Verse 9)
\4 Business Ethics

These verses apply to all aspects of life of a believer. It must be observed by all
Muslim leaders and followers alike. It governs all reiigious, political, social and
economic affairs, including business. Certainly, it also links with distribution of
benefits and burdens among the members of society.

3.7.3 Justice and Business Ethics


In the study of busrness ethics, the concept of justice is relevant primariiy in the
distribution of beneflts and burdens (costs) when we correlate the concepts of justice
and rights. It is a moral right to treat ail individuais as fiee and equai persons out of
uan act of justice. Likewise, benefits and burdens should aiso be distributed equally rn

a social context.
|ustice is an important concept in evaluatingvarious lbrms of social organization.
We can aiso ask about the justice of the economic system in which business
activity takes place. The formulation of the Annual Budgets and Malaysia Plans
by the .,ialaysian government takes into consideration the interests of all parties-
households, businesses, the government sector and international trade to ensure the
cardinal ofjustice is upheld in all institutionai aspects.
One of the first literatures on social justice is from Ar istotle's works. Let us I
t
examine Aristotle's justice principles in greater detaii.
e
i
$

3.7.4 Aristotle's Theony of Justice t

justice is a virtue, long highlighted by Aristotle during the glorious Greek civilization.
Within a social context, Aristotle noted that a rust societv is a prec-ondition for a
rewarding life. He emphasized upon the responsibility of poiiticians and social
scientists to develop social order u,ithin a just environntent for individuals' ultimate t
i
happiness and rvell-being. Figure 3.6 outlines Aristotle's Theor,v of iustice.
q

In Book V Nicomarchean Ethics, Aristotle divided justice into trvo forms--


universai justice and particular justice:
r Universal or procedural justice-in the universai application of justice as
I-Ac.*drc." ,rr".r, a moral concepti virtue, a jr:st or morally upright person is one who always
or procedural justice,
just or morally
does what is morally right and obeys the larv. ln administering justice, fair,
a
upright person is one
impartial ruies and procedures should be applied.
who always does what r Particular justice.- in the second application of justice as a moral e oncept,
is morally right and it may be applied in particular or speciii,- situatious. It is aiso concerned
obeys the law. with upholding the r.irtue of considerateness, empathy and avoiding greed
in oneself by taking only a proper share of soir-ie good. In other words, to
be just, we may have to sacrifice our self-interests ancl be reasonable in our
judgements to utilize the resources that are avaiiable in society. There rs
certainly an element of moderation in action here.
To quote a relevant statement from Boatright, (200tr):
'An unjust person is thus a grosping pcrson v,ho tokes too muth weaLth. hctnour
or other benefit that sociell, offers, or a shirker u,ho reJtLses to bcar a fair share
of sorne btirden.'
Ethical Theories and Principles 85

Figure 3.6 summarizes Aristotle's Theory of |ustice.

ti\
b\
+nF

,(o "

Figure 3.6: Aristotle's Theory of Justice

Le t us further elaborate on the forms of particular juslice based on Aristtltle's


theorr'.

3.7.5 Forms of Particular Justice


Aristotle further sub-divided particular justice into three-corrective or colllpensatory
justice, retributive justice and distributive justice.
r Corrective or compensatory-a matter of compensating persons lor r'r'rongs
done to them.
r Retributive-the extent of punishrnent should fit the offence.
r Distributive-deals n ith distribution of benefits and burdens.
Both corrective and retributive justice relate to correcting rn'rongdoings ttr
maintain a moral equiiibrium. Distributive justice, on the other hand, is comparative
in nature and considers benefits and burdens of a person in relation to other persons.
Le1 us elaborate on each form ofparticular justice.

Corrective/co m pensatory justice


This type of justice involves someone who has committed wrongcloings to another f c"*rr;rr/
pariv. In order to be just, he or she has to compensate the other party out of etrptrthv. compensatory jusrice
For exernple, while driving, we accidentally knocked into a motorcyclist. He feli down involves someone
and needed help. As a result, we have to perhaps compensate his burdens by .leanng who has comrnirted
his niedicai charges or at the least, take responsibility to bring him to tlie hospital for wrongdoings to
immediate treatment, etc. It is an act of injustice to biame him on the spot and defend anorher parcy. ln
ourselr,es to show that we were driving in the right path or lane. If u,e are in the u'rong, order to be jusr,
he or she has to
certainly rve will have to arrange lor our insurance companli to cover the cost of his
compensate the orher
motorcycle repairs. Such acts need not even be determined by legality. it is in the name
party oui ofempathy.
of corrective justice that our actions are taken for the unfortunate party stncu ire are
in the tvrong.
6 Business Ethics

Retributive justice
-R;;;;*;-----1 We earlier noted that justice also relates to punishments for one's wrongdorngs" The
extent of punishment should fit ttie crime or offence that has been committed. For
fusa,ce relates ro
punishments for one's example, drug tralficking is a wrongful act according to the Malaysian law. Anyone
wrongdolngs. The caught for such an offence faces a death sentence. Is it a just and fair punishment?
exrenr of punishment Perhaps so, because the consequences of drug trafficking causes widespread deaths
should fit rhe crime or in the long run due to drug addiction, what more r.",ith the astcuishing increase in
offence char has been the number of AIDS cases! Therefore, a death sentence to uphold retributive justice
commitred. seems fair if there is clear evidence that the person caught really committed the drug
trafficking offence.
Aristotle's retributive justice resembles the Qlsas principle in the Al-Quran. To
quote:

'ah you who believe (those with Iman), the law oJ' equal.itl'(Ql.sas) is prescribed
to you. In cases of murder; the free for th efree, the slave Jor the slave, the woman
for the woman. But if any rentission is made by the brother (or relatives), of the
slain, then grant any reasonable demand, and cornpensatr: him u,itl'r handsrtme
gratitude" l'his is a concession and the mercl, from your Lord. Aiter this,
u,hoever exceeds the lirnits shall be iru grnve pennlty'
(Al-Quran, Surah Al Baclarah, 2: 178)
n
r
s
f--
Distributive justice ::
l;

poiitical and
l'*.,il;;;*.1 Issues on distributive justice arise mostiy in the evaluation o1 social,
economic institutions, where the benefits and burdens of engagrng in cooperative
jr-rsrice arise nrosr ly-

in the evaluarion activities must be spread over a group (Boatright, 2012). In some tnstances,
of social, political a jr-rst distribution is one in which each person sharcs equaliy, but in others,
and economic unequal sharing is just if the inequality is in accordance rvith some principie of
insritutions, where the distribution.
benefits and burdens For example, the implementation of a progresslu inctrnre tax system. 'I'he richer
of engaging in 1ve are, the higher the income tax u.e have to pay. After all. thc re \renues collected will
cooperative activrttes be channelled accordingly for public expenditure as rveil as project development to
must be spread over
enhance the weli-being of society at iarge. Generally, distributive justice is comparative,
a group.
in the sense that it does not consider the absoiute amoulrt of benefits and burdens of
each person but each person's amount relative to that of others.
Ontheotherhand,bothcorrectiveandretribuiivejusticeare'non comparative' i
in their applications. The restoration of the moral equilibrium under these trr,o
forms of justice is determined by the features of each case and not by comparison i
i
rvith other cases. For exampie, under retributive jr-rstice, a punishment fits the tl
i
crime. f'

We shali next focus on justice and the free market system. \Ve shail try to link {,

the concept of justice in a competitive environment and introduce ]ohn Rawls's a:


i.
Egal itarian/lustice Theory. (,
s
rt-
s
&l

s
E-
w
e
P
t!

&
s
a
E
G
!
xlt
E
I
Ethical Theories ancl Principles ,87

3.8 JUSTICE A ND THE MARKET


SYSTEM
The worid economy today promotes globalization and a free market system. The
free market features u ,yri.- rvhere all ecoiromic decisions are taken by individual
households and firms with no or minimal government intervention. It recognizes
the
rights of individuals to accumulate u,ealth and maximize their potential. Competition
is"encouraged among individuals and businesses. Major decisions about what. to
produce, hiw to prod,r.. and for whom to produce are made through the market
operation. Markeidecisions are made on the basis of prices, largely determined by
tl-re

forces of demand and suPPlY"


Thc follon,ing are rights of individuals under the free market system:
r To own Private ProPertY.
r To own a business and to keep all its profits after taxes'
r Freedom to compete rl rvealth accumulation and consumption of goods and
services.
r Freedom ofchoice based on the ability to pay.

3.8.1 Justice and Competitiveness


In a conrpetitive society where members compete to pursue self interests with some
selt-referential altruism, problems of distributive justice u'ti1 obviouslv surface,
tspeciall,v the issue of inequality of distribution of weaith, power and incotre.
'
Arisiotle's justice principles contain much value that lies in its insistence tirat
Il"h. R.r/*
different treatment be justified by citing relevant differences and that djfference in Egalimrian/Justice
treatment b,e in proportion to these differences. Hot^,,ever, there is a contemporar,v fheor,v recognizes
lheory on distributive justice to resoir.e social conflicts tt'ithin a free markct system, rhat conflicrs
der.elopecl bv an American philosopher, John Rawls (1921-2002). and inequality in
disrribution of wealth,
power and incbme
3.8.2 John Rawls'sEgalitarian/JusticeTheory no doubt exist in
such an environment.
Ii.awls'stheory is related to the distribution of society's benefits and burdens lr'ithin
However, it assumes
.i competitive free market system environment. The theory recognizes thai conflicts
rhat conflicts n'ray be
:.nd inequality in distribution of wealth, power and income no doubt exist in suc.h sertled by devising
an enr,ironment. However, it assurles that conflicts may be settied hy .ll'-irirrg a fair a fair method
rteti-rod of choosing the principles by n'hich conflicts are resolved; for example, bv of choosing the
hin.ing a contract or agreement betlveen parties involved in the business. principles by which
To quote from Boatright (2006): conflicts are resolved;
for example, by
'lohn Rawls uses the notion of contract (uhich assutnes thol iJ rndivtduui,' rn
having a contract or
sorne hypothetical pre-contract situstion would unanimously accel)l t.e-rtttirt agreement between
ternts governing their relations, then those terms are just and all peoltLt: nove parties involved in the
an obligation to abide by then) andJormulote s an original positiort (n d'rslinct business.
'yeil of ignorance' whereby the individuals vtho ore i'kcd lo
_featttre of this is
agre on the principles of ju stice must do so witl'tout knowing ntany fttcts trbout
them,:iyes and the situation) to oyercarne indeterminacies in delining torttt:pts
LJ jLrstice.'
iB Bt,siness Etirics

To resolve social conflicts, Rawls proposed two basic principles to be applied in


the process of selecting a fair method of making choices/decisions:
r Principle l-Principle of Equal Liberty
r Principle 2-divided into two parts-(a) Difference Principle, (b) Principle
of Fair Equality of Opportunity

Rawls's First Principle of Justice


l.rh" l-t,;lplrrf 1 As mentioned, this is the Principle of Equal Liberty. Each person is to have an equal
Equal Liberty,each right to the most extensive total system of basic liberties (i.e. freedom) compatible with
person is to have a similar system of liberty for all.
an equal righr ro Everyone has basic rights; the right to liberty i.e. right to life, specifically refbrring
the most extensive
to freedom of action and the rigirt to pursue happiness. Right to property is an
rotal system of basic
extension of right to life. Equal share of whatever goods are available is the most that
liberries (i.e. freedom)
any person may reasonably expect, given the requirernent <-rf unanimttus agreement.
compatrble wirh a
similar system of
' This principle aiso supports the claim that each citizen's liberties must be protected
liberry for all. from invasiorr by others and must be equalto those of others.

Rawls's Second Principle of Justice


Social and economic inequalities are to be arranged so that the1, are both:
1. To the greatest benefit of the least advantaged (Difference Principle)
Tliis principle supports the claim that a productive society r'viii incorporate
inequalities, but takes steps to rrnprove the positton o1'the most needyi
unprivileged members of thc society.
Ilorvever, there are conditions under u4rich rational persons rvould make
5",.d il..r.,"..rcl
inequalrties are to be
exception to the first principle ancl accept less than an equal share of sonie
arr'anged so rhar they primary goods. An unequal share or distribution r.vil1 be justified if everyone
are both: would be betier off l^,rith the inequalitl,llror, withor-rt it. For example, assLlflre
. To the grearesr that there is an increase in total income but it is not possible to distribute
benefir of rhe it equallv among society rnernbers. Honeve'r, if er.erl,oilg benefir"s frorn tlral
least advanraged extra income, it is still considered a just action.
(Difference
Principle).
2. Attached to the offices and positions open to all under conditions of fair
. Attached to equality of opportunity (Principle of Fair Equality of Opportunit,v)
!
the offices and This principle supports the claim that everyone shoulc'l be given arr equal !;
positions open ro opportunity to qualify for the more privileged positior-rs in society's t'

all under condirions institutions i.e. basecl on talent and corrpelence. -lhere should not be
of fair equaliry inequality of treatment based on gender, race, econorlic status, etc" to uphold
of opporuuniry social justice and fairness.
(Principle of 'Ib conciude our discussion on Theory of ]ustice, it is noted that both
Fair Equaliry of
Aristotle and Rawls's social justice theories are primariiy,developed to pror.idc
Opporruniry).
a means for evaluating exrsting and proposecl institutional arrangements.
Insofar as the market systenr promotes utility i nc1 protects rights, it is doubly
justified that these justice principles be applied accordingiy to ensure social
justice rvithin a competitrve market environment. Certainly, lve cannot also
rule out the appiication of religious based justi:e prlnciples that are found iir
buoks o[ d ivine r tvelatious.
Ethical Theories and Principles '89

Figure 3.7 summarizes )ohn Rawls's Egalitarian/Justice Theory'

Figure 3.7: John Rawls's Egalitarian/Justice Theory

Tnis chapter has outlined common teleological and deontological ethical theories
introducecl
that 1.;rr-e been rvidely applied in the study of ethics. It has amotlg others;
developed over
readers ro the ,ruin .o,-,."pts and ti'reories of ethics that have been
centuries b1. inf-1uential moral philosophers. Where applicaL,ie, it has aiso
spurred
within Islamic ethics and rcligious
discussions on the cor-r-rpatibililiof these theories
contexts. The value oi uty theory depends on its applicability rqitliil existrng
institutional arrangements, including business. Howe\rer, one n'ould realiz'e that no
one theory, is compiehensive enough to be applied in all situations and circumstances'
:

Each theorl, has iis strengths and lirnitatrrrns. One's in depth conceptual knou'ledge
1-ili derernrine thc chorceind appropriateness of each theory to be applied in resolving
morar issues, be rt business or ,',or-r-b,",siness. The subseqilent chapters will apply this
theoreticalfoundation to resoive a r,vide range of business ethics topics of interest. T'he
globally competitive business, l^/hich supports the free market system, certainiy has
io operate wiihin ethical consideratior-rs to sustain long-terrn organizational sun'iva1
andreputablecorporateimage'I-ikelvise,emplol,eeshavetoadequatell.Possessa]l
epistemology of elhics knowiedge to be appiied and internalized whrie resolving
business issues rr,ithin the context of fulfilling a social responsibility as a vicegerent
and tiustee on iv{other Earth"

t
!

i
N

I
I
IE

t
!
I
II
?0 1
*l
Business Ethics
tr
T
n
-1
E
ra
k
$
3
To consolidate Four learning, the learning outcomes are surnmarized belorv: t*
T

1. Explain the fundamentals of moral philosophy. E


&
F
Ethics is derived fiom the Greek word ethos,which means character, spirit and attitudes of a group t
l
of people or culture. Ethics concerns what is good or right in hurnan interaction and deals rvith
justice and rights issues" It is therefore a study of action and how man should act. Ethics is also a $
s
branch of philosophy" Conceptually, the five branches of philosophy are metaphysics, epistemology, B
T
ethics, politics and aesthetics. As a field of study, ethics is sub-divided into two branches-meta" 3
t
r
ethics and prescriptive/normative ethics. Meta-ethics classifies morality into two main forms*- L

moral relativism and moral objectivism. Moral reiativism considers that what is right or wrong is k
E

not absolute" It depends on the person, circumstances and social situation" Moral objectivism on r
t
*
the reverse considers that what is right or wrong is independent of human opinion because some
!
rules or codes originate from a divine entity and must be followed religiously. Prescriptive ethics t
divides ethical theories rnto two-teleologicai and deontological theories. tf
L

2. Differentiate between teleological and deontological theories of ethics. ;


il
Teleological theories hold that the rightness of actions is solely determineci bv the amount of
consequences they produce. They are aiso referred as consequential theories. C)n the reversel
Jeontological theories deny that consequences are relevant in deterrnining ttre rightness of actions.
The rightness of action is based on the nature of the action itself or the rules fiom which they :

follou Deontological theories are also referred as non-cinsequential theories.

3. Explain influential ethical theories and/or principles applied in today's global era-Lltilitarian
Theory, Kant's Ethics of Duty, Aristotle's Virtue Ethics, Carol Gilligan's Ethics of Care, Theor,v
of Rights, Theory of |ustice and Rawls's Distributive |ustice/Egalitarian 'fl-reory.

. Utilitarian Theory of Ethics


It is a teleological theory of ethics widely applied b), econornists. There ;rre two forms o{'
Utilitarian Theory of Ethics-Classical and Ruie Utilitarianisn,.
- Classical theory requires consequences to be measured in soire \\iay so that the pleasure
and pain of different individuals can be added together and the results ol different courses
of action compared. An action is right only if it produces the greatest balance of pleasure
over pain for everyone. In Classical Utjlitarian principles, an action is judged to be right
by virtue of the consequences of performing that action. It rs silent on conlpliance to codes
and rules"
Rule Utilitarian Theory emphasizes that an action is right onlv if it conforms to a set of ruies
the general acceptance of which will produce the greatest balance o1'pleasure over pain for
everyone" This principle relates to the importance of complying rvittr rules while assessing
the rightness of actions. It seems to give firmer ground to thc rules of rloralitv and role
obligations. However, it does not specify what rules one should conform to. Presun-rably,
it includes man-made rules as well as God-made rules and pi'inciples. Again, one has to
make their olvn moral judgements in their actions, an indicator of moral reiativism.
- There are four theses of Utilitarianisnr i.e. consequentialisn . hedonism, rnaximalism and
universalism.
Ethical Theories and Principles ;9i
, ,, :

. Kant's Ethics of Duty Theory


It is a deontological theor1,. 'An action is morally right if and only if the actor is motivated by
good will.' Only actions done for rational prrncipled reasons from a sense of duty has moral
worth. It is not a matter of weighing up consequences. Reasons alone can give us the absoiute
moral truth and discover our sense of duty.

li.;r:tl championed the tu,o categorical imperatives:

1. First Categorical Imper ative--Act only according to that maxim by which you can at the saime time
will that it shauld become a universal law.

Sr,rond Categorical Imperative-A ct so that you treat humanity, whether in your own person or in
that of another, altvays as an end and neyer as a means only.

, Aristotle's Virtue Ethics Theory


This ls another deontological theory that is value based. Aristotle's theory begins with a basic
assumption that morality is both necessary and vital for human beings. His theory focuses on
human virtues i.e. good character traits that manifest themselr.es in habitual action. Aristotle
defines a virtue as 'an activity of the soul'. Peopie who compromise morality are degrading
themselves and they have missed their goai in life. Ethics errable mankind to lead successful
and rewarding lives.
This theory throws back at each individual a fundanrental question- what kind of person
should we be? The individual himself must reason this out based on intelligence. Aristotle
distinguished trvo dimensions of humans-the rational and the irrational dimension. He
rdentified our natural desires as natural dispositions. J'l'rese natural desires must be controlled
bv rational thinking and prudence to be virtuous. Aristotle introduced the concept of mean
or moderation in actions. He does not assume there is a universal standard that applies to
all people. Aristotle defines a virtuous person as someone r.vho has taken control oi Lis life,
cultivated his natural dispositions into moral r,irtues, and has ahr,ays throughout his lifetime
found happiness in his actions based on these der.eioped virtues. Some of the virtues identified
b), Aristotie are honesty, self-control, courage, justice, respect, prudence and shame of failures.

. Ethics o.f Care


This theory is a deontological theory that propagates a pcrson to be partial to make ethical
decisions. It emphasizes caring for the concrete rveli-being of rhose near to us. It promotes
the preservation and nurturing of valuable relationships on indiviciual as well as collective
dimensions. This theory distinguishes three forms of caring- caring about something, caring
after someone and cariilg for someone. The form of caring that is promotecl by Ethics oi
Care ls 'caring for someone'. It is the kind of care that is not detached but engaging, deep
in feelings and emotions. [t involves a tno \{ayprocess of nurturing ferr personal individual
develoPment. This theory however recognizes tiiat liot all relationshrps must be preserved.
Only relationships based on compassion, iove, concern, friendshrp and loyalty should be
maintained and nurtured.

. Theory of Rigltts
Rights play an important role in business ethics as well as in all rnoral issues. The concept of
rights can be confusing and manipulative if not well understood because everyone ciaims that
they have rights. Nevertheless, it is an important etirical concept that is very much corelated
ivith justice and fairness.
According to Boatright (}AD), rights may be classified intr. legal and moral rights, specific
and general rights, and negative and positive rights.
9? Business Ethics

A fbcus on natural/human rights features two main characteristics-'universality'


(i.e. rights that are possessed by everyone) and 'unconditionality' (i.e. do not depend on
any particular practice or institutions in society). |ohn Locke's Natural Rights Theory
recognized that each human being has a right to a fair share of the bounty of the earth
based on his or her efforts and contributions to the society that he or she lives in. This is
done by means of the labour services provided by an individual. Locke regards this as a
form ofproperty.

Theory of lustice
Iustici is another important moral concept with a wide range of applications. |ustice is fairness'
)ustice is associated with probity (complete uprightness, honesty/integrity) and virtue, Iegality
and the exercise of processes serving the administration of rights, rewards and punishments
(Roget's Thesaurus). |ustice as a concept may be appiied in individual as well as social contexts'
It is also a universaliy accepted moral vaiue to be internalizedby all people.
Aristotle clas,:'fied justice into two forms-Universal and Particular Justice.
- Universal justice is also referred to as procedural justice. A just and morally upright
person is one who alrvays does what is rnorally right and obeys the 1aw.
* Particular justice, on the other hanc1, may be applied in particular or specific. situations. It
is further sub-ciassified into three forms corrective or compensatorl, justice, retrrbutive
justice and distributive justice. Corrective and retributive justice is non-comparative
an<l maintains moral equiiibrium by correcting rvrongdoings. Distributive justice on the
other hand is comparative in nature and consriers the benefits and burdens of a person in
relation to other persons.

Rawl s's Egal i tarian T' h e ory tf,


A contemporary distributive iustice theory, rvas cleveloped by John Rau,ls u,ithin a conrpetitive
free market system environn,ent. This is tl-re Egalitarian Theor1,. The theory recognizes i1

that conflicts and inequality in distribution of lvealth, power and income exist in such an
environment. Horvever, it assumes that contlicts rnay be settlecl/r'esolved b). devising a fair *
!
*
method of choosing the principies, e.g. having contracts and agreements. T

To resoive such conflicts, Rawls came uir r,vith the folloiving principles:
x
- Principle l-Principle of Equal Liberty. E,ach person is to have an equal right to the most I
ts
&
extensive total sy.51gm of basic libertie s compatrble with a similar s\/sten-) of libertv for all.
- Principle 2- divided into two parts: (a) Difference Princrpie, (b) Principle of Fair Equalit,v :;

of Opportunity, In the Difference Prir-rciple, social an,,l economic inequalities are to be


arranged so that they are both to the greatest benefit of the leirst adr,antaged. In the
Principle of Fair Equality of Cpportunitl,, s1,.iu1 and econotnic inequalities are to be
arranged so that they are both attached to the offices and positions open to all uncler
conditions of fair equality of opportunity.

Elaborate on the important features of each ethical theory'


There are strengths and limitations of each theory described above. Refer to the chapter texts on
the strengths and limitations of each theory rvith further elaborations, where appropriate.

List and analyse the strengths and limitations of each theory, rvhere appropriate.
Students' analysis on the strengths and limitations of each theory u,i11 depend on one's corrceptual
understanding of each theor1., its contexls ;ind dimensions. Some rvill aiso deepen the analysis by
comparing and contrasting these theories with religious principlcs, based on divine coprnnndpcnts
rather lhan rational thinking and judgements.
Ethical Theories and Principles 93

6. Apply the ethical theories to make sound business decisions.


An understanding of the main features and epistemology of each theory rvill give an individual
the edge to apply them in resolving moral issues, be it business or non-business. Students will
have to create or relate to specific cases or scenarios and choose the appropriate theory/theories
that are relevant to determine rightness of an action in a particular situation or condition. The
application of these theories certainly depends on one's logical thinking, judgements as well as
in-depth knorr'1edge and consciousness to practise and internalize ethics in the decision-making
process.

Altruistic Concern for needs and i-eelings of others above one's o$,n needs and feeiings.

Categorical That is u'ithout exceptior"t

Consurner choice theory An economic theory that seeks to deterrnine consumer equilitrriurn i.e. a condition
in which total utility cannot be increased by spending more of a given budget on one sood ancl spencling less
on another good.

Deontological theories A thcorynhich denies that rightness of action depends on thc good consequences
thei produce" Rightness of actioir depends on the nature of the action itself or the rules from which they
li,llorr'.

Epistemology A study of our n'rethod of acquiring knowledge, how does one knou, about something? it
rncompasses the nature of concepts, the constructing of concepts, the validity of the senses, logical reasonirtg.
as well as thoughts, ideas, memories, emotions, and all things mental. It is concerned u.rth how our minds are
reiated to reality, and whether these relationships are vaiid or invalid.

Ethics A branch of study r,vitl-r rvhat is the proper course of action for man A study of action; rvhat should
aperson do? It rs the stud,v of right and wrong in human endeavours. At a more fundamental level, it is the
met}rod bv rvhich rve categorize our values and pursue them.

Aesthetics A study of art; wirat can life be like? Art is a seiective recreation of realit,v. The purpose is to
concretize an abstraction to bring an idea or emotion within the grasp of the obsener. Iror erampie, music,
literature and painting. The selection process depends on the value judgements of the creator. These value
judgements can be observed and evaluated via the field of ethrcs.

lmpartial Putting aside one's emotion or 'detaching' from another person to avoid Liias in order to make
object ivc/effect ive deci siorr s.

fularginal analysis An examination of the effects of additions to or subtractions fronr a current situation.

lmperative A command or duty


T
I
B
94 Business Ethics E

E
t
Metaphysics 'I'he fbundation of philosophy" A study of existence; what is out there? A study to explain and ts
interpret the worl<1 art'rund us in order to deal with reality Metaphysics is also the foundation of a woridview. s
t

r
Maxim A saying that expresses a general truth or rule of behaviour
t
E
rw
Moral relativism 'fhe view that what is right or wrong is not absolute. It is rather relative and variable s
r
depending on the person, circumstances and social situation. t
{
L
r
Moral objectivism The view that certain acts are objectively right or wrong. it is independent of human
r
opinion due to the beiie{'that moral codes originate from a divine entity; either frorn God or some cosmic r
I
i:
force.
r
i
Politics It is ethics applied to a group of people. Politics tells us how a society must be set up and how i
one should act within a society. A study of force; what actions are permissible? However, reason is man's :

prime means of survival. A human being cannot survive in an environment where reason is ineffective. The 9
r
primary goal of a political systcm must be the preservation and enabling of the faculty of reason. Reason does $

not function under fbrce or coercion. A moral political system must ban force and coercion, and promote
I
!

justice and individual fieedom within larvs that are reasonable. i

,.
Prudence Being careful and sensible t

Tawhid The islamic concept o1'unity of God. A person's relationship with A1lah, F{is people and I{is Universe. d

The first relationship (i.e. man and Allah) signifies that Al1ah rs the only God and creator of everything in the
;;

heavens and earth. It requires mankind to follorv the cominandments of Al1ah bv fLrlfiiling all obligations,
and avoiding unethical conduct u,hich is detrimental to allbeings on the planet. Ever)'thought and behaviour
of a Muslin-r is drrected towards attaining tl"ie blessings of Allah. Allah appointcd man as His vicegerent on
earth, and requires him to act as his trustee and dcpr-rt,v in dealing rvjtl-r the universe and its environment, ::

rtealth and other creatLrres.

Teleological theories Anc,ther term for consequential based ethical theorics

u
Theory of Comparative Advantage A countrl, should sell to other cout-rtries those products that it produces !.
t
efficiently and shor-rld buy from other countries those products that it cannot produce a.s ef ficiently. T'
c
H
p
Utility Satisfaction or pleasure that people receive from consuming a goocl or serr.,ice. r.
t,

Unconditionality Anotirer feature of human rights. Rights that c1o not rlepend on anlr particular prac.tice or *1

institutions in society.

Universality A feature of human rights i.e. rigl-rts that are possessed by everyonc.

Vindicated Clear of blame or suspicion

Qisas Principle A principle in the Al-Quran to describe tl-re lan, of equality of treatment when handling
humans. For example, in cases of murder, if someone kills another person, the punishment should be a death
sentence as lvell.
Ethical Theor-ies and Principles 95

. :.

l. Discuss the relevancy of Utilitarian Theory of Etirics from a business climension.

2. Compare and contrast between Kant's Theory of Ethics and Aristotie's Virtue Ethics Theory.

3. Ethics of Clare Theory demands for partiality and nurturing of relationships in moral decision-
making" Elaborate on this statement.

4. Discuss the strengths and weaknesses o[Ethics of Care Theory from Islamic perspectives.

5. Define rights and differentiate between the types of rights.

6. Differentiate between the concepts of justice and rights.

7. Explain John Locke's iiatural Rights Theory. Discuss how this theory fits into the competitive
capitaiistic free market system.

8. Eiaborate on Aristotle's Theory of Justice. Compare and contrast Aristotle's theory with Rawls's
Egaiitarian Theory to uphold social justice.

Ihe Reality TV Controversies; A Series of Controyersies


ln January 2001, religious and conservative pressure groups worldwide (i e. America, Europe, Australia and
Asia) protesred strongly against the airing of Tempration lsland, a TV show. The show, belonging ro rhe genre
of reality TV, was made by the U5 media house, Fox TV. lt was designed to 'resr rhe fideliry' or fairhfulness
of four unmarried but committed couples, who were taken ro an exorjc island, where 25 singles tried ro lure
them so that they would cheat on their partners. Whoever succeeded in remaining faithful ro his or her
partner was declared the winner.
Crirics of the programme demanded a ban on ir on the grouncis rhar ir promored illicir sex and endangered
the relationship between ihe participaring couples. A spokesman for the American Family Associarion, Randall
Murphree, remarked, 'Even the rrailers for the show were enough ro upsei conservarive organizations and
various religious groups.'The activisrs, in their campaign, publicized rhe advertisers'idenriry and encouraged
the public to compel the adverrisers ro boycorr the show.
Though Fox TV authorities argued that rhe focus of Temprarion lsland was on exploring rhe dynamics
of serious relationships and not sex, the fact that Fox screened all contestanrs raking parr in rhe show for
sexually rransmitted diseases weakened its argumenrs. Many family associarions accused it of capiralizing on
the entertainment value of sex and infidelity. The controversy deepened when ir was discovered rhat one of
the four couples had an infanr son.
Though Fox TV pleaded ignorance and removed the couple from rhe series, rhe proresrers argued rhar
Fox TV could have broken up a family. Melissa Caldwell of Parenrs TV Council, a division of Media Research
Centre, said, 'l think a lot of people are appalled at the concepr of trying ro break relationshrps for rhe purpose
of entertaining millions of viewers
II
If;
i Business Ethics E
t
E

x
&

$
s
The programme artractecl simiiar reactions in orher counlries, especially in conservative countries
sur:h n
&
was aired' ln lndra,
aslapan, Tarwan and india. in Taiwan, ihe show was scrapped even before a single episode
E
E

programme was aired, ir faced severe opposirion and ihe STAR TV network had ro give up the
though rhe I
l
idea of makrng an lndtan versiotr of the programme. t*
I
(Adapred from htrp//wwwicmrindia.org/free%20resources/case studies/F,ealiry%20TV%20Contrverstes' $
$
Accessed on 23 June 20D) ,
t
s
x

Questions: g
1. Starc any three (3) erhrcal tssues in this case. t
?
I
2. Several Asian coun[ries cleoded ro ban Temptarion lsland from being shown on television.Apply Utilitarian'
Kanrian and Virrue Erhics rheories ro assess and jusrify whether rhe banning action is a rightful action' G
f,
Relaring ro quesrion (Z) abc e, is rhe banning aciion justifiecl from the Theory of
Rights and Justtce E
3. &

principles? Discuss. E

4. Is the realiry show promotrng social justice? Justify your answer' $


g
rr
r
f
*
t:
9,
r
i
i

The Holy Quran: Text, Translation and Commentary. Ali, Abduliah Yussuf. Maryiand, US: Amana
Corporation, i989. Print.

Abdullah, A.G. and e. irnohd ZainolAbidin (2011). Business Ethics. Selangor: Oxford University Press.

l-15.
Alhabshi, S.O. (1937). The Roie of Ethics in Economrcs and Business" Journal of Islamic Economics, 1(i):

Boatright, J.R. (2007)" Ethics and the CondtLct of Business(,5'h Ed.). New |ersey: Prentice Hail.

Boatright, J.R. (2009). Ethics snd the Conduct trfBirsi ness {0"' F,d.;. New lersey: Pearson International Edition'

Eoatright, l.R. (2012). Ethics and the Conduct of Business (7'h Ed.)" New )ersey: Pearson lnternatiottal Edition.

Blum L.A. (1994). Moral Perception and Particularity. Carnbridge: Cambridge Uiriversity Press" p" 12.

*i
Chandra Muzaffar (2005)" Global Ethic or Global Hegemorn,t| Reflections on Religion, Human Dignity
and
Bi
Civilisational lnteraction. London: ASEAN Academic Press Ltd. p" 2.
L
I
Chandra Muzaffar (2009)" Religion cnd Governance. Selangor: Arah Pendidikan.

Di1lon, R.S. (1992). Care and Respect.lnEveBrowning Cole and Susan Coultrap-McQuin, eds., Explorations
in feminist ethics: Theory and Practice. Bloomington: Indiana Uiriversity Pr.ss'
&i

&
$i

Doris, l. (20c2). Lack of Clraracter: Personality and Moral Behavior. Cambridge: Cambridge University Press- g
st

Dusuki W.A. and Abdullah, t"N. (2006). Whv do Malaysian customers patronize islarnic banks. International w
gi.
6
!ournal of Bank Marketing,25 (3): 142- 160. &

&
H
B
E
3
E
I&
B
n
I
Ethical Theories and Principles .o7

GaafTandl.,Mazereeuw, C. and Yahia, A. (2006). Islam and Socially Responsible Business Conduct-An
Empirical Study of Dutch Entrepreneurs. Business Ethics: A European Rettiew,15(a): 390,a06.

Haniffa, R. and Hudaib, M" (20A2). A theoretical frarnework for the development of Islamic Perspective
of Accounting. Accounting, Commerce and Finance. Journal of Business Finance and Accounting,zl (l-a):
1034 1062.

Harmon, G. (1999). Moral Philosophy Meets Social Psychology: Virt'.re Ethics and the Fundamental
Attribution Error. 1ru Proceedings of the Aristotelian Society, New Series, YoL.99(1999): 315-331.

History Learning Site (n"d.). Saladin. <http://www.historylearningsite.co.uk/Saladin.htm>. Accessed on l3


November 20i3.

Importance of Philosophy (n.d.). <http://www.importance of phiiosophy.con-r>. Accessed on 25 Octob er 2013.

Ibn Manzur (1990). Lisan al-'Arab,vo1.l0. Beirut: Dar Sadir.

Ibrahim, M.S.H (2000), The l-.:ed for Islamic Accounting: Perception of its Objectiyes and Characteristics
by Malaysian Musiim Accountants and Accounting Academics. PhD. thesis. Scotland: Llniversity of Dundee.

Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2010). A Srudy on the Level of Ethics at a Malaysian
Private Higher Learning Institution: Comparison Between Foundation and Undergraciuate Technical-based
Students. International lournal o-f Basic and Altplied Sciences,l0(5): 35-49.

Khalidah Khalid Ali, Satirenjit Kaur |ohl, Lai Fong Woon, Rohani Salleh, Sofiah Molek Lope Arnan Shah,
Rahayu Abd' Rahman and Ilmiah Ibraliim (2012). Busine.ss Management: A Malaysian Perspective (2"d Ed).
Selangor: Oxford Fajar

Lyons, N. (1983). Tivo Perspectives: On Self, Relationships and Morality. Hat'varcl Erigcational Review, 53(2):
I 36.

Maududi, Abul A'la al . (1978). Ethical Viewpoint of Islam, Khurshid Ahmad (trans.). l.ahore: Islamic
Publications Ltd.

McDonougli, S' (1984). Muslim Ethics and Moderrtity. Canada. Wilfrid Laurice University press.

Miqdad Yaljin (1973). Al-tttijah al-Akhlaqi al-Islam. Egypt: Maktabah al-Khanji.


fi
Newall, P. (2005). Introducing Phiiosoph,v 11: Ethics. 'fhe Galilean Library. <http://rvrvu,.galilean-lib
rary.orgl
maniscript.php? Posted=43789>. Accessed o, 12 November 2013.

Nickels, W.G., McHugh, |.M" and McHugh, S.M. (2008). LlnderstontlingBusiness(S'h


Ed.). Ner,v york: McGraw
Hill/lrwin.
IJorazzah Kamri (2010). Implementation of Islamic Ethics in Organizations: Malaysian
Experience. iru
Proceedings of 20l0International Conference on Humanities, Historicai and
Social sciences (CHHSS 2010),
Singapr,re, 26 -28 F ebr uary 201 0"

Rahman, A.R.A. (2003). Ethics in Accounting Education: Contribution of the Islamic


principle of Maelaiah.
{IUM lournal o_f Economics and Manageme,Tr, i1(i): 1-lg.

Rahayu Abdul Rahman (2012). Religious Ethical values ancl Earnings


Quality: Some Evi.lence from Malaysia.
PhD thesis. New Zealand: Massev Universitv
)8 Business Ethics

Roget's Thesaurus online. Definition of justice. <wwwthesaurus.com/Roget-Alpha-Index.html>. Accessed


on 20 October 2010.

Shaw, WIl" (2011). Business Ethics (Zth Ed.). Belmont, CA: Thompson Wadsworth.

Syed Othman, A" andAidit, H.G" (1994) .Islamic Values and Management.K:ualalumpur: Institute of Islamic
Understanding Malaysia (IKIM)"

Tucker L (2005). Econom|cs lor Today (4'h Ed.). Ohio: Thomson South \Vestern.

Velasquez, M.G. (2012) " Business Ethics: Concepts and Cases (7'h Ed.). New fer:sey: Pearson Education.

Zinkin ]" and Wiiliams, G. (2010)" Islam and CSR. A Study of the Compatibility between the Tenets of Islam
and the LIN Giobal lmpact. laurnal oJ Business Ethics,9l (a): 519-533.
CI{APTER

Ethical Leadership and


Corporate Culture

LEARNING OUTCOMES

At the end of this chapter, you should be able to:


r Define ethical ieadership.
r Describe the two pillars of ethical leadershrp-moral person and
moral manager.
r Explain the meaning and importance of the right tone from the
top in the context of ethical leadership role.
r Lxpiain some critical elements of a formal ethics programme.
r Define corporate culture and ethicai corporate culture.
r Explain the role of ethical leadership in establishing ethical
corporate culture.
T
I
l0 Business Ethics II
II
t

4.0 INTRODUCTION E
t
I

i
I
This chapter covers the topic of ethical leadership and corporate culture. There are
I
two parts to this chapter. The first part covers the topic of ethical ieadership whilst I
{
the second part examines the link between ethical leadership and ethical corporate $

culture. First, we wili look at the definition of ethical leadership to set the context of I

our discussion. Second, we will examine the pillars of ethical leadership. Third, we
I
$

will discuss the importance of setting the right tohe from the top in the context of r

establishing ethical leadership in an organization. Next, we will look at the meanings I


t
of corporate culture and ethical corporate culture. Then, we will examine the role of
ethical leadership in creating an ethical corporate culture. Finally, we will delve into f

f'
the elements of an ethics programme in an organization. The ethics programme is an
important aspect of ethical leadership. It helps the leaders to set the right tone from
i

I
the top and instil ethical corporate culture in the organization. I

4.1 DEFINING ETHICAL LEADERSHIP .

'

Leaders have long been vierved as the key influencer of corporate culture and source of'
;rpl"r; b;---1 ethical guiclance for employees because Lhey have the porver and ability to guide and
i

through observation.
5o, leaders ought
motivate others. They can use their pov/er to establish organizationai norms, practices
to send the right and policies. Tliey shouid be able to demor"rstrate the desired behaviour, goals, values
nressage by first and norms of the company. Employees emulate the personal behaviour of their leaders"
behaving ethically They get their ethical cues by observing what their bosses do (|ames, 2000). If their
themselves and then leader's are known r.r have committed unethical behaviour and corporate practices,
motivating their employees might perceive ti-rat these behaviours are acceptable and expected of them.
followers to observe Leaders, in tiris context, are not limited to corporate directors, CEOs and other
erhical conduct. senior executives, but also at every levei of an organization, ir-rcluding line managers
or supervisors. Given this background, it is pertinent for leaders to be the main source
Th"i--r-.,]** I of ethical guidance for employees. So what is the meaning of ethical leadership?
of ethical and
unethical practices
According to Broln, Trer.ino and Harrison (2005), ethical leadership is the ability
are reflected in the
or po\\rer to instil ethically acceptable behaviour through personal actions and
organizational values motivate followers to emulate such behaviour ihrough tr.,r'o-u'ay communication,
and ethical standards reinforcemcnt and ethical decision rnaking, Ethical leadership embraces the values of
established by the trustworthiness, respect, responsibility, fairness and caring as shorvn in Figure 4.1. It-l
organization. fact, an organization is ethical only if its leaders are ethical and most importantly, if
e
t
the leaders are able to motivate their foilolvers to behave ethically. t',,

L.rd.t*- Ethicalleaders set an ethical tone-at-the-top by behar.ing ethically and encouraging &
g
'hflrer,cel
the behaviour of their their employees to do the same. This type of leaders leads by example and encourages s
followers through their employees to take the initiative to solve problems in a fair and ethical manner. s
role-modelling and Some studies found that employees behave ethicaily when their leaders pay attention
esrablishing systems to ethics, take ethics seriously and valuc ethics as mrch as making profits (Trevino ef &
f
and processes that a\.,1999; Hitt, 1990). Other than role-modelling, ethrcal leaders also allocate adequate
promore eihical
financial and physical resources to promote and support ethical behaviour and
behaviour.
practices.
Next, we shall examine the two pillars of ethical leadership, which greatly affect s
K
the extent to which a leader is a strong or weak etliical leader. H
m

N
xE
B
V
&
lE
D
r3
Ethical Leadership and Corporate Culture 101

Figure 4"1 : Core components of ethical values

4.2 rWo PiLtAnS or


ETHICAL LEADERSHIP

Trevino et al" (2003') suggest tr,vo pillars of ethicalleadership-a'moral person'and a


'moral manager.' These tu,o pillars basically reinforce the idea that ethical leadership
requires someone that does not only have a set of core ethical vaiues and acts upon
them, but also establishes various piatforms and a rvork environment that promotes
such values among his followers.
The rnoral person pillar represents the leader's personal traits, character and
altruistic motivation. The moral man?ger piilar represents the proactive efforts of the
manager to influence the way his employees behave, ethically and unethically. These
two piliars are important to ethical ieadership because individuals learn appropriate
behaviour through a role-modelling process, which is by observing the behaviour of
others (Bandura, 1977). Figure 4.2 shows the two pillars of ethical leadership.

Figure 4.2: Iwo pillars o{ ethicai leadershrp


t
I!
I
)?- Business Ethics !
T
T

The rnoral person pillar requires a leader to be a person of integrity, honesty, I


n
I
trLrstworthiness, and competent. He must also shorv concetn for people, b,e socially {
s

responsible and treat others with respect and dignity, and most crucially, live a moral r

life at the personal level. As a moral person, the leader must be a role model to all his a
&

tI
employees. His behaviour and the way he makes decisions must be consistent with
what he preaches i.e. 'walk the talk' and he must live his beliefs i.e. 'live the talk' as
E
I
B
F

opposed to being a hypocrite. E

L..d.rr *Gi b.hr*l In a nutsheil, he must behave ethically in his personal and professional iives. A E

ethically in borh rnorai person knows what is right and wrong anri then acts out of conscience and $
t
integrity. l{e must lead by example and be aware of how the use of his authority, actron
&
their personal and g
p

professional lives. and behaviour affects others. in addition, a moral person must be brave enough to E
&

They should avoid take a stand on questions of ethics, behaviour and morality. in short, a moral person E

being hypocrites. is a principled decision-maker. Figure 4.3 summarizes the characteristics of a'moral
E
2

;
person' and a'moral manager.' :
i
The moral manager pillar requires a manager not only to be a role model a

lhrougL visible action, but also to use his authority to estabiish work en\rironment
&
i
E

and system that promotes ethical behaviour and discourages unethical behaviour. ?

For example, a moral nlanager puts in place a reward system that promotes personal i
accountability and irrstitutes a disciplinary systern that punishes unethical practices
in an organization.
Rrl. -"d ,rc ---l A moral nlanager also consistently and regularly communicates the importance
alone is nor enough of ethics and values to hts employees. He makes conscious effbrts to transter his
ro develop erhical ethical vaiues and beliefs to his employees so as to fbster an ethical work envtronment.
leadership. lt has to A moral manager must ensllre that all decisions are in line r.t ith the ethical r'alues that
be supplemented he professes. He must not be afraid to even decline business that is not aligned to the
by rewards and a ethrcal r,alues of the organization. These actions must be visibie to ali emplo,vees in
penalty system and
rrlder 1o Bcl llreir lttention t.
constant two-way
cornmunication
In a nutshell, ethical leadershrp is about how leaders exercise their porver b1' I'

about rhe
being both rnoral indir.iduals and moral managers. In the next section, lve will look
.j..

importance of ethics. at another impolterilt aspect of ethical leadership, which is the right tone {iom the
toP. 5
h
,
ri.
&
g
s
ruORAL PERSON IVIORAL IuANAGER tf
r

1.

ffi
I",: ,,l i .l'rta!!Sr1:.:qli :*,I Role modelling through .
I I -t ntesriry,:Ioriqqry^.trqqtw"riirtht nshs-'t . I visible action
II nbf. t 66fifidtehi;,'G:i#g;1
-',-' !'';"/j* s:
'. .. ,'-,
I
'.'f";'-l t:
:l

ffi

-:-#"ti*j: eEffi fiffii*il-H$n*ff $Iil


I
EqdtibB*}hlhtfr &ffifr 5ll
I'-'*tKbEtft0boefil:Delsonal molafIffi^l
ffi Rewards and discipline
t:
I r: j6xe !"frx$fts" f !" 'r { s'{ie\"ftqdE&gl t'
!,
&
I\1$iiffi#(ry1Deel$&i,',diE11th"ri?#3#t ffi.t
"Si9$i5ld
I rii.to flilil;s.$bieicti'iirniii&ffi1 Ccrnmunicating about ei' rics
1 .offtfr br, ieid'#cti$ffi"tnufrffi I
|I ;d and values
;"tr]:#- ffi; r H-7111#%h4}MiYlffiCl
r 1: it*i.srrr.\sqqso!"rulqsr+ts:'1s{d$I
I Y.:

ts
s$:
&
it:
F
*
Figure 4.3; Characteristics of a 'rnoral person' and a 'moral manager'
&

E
x
&
g
&
Ethical Leadership and Corporate Culture 103

413 SETTING THE RIGHT TONE FROM


THE TOP
A very important dimension of ethical leadership is for the leaders to transform their
words into action, which is to set the right tone from the top so that they rvill not be
seen as paying lip service to ethics. What does it mean by setting the right tone at the
top? 'Ihere are many ways to interpret this expression. In this book, we can take it as
the efforts undertaken by corporate leaders, including the board ofdirectors, to create
an ethical atmosphere in the workplace" It is about creating a culture that is conducive
for everyone to take ownership and responsibility to do the right thing because it is
the right thing to do.
This type of culture is so infused in the daily lives of aii employees that it
becomes a porverful tool to mitigate risk arising from fraud, corruption and unethical
behaviour. For example, a manager sets the right tone from the top when he decides to
discard a component of a product that fails to meet a critical safety test. The manager
believes that faulty products shor,ld not be sold in the market even if the colTrpany is
under pressure due to time and budeet constraints. His empioyees emulate this belief
and expectation, then internalize them in their daily lr.ork. The manager has, in fact,
m* ft""l,h..p,'t
a powerful means to
set the right tone for the company for years aheacl that ensuring product safety is affecr the behaviour
paramount to the company. of employees in
The irnportarrce of setting the right tone from the top is greatly emphasize d by.l oot rhe organization.
and Ofori (2009) u,hen they assert that 'leadership r,r,hich lacks ethical conduct can be Leaders have to set
dangerous, destructive, and even toxic'. If the top management sets an inappropriate: che righr tone from
or wrong tone at the top, that is the atmospirere that encouragcs urnethical practices rhe rop so as to
lhe ernployees will not take ethics seriousiy. If the top management shirks, misuses communicate their
company assets, misrepresents the capabilities and perfbrmance of the organizatiot't, expecrations about
rhe imporrance of
sii,es bribes, Lrreaks the law and engages in other unethical practices, then the
ethics in business
emplol,ees receir.e the message that these types of behaviour are not only acceptable,
dealings.
but perhaps expectecl. They might think that it is certainly the r.vay to get ahead in that
iirganization. Employees watch the behaviour of their managers, iisten trr rvhat the1,
say and follow their lead.
Case for review 4.i highlights the incident where the top rnanagement rvas so
',,bsessed
u.ith the achievement of financial goais at any cost that the emplovees
'sorted to unethical prac.tices to meet the goals to avoid harsh actions from their
hosses.

Bausch & Lomb: Overstated Earnings

fhe Hong Kong division of Bausch & Lomb had tremendous sales growth throughout rhe 1980s
and early 1990s. However, suddenly, the division reported a significanr reduciion in earnings in 1994.
The earnings dropped by 54 per cent. The decline in earnings was due io the excessive distrrburor
inventories.
)4 Business Ethics

The SEC's investigation revealed rhar Bausch & Lomb had been overstating its earnings for years.
Nor only the l long Kong division was involved rn rhis unethical and unlawful acr, but also other
divisions in Latin America and orher Asian counrries. How did Bausch & Lomb rnanage to oversta[e
irs earnings? Apparently, the company resorred to various unethical sales tactics to boost sales, such
as durnping Ray-Ban sunglasses ar cheaper prices ro'black'markets and shipping con[act lenses to
doctors who did not make any orders in the firsr place. In some extrme cases, the distributors even
held up to r-wo years of unordered invenrories. ln short, the company relied on financial manipularion
ro meet sales targers, thus arrificially boosted rheir earnings.
The SEC charged rhe company for breaking rhe US law for overstaternenr of earnings. Several of
its top executives were named in rhe charges. As a resulr of the unethrcal sales ractics, Bausch & Lomb
had to restate rhe earnings. l-he revenues were reducedby 542.1 miliron and ner profrrs by413 million
for 199-3. Although the SEC did nor find any evidence rhat could direcrly irnplicare rhe rop executrve-(
on rhe oversraremenr of profirs, rhe invesrigarion revealed that rhe culture ar rhe company focused
roo much on the achievement of earnings and sales goals.
The rop executrves gave challerrging sales targets and expected the salespeople ro achieve them
at any cost. They did nor wanr ro hear any excuses for not meeting rhe rargels. Sometimes, employees
who failed ro meet the targets would be sub;ecred to severe humiliarion. T.he top executives failed to
emphasrze chat rhe achievemenr of f inancial goals must be made rhrough ethical means and values
such as honesry and fairness. They had pur tremendous pressure orr the salespeople to achieve sales
rargers unril rhey resorted ro whaiever means ro meer them. lr-i short, rhe top executives set the
wrorlg Lorre [rorrr t-lre Lup Lirar Llre errrployees had Lo do whatever it takes to boost sales.
Nor only the culture became so obsessed with the ochieverrenL of earnings. the cornpany also
gave higher weighr ro achieving higher saies and earnings growth and profitabilrty than the werghr
on ensuring customer sarisfacrion As a resulr, Bausch & Lomb pard deariy fr:rr-this lack ol ethical
leadership and had to serie a shar-eholder Iarvsuit over the overstatement oI earnings as well as the
SEC charges. The company's reputation was badly damaged too.

(Adaprcd frct m : J e n n i ngs, )0 09)

Case for Review 4.2 shows when the CEO of iohnson and )ohnson set the right tone
from the top about putting customer's safety first, it heiped to gain public confidence
and restored its damaged reputation in the long run.

Johnson and Johnson: Tylenol lncident

ln 1982, several people dred after raking Tylenolcapsules rn Chrcago, USA. The then CEO of Johnson
and]ohnson, James Burke, clurckly referred to the company's credo of olacrng cusromer safety ahead
of financial considerations io make a swift decision to recall the prod.rct from ihe market nationwide,
fuliy knowing ihat rhe sales and share price would fall.
He rook a big risk because the recall meanr rhe company had ro absorb a massive cost bLr his
conscience was clear because he knew rhat he could not rrsk more lives. He did not wait for the
investigarion ro be complered before making such a decisicn ln ocing so, rhe CEO had ser the righr
tone irom the rop-to put the cuslomer's interest and safety firsr in whatever they do in rhe company.
Ethical Leadership and Corporate Culture 105

ll

He belreved rhar only when rhe cusromers were happy then rhe interests of shareholders would
be served. His acrion and rone frorn rhe top enarled the company ro endure the Tylenol crisis and
derive a long-rerm comperrrive advantage from the incident. How is thar possible? l-le was nor afraid
to make a decision when there was a quesrion of ethics and stakeholders took notice of rhis acrron
Akhough iniriallyJohnsorr andJohnson suffered a temporary serback due to the massive loss from
rhe recali, ir came back stronger with higher customers' rrust and loyalry as well as enhanced repulation.
Since then, rhe company has been one of rhe mosr profitable and successful companies worldwide.

Holv do the leaders set the right tone from the top? Leaders must embrace the two
pillars of'ethical leadership that lve discussed in the eariier section of this chapter. A
summary of the actions that can be taken is as follons:
r Always act as roie mode,ls by being ethical towards employees, customers,
suppliers, shareholders and regulators. If the CEO himself breaks tire law,
then he could riot have been setting the right tone from the top for the
organ izat ion "

r Actively embed values so tirat ernpioyees know ti-rat ethics and honesty are
rmportant in thc orglnizatiutt.
r Regularly talk about the <;rganization's ethical values and standards in all
compan)'er,,en1s to show that ethics is a prioritv.
r Consistentl,v 'clo as the,v sar,r' as opposed to double talk, ivhere in the
organization the leaders talk about the irnportance of ethics and integrity,
but ignore them in therr personal lives and social engagernents.
r Implement policies, processes and systems to support the tone from the top.
r Make it clear that comphance and ethical risks are not tolerated, and infuse
this stance in the organization's rervard and disciplinary system.
r l-ake imrnediate action to fix anv ethical problem and remedy the harm,
rvhich includes taking appropriate action against tl-re offending ernployee in a
su,ift and firm manner.
r Provide, sponsor and endorse adequate and regular ethical training on a code
of ethical business conduct of the organization.

In reality, horvevcr, nurrerous firms have failed to establish the right tone
frorn the top, leading to l-rarmful scanclals and even their collapse. Take 0nron, for
example. It had a corporate slogan of 'Respect, Integritl., Community, Excellence'
but the top executives were the ones that betrayed the trust of the empioyees and
shareholders by getting invoived in massir.e lrauds. The former CEO, ]effrey Skilhng,
emphasizcd bottom-line results over ethical values whereas another former CEO,
Ken La1,, showed unethical leadership bv instructir-rg his managers to use his travel
agency for arranging ail overseas trips for Enron's executives. As such, the lr,ords of
that slogan meant nothing to the stakeholders as they lost their jobs, pensions and
life savrngs. Similarly, rve had rvitnessed how the CEO and founder of Computer
Associates International, Sanjay Kumar, proudly talked about his company's
corporate qovernance and business ethics practices. However, at the same time, he
committed large-scale fraud that led to his indictment in the US court. He obviously
did not walk and live the talk.
In the next section, we rsill look at some critical elements of a forrnal ethics
programme, lvhich is one of the building blocks of an ethical leadership and corporate
06 Business Eihics

culture. We can also take this ethics programme as a way to safeguard against unethical
practices in the workplace or the way to institutionalize ethics in an organization.

4.4 CRITICAL ELEMENTS OF A


FORMAL ETHICS PROGRAMME
In the earlier section of this chapter, we have learned the importance of setting the
right tone from the top. Here, we wiil explore a structure that leaders can estabhsh
to support the effort to 'walk the talk' and ultimately establish an ethical leadership.
It is normally referred to as a formal ethics programme, which provides ethical
safeguards in the workplace. This programme consists of a set of formal activities,
policies, practices, processes and procedures to deal with ethical issues in an
organi: rtion.
This 1-'rsg12mme aims to affect employees' perception and view of ethical issues,
and rnost cruciail1,, to guide them to address those issues that arise on the job. It is
also inter-rded to suppnrt employees to comprehend the ethical standards set by the
organization and ensure compliance with the standards. Employees necd to har.e
ethicai standards, training and channels to seek advice whcn they encounter an
ethicalrJilemma in their dailywork. Then, theyu,ill tre able to rnake an informed arrrl
ethical decision to address such a dilemrla.
T'he top management, particularly the CEO, should take the lead to initiate
and sponsor this ethics programme. Furthermore, it is a manner in rvhich the top
managernent team and the employees' irnmediate si-rpervisors can sholtr strong i
ccxrmitrnent to create an ethical atmosphere throughout the organization. The !
a
supen.isors har.,e a crucial role in impiementing a formal ethics programme because B

they need to give support to employees in adopting the cthical standards. Frgr:re 4.,1 i--
t
shorvs a list of critical elements in a formal ethics programnte. ,..
!.
t?
*
&

Critical Elements of a Formal [thics Programme


#
s
s
6

&

" Core value statemenL . Erhics training programme


!_

. Code ol eLhical conducr . Whistleblowing policy and ethics helplines


ll
&
. Compl,ance manual . Ethics audir
E
F

. Lrhic. of iicers and cornpliance officers . Ethics award


&
&
re
&

Figure 4.4: Critical elenrei'lts of a formal ethics prograrnme B


h
sI
l
*&
4.4.1 Core Value Statement x
An important dimension of ethical leadership is the articulation of organizational r_
G

D
x
values to all empioyees and other stakeholders. This can be done via a core value x
G
statement. Top management needs to identify anri derine a clear shared meaning of xT
values/befiefs, priorities and principles that can guide everyone in the organization in E-
&
their daily activities" IE
I
T
Z
I
I
Ethical Leadership and Corporate Culture 107

4.4.2 Code of Ethical Conduct


Code of ethical conduct or simply ref"erred to as code of ethics is one of the most
common critical elements of a formal ethics proJramme. Many established
organizatrons have formulated such a code. We can take it as one of the best-known
and important instruments for implementing business ethics in an organization
because it can influence behaviour of the employees. It usually contains poiicies and
ethical principles that sirould be followed by all members of the organizalion so that
they can behave ethically. It is meant to guide managers and employees on what is
viewed as ethical behaviour and to enhance their ability to deal with ethical issues.
Schwartz (2004) suggests that code of ethics shouid have the follorvino
characteristics for it to be useful and effective.
r Applicable to er.eryone in the organization and all business partners
r Easy to understand and non-legalistic
r Contains reievant exampies of ethical and unethical behaviour or practices
r Avoid negative tone
r Specify sanctions or penaltics for violatron of the code
Other than the abovementioned characteristics, code of ethical conduct should
also specify the procedure for handling complaints and rnciude the descriptions
fMr*rrt*d
of standarcl of condr-rct ancl standard of practice expected of ail rnembers of the -
supervisors must take
proactive steps to
organlTation. It is conrmon for tire codc of ethics to be a stale document, u,hich is ensure that the code
rreant to be stasired ar,vay sotrrer,r'hele in the desk drawer of errrployees afler atLelrtling of erhics is not a stale
an induction programme. Hence, it is pertinent for organizations to ensure ali document rhar has
employees are reqr-rired to sign-off on ti-re code annually to indicate that they have no significance ro the
read, understoocl and undertake to contply with the code. employees performing
In additjon, the code of ethical conduct wiil be more effective if it is follorved by an their daily routines.
employee ethics training prograrnme so that ethics can be infused in the company's
dav-to-day activities. Figure 4.5 lists typical provisions or issues covered ir-r a code clf
ethical conduct r,r'hereas Figure 4.6 shows the PETRONAS no gifts policy statement,
,,"hich is also rnclucled in its code of business conduct and business ethics.

Accepting or refusing gifrs from business


partners policy
Conflict of rnteresr
Securiry of propnerary and conlideniial
infornrarion

.p!lQ!f les

Figure 4.5: Con',mon prcvisions of the coie of ethical conduct


)B Business Ethics

NO GIFTS POLICY

pETRONAS aspires ro achieve rhe h;ghesr standards of inregrity and honesty in rhe conduct
of its business and operations.
pETRONAS staff are required ro acr in rhe besr inrerests of PETRONAS and to refrain from
engaging in rhe conducr whrch may affecr the besr interests of PETRONAS.

fherefore PTTRONAS staff shall NOT:

r zccpt personal gifts from external parties

. give personal gifrs to external paruies

The policy is meanr ro avoid conflicrs of interest or the appearance of conflicrs of interesr
rn any ongoing or potential business deallngs of PETRONAS

pETRONAS staff are required ro familiarize rhemselves wich the provisions of PETRONAS'
Code .-rf (..onducr and Business Erhics (CoBE) to ensure rheir conducr is in compliance
wirh
rhe CoBE
(Scturce: http://www.petronasgas.com/events-prctmorions/Pages,/articlel
GENTLEREMINDERNOGIFTSPaUCv: aspx, accessed on 12 lune 2014 )

Figure 4.6: The PFTRQNAS no gifis policy statement

4.4.3 Compliance Manuals


It is common for large org,anizations to have corrp.liirnce nlattuals to communicate
relevant rules, policiei a,r.l regulations that must be adhered to by all employegs. $n6h i:'
l
a manual guides enployees to understand the rules and helps them to implemerrt r
I
them in th"eir .1ally u.tiviti"r. Some rnanuals include a checklist of things tcl compiv
t-
n,ith for easy ref-erence of employees. For example, HSBC Bank Malaysia reciuirer all r
t
functiolal lteacis of clepartment to ensurc that a11 employees rcad and con'rpl1' 1r i1fi
the provisions of the bank's compliance manual. They are also required to sign off
r*
E

on the manuai annuaily. The heads of department need to complete arrd sign off on a u

checklist that specifies all the relevant banking policies, regulations and provisions of
t
*
larvs that need to be complied rvith in the bank's dal'-to-day operations.
r
s
:l

4.4.4 Ethics Training Programme


Ethics training programme aims to train all levels cif ctuployees to engage in ethical
practices and behai.iour in the workplace environment. It is liot meant to teaclt
employees about morality but to help them make the nght dee isions that are consistent
with the organizations'ethical standards. Training can be in the fornr of briefings,
lectures, workshops, gloup discussrons, high-level spceches and uewsletters'
E,.r- ;,,rrrg-_--1 The training ihould cover the provisions of the cocie of ethtcs and ethical issues
Leiomes nerrfei rrve if that are specific to an industry or profession. In other words, it should be tailor-made
rhe ourcomes a,'e Tror to address issues encountered by different business ftrnctions in an organization
assesseci or 1ev1sv,,s1l For example, human resource managers may face unique ethrcal concerns in the
i'egulariy recruitment process and ernployee relations. Meanlvitile, procurement managers
may have to deal *,ith the issues of accepting gifts, b, ibes or benefits-in-kind in the
supplier selectron process"
Ethical Leadership and Corporate Culture '109

Ethics training can help to shape the behaviour and perceptions of employees
toward acceptabie and unacceptabie practices in the organization. Hence, it is
important for the ethics training to provide them with the exposure and skill to
analyse case studies on real ethical dilemmas in the workplace and guide employees
in the process to make the right decisions to resolve them. Organizations can also use
training programmes to convey their expectations and ethical rules to the employees.
Finally, organizations should put in place a system to measure and track the
progress and success of ethics training. Periodic qaizzes or tests can be arranged
to check the employees' knowledge retention. Supervisors can keep track of any
behavioural change that is more in tune with the ethical standards or an increase in
reported concerns or complaints about potential unethical activity.

4.4.5 Ethics Officers and Compliance Officers


Ethics offlcers (EOs) are basically administrators who have a direct and full I-T*" **d
responsibility to oversee all matters related to a formal ethics programme in an facrors for the
organization. They inplemeirt and monitor the programme and advise the top effecriveness of EOs
management and board of directors on ethical problem identification and resolution. are independeni
They are senior corporate officers whc, have the clout and power to act on ethics-related reporting and
matters. To ensure the EOs act independenth,, a reporting mechanism should also be organizational
established to provide confidentiajit-r and anonymity without any fear of retaliation. reS0urces.

O..6.r.L,1it the EOs shouid report directlv to the board of directors with a dotted line
reporting to the ClrO 1br adrninrstrativc matters. ivlembers of an organization will not
be confident to refer potential ethical problems to an EO lvho is rrot impartial for fear
of reprisals or a conflict of inlerest.
One of the more critical fr-rnctions of an L,O is to assist the top management fEot *.r" b.
leam and board of directors to rnstrl ethical culturc in an organization. EOs are accessible ro all
the key contact point for marlagers, employees, customers, directors, shareholders employees i,r a
arrd even suppiiers on issues reiating to cthics. Petry and Tiez (.1992) suggested confidential rvay
that the responsibilities ol'ethics oificers include advising empioyees, investigating
aliegatrons of ethicai problerns, as r,e1l as der.eloping and coordinating ethrcs and
compliance policies. An rmportant point to consider is to ensure that EOs have the
resources to perform their fui-ictions. Hence, the support from the CEO in aliocating
the budget and human capital resollrces is paramount to ensure the etfectiveness of
the EOs"
Conipliancc officers (COs), on the other hand, are tuliy responsible for not
onl-v ensuring compliance lr,ith policies, rules and regulations, tut also monitoring
adherence to ethical procedures ancl standards. It is comrlon to combine the functtons
oi erhics and compliance officers in most organizations. In short, EOs and COs are
the anchors of a successl'u1 ethics programixe in an organization.

4.4.6 Whistleblowing Policy and Ethics Helplines


Whistleblorving is the disclosure of information about unethical or illegai practices tcr
someone rvithin an organization who can take action to investigate, prevent and punish
the lvrongdoers. It is an important risk management mechanism to uncoyer unethical
activities that could expose the crrganization to various risks. A whistlebiower is an
individueii who reports the evidence eif wrongdoing or unethical activities.
Tlvo famous whistleblo\vers rvere Sherron Watkins and Cynfhia Cocper of
Enron and \{orldCom respectively. They reported accounting irregula,-ities in the
10 Business Ethics

Whistleblowing will I companies. In the case of Ms. Watkins, she reported her concerns to the CEO, Ken
not take place if rhe Lay. Unfortunately, the CEO did not take the report seriously and failed to investigate
employees do nor the concerns thoroughly. This incident highlights the importance of having an
know how to do independent whistleblowing channel of reporting so that any reporl of wrongdoing
it and they are nor can be investigated instead ofshoving them under the carpet.
confident thar rhey Employees are the ones who usually have the inforrnation about conduct or
will nor suffer from
activities that could have ethical or legal ramifications. However, they are reluctant
reprisals from doing
to report such activities due to fear or simply mrsplaced loyalty to coworkers or
50.
superiors" So, it is pertinent for organizations to have a written policy and procedure
on whistleblowing in order to guide and encourage employees to report unethical and
illegal activities.
Further, the policy and procedure is necessary to prevent abuse or misreporting.
Swoan (2007) suggests the foilowing reasons for having a whistleblowing policy in an
organization.
r fb identify risks that the top management or the board of directors might
not know.
r To encourage employees to voice out their concerns.
r To provide an alternative channel for employees to report unethical activities
if they cannot report them to their immediate superior.
An inrportant element of an effective whistlebiowing policv is to specify the
protection to be accorded to the whistleblowers. Protection in terrns of confidentialit,v
of in{brmation and rmmunity from civi} or criminal actions is necessary to encourage
u,histleblou,ing activities. Whistieblowers should also be protected from an1, fornt of
retaliation such as dismissal, pay cut, job transfer or e\ren a demotion.
Without this protection, nobody will dare to speak out for fear of being victirnize d.
In Malaysia, the government has introduced Whistleblorver Protection Act 2010 rn i.
Decenrber 2010 to give legal protection to individuals who expose corrupt practices s
I
in the public and prn ate sectors. The Act assures confidentiality and gives irnmunitv
t--
from criminai trr civil cl-rarges. I
r
An essential element to the rvhistleblor,ving policy is the etl'rics helpline, rvhi,-h
serves as a confidential channel for everyone in the organization to communicate
information on ethical violations and illegai activities. Members of an organization
can also call the helpline to seek advice on ethical problems or dilemmas in case of
doubt. Thel'can choose to remain anonymous. Thr heipline can be in the form of
telephone lines or via the Internet. Establishing helplines indicates that an organization
is serious in promoting ethical practices, which in turn gives confidence to employees
to b1ou, the vr,histle on bad behaviour.

4.4.7 Ethics Audit


Some firms have put in place an ongoing process or mechanism to verify and assess
the effectil,eness of their ethicai safeguards by conducting an audit of their ethics
programmes and standards. This process helps the organizations to determine any
loopholes, tr,eaknesses and warning signs that could lead to future ethical problems.
Another purpose of the audit is to ensure that thc managers and employees closely
foliorv the desrred ethicai standards specified in the code of ethicai conduct. The audit
also periociically revien s and assesses the adequacy of the existing ethics policies and
procedures and suggests improvements. Ethics audit ts also perlormed in order to
identify anlr d.,riu,toirs from the code of ethics and assess whether the manageinent
has taken the necessary steps to rectify them.
Ethical Leaclership and Corporate Culture 111

4.4.8 Ethics Awards


demonstrate
arganizations can give recognition to empioyees who have gone all out to
,nj.mbru.. the core and ethical values in their daily routi'res. This form of recognition
helps to show other empioyees the appropriate behaviour expected of
them, which
thei shguid emulate. Ethical employees can be role models and set good examples of
ethical conduct fbr their coworkers. The role models can provide supPort and give
encouragement for their coworkers to follow the ethical standards establislied in the
organiza-tlon and to consider ethics in decision-making.
" In ,u*-ury, the top management needs to ensure that they use or integrate a1l
mri;il;6,, -.
the eight elements of an ethics programme together because they reinforce each other musc be included in
and iiis more effective to do so. Studies have found that employees in the companies an erhics programme
that have a comprehensive ethics programme are less likely to engage in unethical for it ro be effective.
()oseph,
behaviour and inclined to report such behaviour to the relevant authority
2000; Kaptein, 20U9). A formal ethics programme must not only exist on paper but
must be present in the hearts, minds and actions of every member of an organization
for it to be effective.
In the last few sections of this chapter, we lvill explore the link between ethical
-1b
leadership and corporate culture" begin with, first we need to be clear on the
definitions of corporate culture and ethical corporate cuiture. We may have briefly
broached on these tlvo areas eariier in this chapter so it is now the time to delve into
theitt t'Jstrril.

4.5 DEFI N ING CORPORATE CULTURE


AND ETHICAL CULTURE
Personalvalucs and nroral character play crucial roles in influencing an organization's
ethical stance and perforn'lance. Hor'l.ever, they are not sufficient to prevent nr isconduct
because research has shonn that ethical culture is the one that has the strongest
inflr-rence on behaviour (Whetstor-re, 2005; lurkiewicz, 2007).In this section, rve will
revieu'the compot"tents of an ethical culture. However, to begin rvith, we need to knorv
the nteaning of corporate culture and its role in shaping the decision-rnaking process
oian organization.
Corporate culture is the sirarecl beliefs, values, norms, customs, expe :tations artd
meanings of the members of an organization that shape or influence their thinking
and behaviour. Simpll, pr-rt, it is the way everyone does things in an organization.
It also ties indir.iduals in thc organization and guides how thev ought to treat each
other. F,:rther, corporate culture gives a sense of identity to achieve common goals
and enhances social stability because it holds the organization together.
Elements of a corporate cuiture include methods of probiem-solr.ing and
conflict resolution, rules and policies, incentives and rer,vard system, reporting line
and authority, tempo of' rvork, pirysical layout of workplace, mode and channels
of communications and leadership styles. An example of a corporate culture is
AirAsia's culture--team,orientated, fun, low cost and high productivity. Financial
institutiotis, on the other hand, are knolvn to har.e a compliance based culture and
strict control.
Ethicai cuiture rs an unspoken understanding amongst meri'lers of an
organization of the legitiinate and unacceptable practices. It is the part of corporate
12 Br.rsiness Eti,ics

culture that promotes the ethical values of an organization and guides employees
Th. rbt-,-* I to understand the importance of doing the right thing. In a strong ethical culture,
"f
an ethical culrure employees know that doing the rieht thing is expected and they have a positive attitude
could bring abour a towards the ethical decision-making process. They also know that doing the right
disastrous effecr on thing is a priority in the organization. The top management team is instrumental in
the sustainability of developing a strong ethical culture because their attitudes, choices and actions have a
an organization.
great influence on the expectations of the employees.
Organizations that have a strong ethical culture embed ethical values in the
actions and decisions of the management and employees, in the company policy and
procedures and formuiation of incentive systems. The establishrnent of a formal ethics
programme is one of the key components of the development of an ethical culture.
The other component is the top management's commitment to ethics, which is
encapsulated in the concept of ethical leadership.
In a strong ethical culture, employees are not merely concerned with getting the
job done, but getting them done in the right/ethicai way. In fact, a stronger ethical
climate ,rncourages ethical conduct, promotes ethicalleadership (Brown and Trevino,
2006) ancl enhances employees' perception that the management is committed to
ethicai practices (Sims and Keon, 1999). A survey of Ethics Resource Center (2009)
in U.S. companies revealed the folloning findings *,ith regard to the companies that
have a strong ethical culture:

r Fewer employees felt pressure to commit unethical behaviour.


r Lotver incidents of miscottducl alttuttg etttpluyees.
r I{igher tendency to report for observed misconduct.
r Actions and perception of top management team drive the ctl-rical culture.
r Strong top managerrrent commitment erlcourages reporting of financial
misconduct.
'l'rer.ir-ro et al. (1999)
in a survey of more than 10,000 U.S. employees found that
ernployees are more r'r,i11ing to report bad news and ethical violations to management
and they perceive that the presence of ar-r ethics programme enhances their decisjon-
making process. The findings of this survey indicate that ethical culture plays an
irnportant role in the employees' decision-making process. Employees are inclined
to make ethical choices when the culture of an organization gives priority to ethical
values and conduct and the top management does not compromise ethics in their
actions and decisions.
In summarv, corporate cuiture piays an important role to bind emplot'ees together
and to make them understand the expectations ,.nd values of their organizations.
I'hey are guided by the corporate culture not only in the ivay they do things but also
the rvay thev interact with each other and ti-re ntannel they treat other stakeholders.
Ethical culture is the component of corporate culture that griides employees on what
is acceptable and unacceptable behaviour in therr datly activities in the organization.
A strong ethical culture fosters the environment that makes being ethical a priorrty
and essential to achieve organizational goa1s. Ethrcal leadership and a formal ethics
programme are key comprJrlents of an ethical culture.
Next, rve shall examine the relationship between ethical leadership and ethical
corporate culture.
Ethical Leadership and Corporate Culture 1i3

ETHICAL LEADERSHIP AND


ETHICAL CORPORATE CUrIURE
We have noted that ethical leaders embrace a set of universal ethical values and personal
traits such as trustworthiness, respect, responsibility, fairness, caring and integrity,
among others" Further, leaclers explicitly make the statements of values, beliefs
and customs through their conduct, speeches and various systems and procedures
established in the organization. Ail of these become ingrained in the organizational
culture. Ethical leaders are both 'moral persons' and'moral managers'who encourage
ethical behaviour by role modelling, purposefully managing ethics and making
eyeryone in the organization accountable for ethics. Given these characteristics,
ethical leaders are instrumental in cultivating ethicai culture in an organization. In
other words, ethicai leadership is a precondition to an ethicai culture.
Leaders are influential in shaping the expectations, perceptions, practices and
C,h'.ril.rd"rth,p h*
behaviour of everyone in thei. organization. Trevino, Hartman and Brou,n (2000)
a posirive relarionship
highlight that the 'moral manager' piliar makes ethical leadership stand out, which
with erhical
in turn greatly affects the corporate cuiture of an organization. They have polver and corporate culture.
influence that they use to motivate their followers. Motivation is, in fact, a powerful
force that influences individuals to channel their behaviour, energy and concentration
to achiet'e organizationa) goals. So, ethical leaders motivate or even compel others to
confor rrr to their cxpcctalions ahout cllrir.al conrlrrct
Horv do ethical leaders motjvate others to embrace ethic:l principles in their
daily actir.'ities? They can creatc motivation by establishing an incentive systcrn that
rewards the achievernent of goals througl-r ethrcal means and punishes emplol,ees who
fail to coniply with the ethical standards of the organization. This reward system is
a porverful reinforcement for ethical behavior.rr. F,,rrther, it is through such incentive
systems that leaders can convey their expectations of ethical conduct.
Further, ethicai leaders lead bv erampie and are role models for the einployees.
Grojean, Resick, Dickson and Srnith (2004) assert that role rnodelling can be an
important determinant of an ethical culture because it increases trust in leaders
and aligns the values of the ernployees r,vith those of the leaders. In aildition, ethical
leaders provide the direction and facilitate the process of achieving organizational
goals through role modeiling. Sci, naturall,v, employees look up to thern to determine
lhe expected beiraviour.

. In addition, policies of ethical leaders greatly affect the rva1, employees perform
their daiiy work and behave in the organization. Ernployees vierv leaders tha,1 introduce
policies and take actions that are in Iine with the core values of the organisation are
more trustworthy. Thus, in a nutshell, ethical ieadership is a critical iomponent of
an ethical culture, which is an ultimate source of ethical behaviour (Slnclair, tqq:).
in.fact, \^ e can say that ethical leaclers play a dominant roie in developing an ethical
culture. it is through their ethical tone from the top and actions that they.*u, p.ornot.
and reirrforce ethical culture.
In summary, ethical leaders promote ethical culture. Unethical leaders
demonstrate a severe lack of ethical conduct in business operations and breed a
culture of anything goes that we have witnessed in various companies such as Bausch
& Lomb, TVco [nternational, Artirur Andersen, Parmalat, Satyam Computer Services,
Lehrnan Brothers, Merrill Lynch and most recently HSBC Banking Group
4 Business Ethics

The learning outcomes for this chapter are summarized below:

l Define ethical leadership.


Ethical leadership is the abiiity to cultivate ethical behaviour in the workplace by role modelling
and motivating followers to observe ethical conduct in their daily acrivities. Leaders can encourage
ethicai behaviour through two-h,ay communication, reinforcement and ethical decision-rnaking.

2. Describe the two pillars of ethical leadership: moral person and moral manager.
The moral per.son pillar represents the ieader's personai traits, character and altruistic motivaticin.
'fhe moral manager pillar represents the proactive efforts of the manager to influence the way his
employees beirave, ethically and unethically.

3. Explain the meaning and importance of the right 'tone-from-the-top' in the context of ethical
leadership role.
'Ihe initiatives by corporate leaders and the board of directors to create an ethical atmosphere in
the workplace where eyer).one takes ownership and responsibility to do the right thing because it
is the right thing to do.

4. Explain some critical elernents of a formal ethics programme.


Core value statement--a u,ritten statement issued by the top management team to convc,v Lhe
values of the organization to en-rployees and other staketolders.
Code of ethical conduct a r,r,ritten set of rules, policies and ethical principles to gurcle managers
and employees to behave e thically and to resolve ethical problems at the workplace.
Compliance manuals -a set of guidelines to guide employees to understand and implernent the
relevant rules, regulatjons arnd laws in their daily activities.
Ethics training programme a programme to train all empioyees to engage in etl"iical practices
and behaviour in the rvorkplace environrnent and to help them inake the right decisions based on
the establisl-red ethical standards.
Ethics offices and compliance officers-Administrators who have a direct and ful1 resporrsibilitl,
to oversee al1 matters related to a formal ethics programme and to advise the top management,
board of directors and employees on ethical problem identification and resolutlon.
Whistleblowing policy- a policy that outlines the procedure to disclose information about
rinethical or iJlegal priictices rvithin an organization and specifics the protection accorded to the
i
r'r-1ristleblon er. ?
f,
Ethics helpline-a conficlential channei of communication establi.shed for all members of the I,
r
organization to report on ethrcal violations and illegal activities to seek guidailce on resolvins E.
u

etl, ical problerns or dilemnras. ii


k
i
Ethics audit-an on-golng process to verify and assess the adequacy and eff-ectiveness o1'ethical &
r
safeguards and to check that the managers and employees closely follorv the desired ethical I
standards specified in the code of ethical conduct. r
E
Ethics arvards-Recognition tti employees who have gone all out to demonstrate and embrace the &
core and ethical I'alues in their daily routine. fr:
s

5. Define corporate culture and ethical corporate culture. #


x
Corporate culture rs tire shared beliefs, values, norms, customs, erpectations and rleanings of the
members of an organization that shape or influence their thinkrng and behaviour. It is the wav
li
&
everyone does things in an organization. H

B
B
E
s
E
Ethical Leadership anci Corporate Culture l'15

Ethical culture is an unspoken understanding amongst members of an organizationof the legitimate


and unacceptable practices. It is the part of corporate culture that promotes the ethical values of an
organization and guides employees to understand the importance of doing the right thing.

6. Explain the role of ethical leadership in establishing ethical corporate culture.


Ethical ieaders play a dominant role to cultivate ethical corporate culture in an organization' They
embrace ethical values in their personai and professional lives. Thcy make decisions based on
ethical principies and ethical r.alues. Ethical leaders have a great influence on the way the followers
behave and perceive things in the organization. Hence, they can influence and motivate them to
pay attention to ethics in their daily activities through role-modelling and establishing policies
and reu,ard systems that promote ethical practices. They can reinforce ethical behaviour by talking
about ethics and emphasize on the importance of ethics to the organization. When leaders practise
ethical leadershrp, the follolvers iearn the appropriate behaviour through observing them and
copying such behaviour. Ethical leadership lets employees know the boundaries of acceptable and
unacceptable behaviour in the workplace.

Erhics audit An on going proce ss of assessing the adequacy and effectiveness of a formal ethics Programme
,lf an organization.

Ethics awards Recogi'ution given to emplol,ees who are known to observe ethical conduct in their dailv
actn ities consistentl-v.

Ethics helpline A confidentialchannel of communication for all members of an organrzatton to seek advice
on ethic,ai problems and to report any rt'rongdoing.

Ethics officer A senior rnember ofthe management team who is responsible for overseeing the implementation
of a ibrn'a1 etl-rics programmt: and ensuring adherence to established cthical standards.

Ethical culture An unspoken understanding amongst members of an organization of the legitimate and
unacceptable practices"

Ethical leadership fhe ability or po\,\rer to instil ethicaliy acceptable behaviour through personal actions and
,notivate follotvers to emulate such behaviour through two-wa1'communicatiun, reinforcement and ethical
,.iecision-making.

f thicsprogramme A set of fortnal activities, policies, practices, processes and procedures to deai with ethical
tssues in an organizatiott.

Ethics training A prograrnrne that aims to irain all levels of employees to engage in ethical practices and
lehaviour in the workplace environment.

Code of eth ical conduct A written set of rules to guide managers and employees to observe ethical conduct
and to help them rvork through ethical <-lilemmas.

Compliance manuals A set of written guidelines about policies, iules, rcgulations and provisions of laws to
1r-ride employees to implement them in their daily work.
ib Busrness tthics

Compliance officers A manager who is responsible for ensuring that the organization and its members
comply with the policies, relevant rules, regulations and provisions of laws.

Core value statement A written statement articulating organizational values to all employees and other
stakeholders.

Corporate culture The shared beliefs, values, norms, customs, expectations and meanings of the members
of an organization that shape or influence their thinking and behaviour.

Moral manager Represents the ef'forts of the managers to be role models and to establish a work environment
and system that promotes ethical behaviour and discourages unethical behaviour in an organization"

Moral person Represents the leader's personal traits, character and altruistic motivation.

Tone from the top


The efforts undertaken by corporate leaders, including the board of directors, to create an
ethical atmosphere in the workplace.

Whistleblower An individual H.ho provides the information or evidence about potential unethical or iliegal
activities in the organizatioir.

Whistleblowing Disclosure of information or evidence about potential unethical or illegal activities by an


individual within an organization to the parties outside or the authorities in the organizatioti.

t. Explain the meaning of ethical leadership.

2. List and briefly explain five common organizationai ethical values.

3. In your opinion, explain rvhat happens if a moral person fails to be a nroral manager?

4. Illustrate. with examples, the meaning of setting the right tone from the top.

5. Analyse the importance ol ethical leadership in cultivating ethical culture in an orqanization.

Earnings Growth: The Orbit Way


Mac was a Senlor Vice President in the Customer Credit Department at Orbit lntern.:'ional Broadcasi
Network (Orbit), a leading inregrated consumer media entertainment group in Malaysia and Soutlreast
Asra Crbir operates in four areas of business, iiamely Pay-TV Radio, Publrca:ions and DigiLal Media Mac
was responsrble for customer i)ayrnents, credirs and reconciliations of accor-inis. Ihe top managenlent gave
hinr chrlienging monthly revenLle growth targets. He felt pressured ro achieve the targets He knew thai
not meeting ihe targers would put his 1ob on the line.
Ethical Leadership and Corporate Culture 117

ln Orbrr, ir was common for upper level management to'massage'the company's financial records'
Mac knew thrs. They were willing ro do wharever was neLessary ro achieve revenue growth withour farl.
The board of drrecrors did nor know about this activiry. They were happy to see performance
growth and
did nor borher to ask any quesrtons. They pur their complete trust in the top management team to deliver
resulrs. One evening, a week before the end of the month, Mac was under rremendous srress. He had
yer ro meer the current monrh's iarger. He did nor have much time left. He ccrrainly did not wanr to be
humiiiared during rhe deparrmental heads' meering for not meering the target. He went rhrough it a
few
year. He had
rimes lasr year. lt was nor a good experience. He lost a hefry poriion of his annual bonus last
also warched orher heads of deparrmenr go rhrough a hellish time on numerous occasions. All of them
were very fearful of rhe CEC.
Mac knew his bosses manipulared financial records and said ro himseli "l should do the same in this
desperare rime. Why nor? My bosses never get caught. There is a slim chance that lwill be discovered,
bur
lconrrol all rhe records." soon, ir became a habir for Mac ro manipulate rhe financial records. Larer, his

subordinares would also do rhe same fraudulenr activity under his v;atch. ln fact, they worked together
ro'brainsrorm'creative ideas rct cook rhe company's books. The inrention was ro fraudulenrly stare as if
rhey were meeting revenue growrh orojections albeit artificially. Mac wanted ro make hls bosses happy,
lro more importantly, he could save himself from further humiliation. He had had enough. lr was during
-.: D:ainsrorming sessrons rhar Mac learned how to hide bad debt, which caused the assers and profit to
;. nilaied
!re i ne Cay in Decenrbcr, a ream of inrernal audirors paid a visit ro rhe Customer Credit Department'
They
They v,,enr srrarght ro see Mac and dernanded to examtne the accounting records of the department.
did nor rake long ro frnd unusual journal enrries made and appro\ed by Mac. They confronted him about
rhe entries. Mac panrcked and coulcl nor rhink of any plausible explanation. lt was then that he confessed
. o his iraudulerr prz( r cp

Questions:
1. ldentify rhe elements in Orbir lnrernarional Broadcast Network that contributed to the decisions to
manipulate financral records and continue to do so.

2. Wharwasrheronefromrheropinthiscompany?lnwhatwaydidtheboardofdireciorscontriburedto
rhi: lraudulenr activrryl

Bandura, \. (1977). Self-efficao,: 'l'or,r,ard a unifying theory of behavioral change. PsS'chological Reliew, B4'.
t91-215"

Brown, M.E. and Trevino, L.K. (2006). Ethical leadership; a revierv and future directions. The Leadership
Quarterly, 17 : 595 - 616.

Brown, M.E., Treyino, L.K" and F{arrison, D.A. (2005). Ethical leadership: a social learning perspective for
construct deyeloprnent and testin g. Organisational Behavior and Human Decision Processes, gT(2): 117-134.

Irthics Resource Center (2009). The rmportance of ethical culture: increasir-ig t:ust and driving dorvn risks-
<http://trvr,r,.ethics.orglfiles/u51Cu1tureSup4.pdf>. Accessed on 12 ]anua f '; 2014.

ts*
118 Business Ethics

Grojean, M.\V., Resick, C.J., Dickson, M.\Ar. and Smith, D.B. (2004). Leaders, values, and organizational
climate: examining leadership strategies for establishing an organizational climate regarding ethrcs. Ictttrneil
oJ Bu sine s s Ethic s, 55: 223 -24 l.

Hitt, W.D. (1990). Ethics and leadership: putting theory into practice. Ohio: Battelle Press.

iames, H.S., )r" (2000). Reinforcing ethicai decision-making through organizational structure. laurnal of
Business Ethics, 28(1): a3 -58.

Iennings, M.M. (2009). Business ethics: case studies and selected readings (6th Ed.). Ohio: South Western'
Cengage Learning.

|oseph, J. (2000). National ethics survey, Volume l: Hou, employees perceive etlrics at work. Washingtorr D.C.:
Ethics Resource Centcr.

Jurkiewicz, C.L- (2007). Louisiana's ethical culture and its effect on the administrative faiiures foiiowiug
Katrina. P ubli c Adm ini s t r at i o n Re v i ew, 67 (l) : 57 - 63.

Kaptern, M. (2009). Ethics programme and ethical culture: a next step in unravelling tireir multi-faceted
relationship . I ournal o"l' Business Ethics, 89 261-268.

No Gifts Policy. <http://u,.rvn'.petronasgas.comievents-promotions/Pagesiarticlel


PETR.ONAS Gas Berh:rd.
GENTLEREIVIINDERNOGIFTSPOLICY.aspx>. Accessed on i2 lune 2014.

Petry, E. and Tietz, f. (1992). Can ethics officers improve ethics? Business and Society Ret,iev,,, 82(1): 21 25.

Schu,artz, 4.,1.S. (2004). L-inir.ersal moralvalues for corporate codes of etl'rics. Journal of BtLsiness Erfuir-s, 59 (1):
)-7 - 44

Sims, R.L. anC Keon, I'.1 . (1999). Determinar-its oiethical decision-making: The relatronship of the percerved
organizational enr.iron nrcnl. lournnl of Bu:iness Ethics, D@):393-401.

Sinclair, A (1993). Approaches to organisational ctilture and ethics. Journal of Business litltics,12:6'3 73

Snoan V (2007). L,stablishir-rg a u,histleblowing procedure. ICSA Best Practrce Guide (Z'd Ed.). London:
International Charterecl Secretaries and Administrators.

Toor, S.R" and Ofori, G (2009). Ethicai leadership: examining the reiationships with full range leadership
model, ernplovee outconres, and organizational culture. Iournal of Business Ethics,90(4): -533-5'17

Trevino, l-. K., Hartman, L. P. and Brorvn, M. (2000). Moral person and moral manager: horv erecutives
develop a reputiition for ethical leader:ship. California Management Review,42 l2B-142.

Trevino, L,. K., Brorvn, M. and Pincus Hartman, L. (2003). A quantitative rnvestigation of perceived execulivc
ethical icadership: perceptions from ir"rside and outside the executive suite. Htnnon Relations,56(l): 5-37

Trer.i.no, L. K., Weaver, G.R., Gibsoir, D.G. ancl Toffler, B.L. (i999). Managing ethics and legal c.ompliance:
whai hurts and rvhat ',r'orks. Oalifornic Management Review,41: 131-i51.

Whetstone,'f.i. (2005). A framervork for organizational virtue: the interreiatronship of mission, culture and
leadership. Business Ethtcs: A E'uropean Review, V(4\367-378.
CHAPTER

Corporate Governance

I-EARNING OUTCOMES

At the end of this chapter, you should be able to:


r Explain the meaning of corporate governance-
n Explain in what way that the separation of ownership ano control
in public corporations could lead to corporate governanc'e
problems.
s Elaborate on the meaning of conflict of tnterest in the context
of the relationship between shareholders and professional
rnanagers.
r Explain the implications of the Malaysian corporate ownership
structure on corporate governance.
Describe the nature of the principal-agent relationship in the
context of corporate governance.
Explain the stakehoider, property and social institution theories
that are applied to the corporate governance discipline.
Describe the role of various Corpordte governance mechanisms in
protecting the interest of the shareholders and stakeholders.
Describe the various ethlcal issues in corpcrate governance.
CHAPTER

Corporate Governance
5

LEARNING OUTCOMES

At the end of this chapter, you shouid be able to:


n Explain the meaning of corporate governance-
r Explain in what way that the separation of ownership and control
in pukrlic corporations could Iead to corporate governance
problems.
s Elaborate on the meaning of conflict of interest in the context
of the reiationship between sharehoiders and professional
managers.
a Explain the implications of the Malaysian corpcrate ownership
structure on corporate governance.
Describe the nature of the principal-agent relationship in the
context o{ corporate governance.
Explain the stakeholder, property and social institution theories
that are applied to the corPorate ciovernance discipline.
Describe the role of various corporate governance n-'echanisms in
protecting the interest of the shareholders and stakeholders.
Describe the various ethical issues in corporate governance.
l:
:0 Business Ethics

.- 5;0. -' INTRODUCTION

By nature, human beings are egoists. Recall the discussion on ethical theory where
egoists tend to place emphasis on their self-interest. Their actions are based on
promoting their own'happiness. Being egoists, human beings can be greedy too.
Horvever, the extent of the greediness differs from one person to another. In a business
context, when greed is combined with unfettered power, it can almost certainly lead
to corrupt or unethical practices. Corporate governance problems largely arise due to
the unethical behaviour of corporate managers. They are human beings who can be
egoists, greedy and have power in their hands. undeniably, there are many good and
ethical corporate managers out there who work diligently to ensure that shareholders
are not short-changed. Howeveq there are aiso sufficient numbers of errant and
unethical managers who had caused havoc in the corporate worid at the expense of
stakeholders.
In llre past decades, we have witnessed various corporate scandals, be it in the
rArestern or other parts of the world. The US government responded to the Enron
scandal by tightening the legal framework governing corporate managers and public
corporations. Meanwhile, the UK and Asian countries introduced various corporate
governance codes to address the issue of abuse of power by corporate managers
and revamped their respective company laws. 'lhese initiatives were mainly taken
to strengthen the oversight function within public corporations. The ultimate
aim is mainly to protect shareholders and stakeholders and to improve corporate
rnanagement of public corporations.
In Malaysia, \^re have a good share of corporate scandals invoiving pubiic
corporations, namely the financial irregularities in Renong Berhad, the Perwaja
Steel fiasco, the downfall of Sime Bank Berhad and the massive trouble at Malaysian
Airlines System (MAS) Berhad in the late 1990s.In 2006, we witnessed the'llransmile
Berhad's financial manipulation case in which tu,o of its dircctors were sentenced
to jail for providing misleading financial information to Bursa Malaysia Securities.
In 2010, the case of former Sime Darby Berhad's top executir.e in connection with
trvo alleged failed investments overseas and the Bakun Project had rocked corporate
Malaysia. Sime Darby Berhad allegedly suffered a massive loss dr-re to these failed
investments.
Poor corporate governance is of great concern to not only shareholders, but also
to other stakeholders as well, because it can lead to massive losses and the collapse
of corporations such as Enron, Worid Com and closer to home, Sime Bank Berhad.
Hence, robust corporate governance provides a mechanism for the board of directors
and shareholders to control corporate managers so as to give them little room to misuse
their porver and to advance their greed at the expense of stakeholders. Hower.er, this
mechanism needs to be supported by the promotion of ethicai practices amongist
the corporate managers. In this instance, the board of directors play a crucial role to
inculcate ethicai behaviour in a business organization. Hence, the interrelationship
between corporate governance as a mechanism to oversee the way power is exercised
in a pubiic corporation and the role of ethical practicts or behaviour in ensuring the
achier.ement of organizational objectives is established.
This chapter attempts to provide an overview of corporate governance in the
context of business ethics. We will focus on corporate governance issues relating
to public corporations. Then, we will learn about the developrnent of corporate
go\rernance in Malaysia and the uniquencss of the Malaysian corporate olr.nership
structure that is said to be an important corrtributing factor to corporate governance
CorporateGovernance 121

problems in our public corporations. We will also examine the theories of corporate
gou..nur.. to understand why corporate governance problems occur and the remedies
ior them. Finally, we will delve into some of the ethical issues in corporate governance.
However, we first need to be clear about the meaning of .orporate governance and its
importance to public corporations.

5.'1.". DEFIN ITION OF CORPORATE


GOVERNANCE

According to Tricker (1984), the term 'governance' is derived from the Greek word
gubernare, which means 'to steer'. Shareholders of public corporations rely on board
if directors to steer the corporation on their behalf. In contrasi, owners of small
private companies steer the con-rpany on their own. The official definition of corporate
governance in Maiaysia as adopted hry the Malaysian Code on Corporate Governance
(2000) is:

'Tht' process tmd -strtLcture ttseLl to direct and n'LanLtg the business ond
ttlt ;irs of the compctrtl, to)+,ords e nhcncing business prasperity ancl corporate
ttccorrttabilitlt ,,ytisJ, thc ultimate objective of realisit'Lg long-tcrm sharcholdcr
value, whilst taking into accotult the interests of other stakeh,'lders-'

This definition takes a broader perspective where companies need to take into fc*p*r"
.onsideration the welfare of stakeholders in fulfilling the objective of maximizing governance aims
value for the shareholders. The ultimate role of corporate governance is to oversee the ro ensure that rl-re

management that manages the business on a daily basis. company serves and
Corporate governance, in this contexl, should ultimately lead to enhancement of prorecrs the inrerests
of irs shareholders
accountabilit,v of the board of directors and corporate wealth. Corporate governance
and stakeholders.
encompasses a broad spectrum of internal and external mechanisms inter-rded to
mitigate agency risk by increasins the monitoring of managements' actions, limiting
managers' opportunistic behaviour, aird irnproving the quality of firms' information
florvs.
Next, r,r,e rvill look at the significance of corporate gorrernance in public
corporations. But first, we need to have a good understanding of the structure of the
public corporatiotr that gives rise to various corporate goverttance problems.

5.2 CORPORATE GOVERNANCE AN D


PUBLIC CORPORATIONS

In this section, lve urill examine the structure of a public corporation, rn'hi.h has a
srgnificant implication on corporate governance. To begin with, though, we should
note that a public corporation is one of the common forms of business ot,nership. The
other two fbrms are sole proprietorship and partnership. Our focus in this chapter
rs on public corporations. Knorving the structure is crucial to the undrrstanding of
rvhy peopie give prominent attention to corporate goyernance of public corporations
22 Business Fthics

as oPposed to private companies. Most importantly, we will investigate in what way


the structure ofpublic corporations contributes to the various corporate governance
problems. We will pay close attention to the misalignment of interest between the
shareholders and controllers in pubiic corporations.
Most companies started off as small entities where a group of people or
rnp'*;"r,pill family members pool their funds together to form a business entity. The orvners
the owners are
directly involved in
are effectively tiie managers of the company. This form of orvnership is called the
'ownet-ntanager firm'. As firms aspire to expand tiieir businesses, the otvners need
rhe management
of day-to-day substantial capital to support the expansion. A common way of raising capital rs
operations. to issue shares and bonds to the public through. capital markets. The shares are
tradabie in the stock market.
Once a company goes public, often times it is no longer fully ccintrolled by the
founders. This situation is typical of the Anglo-American type of public corporation.
rvhich is found in the US and UK. Pubiic corporations in these countries are
characterrzed by dispersed share ownership in which there is a large number o{
shareholders with small shareholdings. It is uncommon to find a single or a group of
large shareholders. Figure 5.1 shows the corporate ownership structure for private and
public companies. A public corporation is its own lega1 entity, as if it r\re re a person.
iror example, a public corporation can enter into a contract to organize a business
transaction and own a property in its own name. Similarly, it can sue and Lre sued for
breaching a contract.

Managen :nr

Figure 5.1 : Corporate ownership structure for private and public cornpanres

1'he dispersion of share ownership into hundreds of thousands or er.e n


l" prbh. ilt"d --_l sharehoiders meant that no single sharehoider has enough shares to exercise cffective
miliions of'
companies, rhe
owners delegate
control over the company. In this instance, the shareholders do not manage or have
the managemenr fuil controi over the enlarged entity anymore. They effectively surrender or deiegate
of day-ro-day most power to their appointed board of directors. .r board of directors consists of
operarions ro a professioral directors that control corporate resources on behalf of the shareholders.
group of professional Thc leader of the board is the chairman. He or she is the highest ranking officer and
managers. is the cirairman of the public corporation too^ Figure 5 2 illustrates the relationshrp
betu,een the shareholders and the board.
Corporate Governance 112
ILJ

BETWEEN THE SHAREHOLDERS AND THE BOARD OF DIRECTORS

The shareholders delegate power and


aurhoriry to the board of directors

The board delegates porver


to the management

Figure 5.2: Relationsl'rp between shareholders and board of directors

The control or mariaBenrcnt of public corporations are distinctiy separate from I Shareholders are rhe
ownership. Corporirte ownership and control is divided bettveen two parties- owners br-rr rhey do
shareholders and the boirrd o1'directors. The sharehoiders own the firm and the board nor direcrly conrrol
r-.i directors control thc pubiic corporation. This situation is possible because it is not all the decisions in
;-raclical fbr the large number of shareholders to speak in one voice in managing the their company.
daili' alfhirs of the public corporation. Further, some shareholders prefer to beirar,e
like investors rather than shareholders. Thci, fls not wish to take part in managing
bilsiness actiyities" 'I'hey are only concerned lvith business performance so tirat ther.
car) reap the desired retLlt ns {'rom their investment.
The separatisn rrf o\{rnership and control has two important implications. First,
the delegation of control ovt:r corporate resources to the board of directors diiutes
the porver of the shareholclers. Tl-rey are the owners but irave limited power over the
r"ay the public corporatiolt is managed. The board of dirbctors usually cor-rsists of a
small nurnbcr c',1 people depending on the size of the corporation. Hencc, thel, are
unable to control and manage the affairs of the corporation by themselves. The,v hire
prolessional corporate rnalrallers to manase and make decisions on daily operations
of the e orporation. \\re call this group the top management team. It is led by a chief
executive offlcer.
The board of directors then focuses on charting the strategic direction anri k*p*r",.n.rrg."
making srrategic decisions. In tiris structure, the board of directors should be have the tendency to
rJeally the shareholders' first line of defence against potential abuse of po\,\,er by the pur:sue self-inreresrs
professronal managers. In reality, hor,r,ever, r,ve have witnessed numerous faiiures of firsr, often making
the board of directors to ellectivel.y play the important role of protecting the interests decisions rhat do nor
.'f sliareholders. So, in this chapter, we shall consider the directors and prolessional serve the interesi of
rorporate managers as controllers of a pi:blic corporation. They have the tendency rhe shareholders. This
io abuse their immgnse po\{er if they are left unmonitored. It is rvorthr,vhile to bear situarion is known as

;n mrnd that the boarcl o|directors can be a powerful mechanism for protecting conflicr of interesr.
the interests of sharehoidcrs rf it is coinposed of a sufficient number of i;idependent
direcfors" We shall examine this issue in Section 5.7 of this chapter.
24 Business Ethics

Second, when there is a separation of ownership and control, there is bound to be


Corporare -1 a conflict of interest between the shareholders and controllers. Shareholders expeet
governance in public
the controliers to maximize their wealth so that they can enjoy good returns on their
listed companies aims
to align the interests
investment in the forms of dividends, capital appreciation and iong-term survivai of
of the professional the public corporation. The controllers, however, do not necessariiy share the same
managers wich those aspiration or objective as the shareholders. The controllers may have their own
of the shareholders. agenda or motir.e in exercizing control over the public corporation. This divergence
oi misalignment of interest between the shareholders and controilers is said to be the
origin or key contributor of corporate governance problems in public corporations.
Recall the opening section of this chapter-that human beings are opportunistic
or greedy by nature. The controllers' power to control the public corporation
combined with the natural tendency to be greedy and an ineffective monitoring of'
their behaviour can lead to disastrous outcomes. We have learned from the media
of various corporate governance issues such as creative accounting, the controllers
paying hefty bonuses to themselves despite poor performance, taking excessive risk by
icquliing other companies that may only serve to enhance their prestige and power,
committing fraud, etc. Mismanagement issues are bound to arise . The effect of these
to shareholders and stakeholders'
'We g()vernance problems are far reaching
corporate
have now seen that this type of corporate structure renders shareholders to
be aimost pow,erless except for the power to exercise the voting rights to reject major
corporate decisions that are not in their favour. In reality, ho\t'ever, it is not easy to
coordinate a large number of shareholders to speak in one voicc in oppositlg corporate
actions during the general meeting of shareholders. Hence, tvhen left to their own
devices, opportunistic and errant controllers tend to exercise their pon'er not to
advance the interests of sharehoiders as expected, br-rt to prornote their self-interest.
This is argued to be the starting point of corporate governancr problems tllat lve have
been witnessing so far.
The precedilrg discussion establishes the r-reed l'or corporate governance in
public coiporations. Corporate governance is meant to mot'titor those errant and
opportunistic managers so as to ensure they exercise therr Po\,\'er to advance the:
interests of shareholders at all times. In contrast, the role of corporate governan,-c is
said to be less needed or significant in private companies r'r'here there is iittle separation
of ownership and control between the on'ner and manager.
The owner-manager is basically the same person who orvns and manages the
cornpanyhimself or herself. He or she has full control over the direction oithe companY
and makes his or her own decisions on matters of importartce to the company i.e.
or,r,nership and control are in the hands of the shureholders. In this respect, there is no
divergence of interests as in the case of public corporations because tl-re shareholders
cum controllers are pursuing the same objectives or interests. Further, it is in the
o\vner-manager's best interest to ensure that their comPany is rvell-managed and
profitable. The conflict of interest situation common in public corporatiolrs is ke;rt to
a minimum or does not exist at all.
In summary, the structure of public corporalions gives rise to the various
corporate governance problems that we had witnessed so far. The structure leads to the
cletachment of shareholders as owners of the public corporation-they are separated
fiom controlling their ou,n property. They rely on the controllers to protect their
interest but why would the controllers care about the shareholders? They might pursue
their own interest because they are greedy by nature, and with Power in their hands,
they are in the best position to enrich themselr,es at the expense of the shareholders.
ln this situation, the controllers need to be rn;nitored so as to ensllre thel' do not
deviate from the activities and decisions that u,rl} give priority to serve the objective
CorporateGovernance 125

to maximize shareholders' wealth. 'Ihis monitoring comes in the form of corporate


governance mechanisms, which will be discussed in Section 5.7 of this chapter.
In the next section, we shall take a look at an alternative form of corporate
ownership and its implication to the nature of corporate governance problems. Unlike
the typical diffused shareholding in Anglo-American corporations, Malaysian public
corporations have concentrated ownership: It is common to find family groups,
institutions, the government and individual shareholders having large proportion of
ownership; thus exerting substantial control over the public corporations. As such,
there is little or rare separation of ownership and control compared to the diffused
corporate ownersh ip envj ronment.

5.3 THE CONCENTRATED


OWNERSHIP OF MALAYSIAN
PUBLIC CORPORATIONS

Corporate governance in Malaysia is generaily characterized by a high degree of fo-*rrhe .f prbht


concen:ration of corporatc otvnership and tight insider control. Concentrated corporarions in
ownership refers to the situation where the ordinar), share ownership in a public Malaysia is mosrly
corporation is largely held bv individuais, a group of individt als, famiiy members, concentrared
instittttions and the government. In this tvpe of ownership environment, olvnership in the hands of
and controi tend to be concentrated in the hands ofa large group ofshareholders that family groups
har-e sigitiiicarrt direct control in a company. Concentrated shareholders are known and governmenr
as the 'insiders' that have long-term stable relationships with the public corporation. institutions.
Insiders exert control over the public corr)oration either through exercising their
outright majority voting rights or by orvning a significant minority shareholding.
In thls section, wc siraIl focus on the concentrated ownership of family and fC"*.."r"d
government owners ancl their in-iplications to corporate governance. In particular, ownership refers ro
\re are interested to look at in rn',hat way concentrated owners may act in their or,vn the large percenrage
tnterest at the expense of minority shareholders. The situation may get worse when the of share ownership
controlling owners also serve in the top management capacity. Concentrated o\\rners that belongs to an
have controlling interest in a public corporation when they own a large percentage individual, a group
of shareholdings, which gives them greater control or voting rights to influence the of individuals,
decrsions of the corporation. family groups
or government
institurions.
5.3.1 Family Ownership
According to Claessens et al. (2000), corporate ownership in Malaysian public
lorporations is highly concentrated predominantly in the hands of individuals and
family groups. In fact, they found that the most significant controlling shareholders
rvere family groups, follou,ed by the government. This finding is not surprising because
nany public corporations including the conglomerates have evolved from traditional
family-owned enterprises (Kean and Cheah, 2000). A more recent study revealed that
from the p-riod 1999 through 2005, over 43 per cent of the main board companies of Frrdy **rr *.d
ihe Maiaysian Bourse are family-owned (Haslindar et a\.,2009). to have a close or
tighr conrrol over rhe
As traditional family orvired firms in Malaysia grew prosperous, thry expanded
company they own.
and went public" However, the founders of the family firms still retain significant
2-6 Business Eihics

o\,\,nership and control in the newly listed corporations. Exampies of family-owned


compani;s are Robelt Kuok Group, Genting Group, YTL Group, Hong Leong Group,
Lion Group and Kuala Lumpur-Kepong Berhad. The government introduced the
secondboaid of the Bursa Malaysia (formerlyknown as Kuala Lumpur Stock Exchange)
in 1998, which rnade it easier for smaller family firms to access the capital market for
raising capital to support their business expansion. This initiative had contributed to
significani grorvth rn the number of small listed family-owned corporations and the
growth of the Malaysian equities market (Mak, 2006).
Family owners tend to exert controi on the corporation because they have longer
investment horizons and usually plan to pass the business to future generations of the
famiiy (E11u1, Guntay and Lel, 2006). This important characteristic has helped family-
owned corporations to persevere and prosper in business.

5.3.2 Government OwnershiP


In Mai*ssia, the government has been involved in business enterprises for more than
40 years, since the early 1970s. The involvement of the government in businesses
can be attributed to the historical and political developments of Malaysia, especialiy
after the implementation of the New Economic Policy (NEP) in 1971. l)uring the
fornrative yeirs post independence from 1957 until 1969, the foreigners and Chinese
businessnten largely dominated business actir.ities in Malaysra (forrnerly knou'n as
Malaya). A major ethnic group, Malays were ieft far behind in sharing the economic
rve alth of the neu,ly independent natior-. The unequal distrrbr-ition of r."'ealth between
the Mala1,s and Chinese led to social unrest in 1969, follorn'ed by brief political
instabilitl', particularly in Kuala Lumpur.
The noble aims of the NEP u.ere to eradicate poverty regardless of race in N4alaYsi.r
rl* g"*r"d"r I
ald to enhance the participation of the ethnic Malays in business.
'i'he NEP's specific
Malaysia has been
objective r.vas to achieve 30 per cent of corporate ort,nership and nranagemetlt for
involved in business
way to manage
Br-irniputera by 1990. The government had hoped that tlie NIrIr u-ortld be able to reducc
a5 a
the economy and to the huge inequality in nealth distribution and ultintateh,proinote social stabilit'" in
correct rhe socio- the country. The NEP has created the building blocks for thc Present da,v corporate
economic imbalance eni ironrnerrt in Malaysia.
The NEP served as an important impetus for greater governl.nent participation
in business. During the initial years of its implementatiot-t, the goverument had
actively acquired corporations in strategic industries such as plar-rtations. lnining as
u,ell as banking from the foreigners (Azham, 2002). The gor,ernrnent had technicaiil'
transferred the ownership and control of those c,lntpanies in major industries into
their hands. The NEP has entrenched government inr.olvement in the corporate
sector, ancl a more intimate relationship was forged betrveen business and poiitrcs irr
Malaysia.
Further, corporate on,nership in Malaysran public corporations is also lareely
aff'ected by the national economic agenda. Beginning tn the 1980s, the governinent of
lVlalaysia under the leadership of Datuk Seri Dr. Maliathtr Mohammad (now Tun Dr
Mahathir) has aggressively embarked on privatization of key state companies, but at
the same time, remained a major shareholder in t1,'ose privatized entities (Rashidah,
2006). The privatized corporations are now knorvn as go\rerllirlent-linked companies
(GLCs). Currently, the GLCs greatly influence the perforn-rance and vibrancy of the
lvlalaysian capital markets. The GLCs also play a promincnt role as one of the kel
engines of economic growth in Malaysia.
The govemment also embarked on the 'l.ook East Policy' in the early t980s.
Urrder this policy, many iapanese corporations invested in Mala1.sia, especially rn the
CorporateGovernance 127

manufacturing sector" They either invested directly by opening their manufacturing


plants in the country or formed joint-venture entities with local companies. The
prtvatization exercise, coupled with the active involvement of foreign-controlled
corporations, helped to spur the economic growth of trre country in the mid 1980s
until the Asian financial crisis in the iate 1990s.
Following the Asian financial crisis in 1997, the government established its
investment arm company known as Khazanah Nasional Berhad. It is a major
shareholder of a few public corporations such as TM, Malaysia Airlines, Tenaga
Nasional, Edaran Otomobil Nasional (EON), Petronas Dagangan, Petronas Gas,
UMW Holdings, Faber Group, Perusahaan Otomobil Nasional (Proton)'and Sime
Darby, to name a fer,r
The natrire of"Malaysian corporate ownership influences the type of agency
probiems that exists in public corporations. In view of the highly concentrated
ownership in Malaysian firms, the extent of the traditional agency conflict between
sharehoiders and professional managers may be less severe than the conflict between
major shareholder (or.vner-manager) and minority shareholders. We shall now
examine this issue in the next sub-section.

5.3.3 The Nature of Agency Conflict in a


Concentrated Ownership Environment
In a concentratecl owuership environment such as in Malaysian public corporations,
mp. hg.*y
there exists one iarge shareholder and a fringe of minority shareholders. In such an
env:ironrnent, the classic o\\'ner manager conflict in diffused ownership (referred to as
problem exists
between owners
-
-f1.pe
I Agencl, Problem) described by Berle and Means (1932) or ]ensen and Mecklir-rg and managers in
i1976) rs niitigatecl due to the iarge shareholder's greater incentives to mor-ritor the a diffused rype of
controllers. Horvever, a second type of conflict appears (referred to as Type II Agency, corporate ownership.
Problem) in r'r,hich the large shareholder that is also the controller may use its It is also known as
controlling position in the firm to extract private benefits at the expense of minority owner-manager
conflicr.
shareholders through managerial entrenchment or various other forms of seil intercst
related party transactjons (Morck and Yeung, 2003).
Minorlt,v shareholders refer to those shareholders that own a small percentage
olshares in a public corporation. Technically, shareholders that onn less than five
m. il rr*y
problem occurs
per cent of total shareholdings are classified as minority owners. In this instance, in a concenrrated
corporate governance is mearit to alleviate the Type II agency problen-rs that are ownership
detrimentalto ilitrority s1-rareholders and other stakeirolders such as the creditors ancl environment
lenders. Hence, givetr this background, corporate governance in Malaysra is not only between rhe large
meant to curb the potential abuse of power by the controllers, but most intportantll., owners and the
to curtail the tendenc,v of the large shareholders to expropriate funds fron-r the minoriry owners.
rninority shareholdcr:s. An important aspect of corporate gor/ernance, in this instance, lr is also known as
principal-principal
rs the strt'ngthening of tl're reguiatory framework to give protection to the minority
conflicr.
:'lrareholders"
Le t
us now move on to the development of corporate governance in lvlalaysia,
which was accelerated by the firancial crisis in the late 1990s. The government,
through regulators of f-inancial markets such as the Securities Commission, Bursa
ivialaysia and Companies Commission of Malaysia, has initiated various corporate
governance reforins following the financial crisis. One of the most significance
outcomes of tiiis initiative rvas the implementation of the Malaysian Code on
t-orporate Governatrce in March 2000. The code was revised and strengihened
trvice in 2007 and 2012.
:t1 Busrness Lthrcs

5.4 THE DEVELOPMENT OF


CORPORATE GOVERNANCE IN
MALAYSIA

Although corporate governance issues emerged wrth the birth of firms, they were
targely unheard of in Malaysia until the Asian financial crisis in 1997-1998. The
financial crisis basically served as the irnpetus for.aggressive corporate governance
reforms in Malaysia. The crisis exposed the structurally weak foundation of Malaysian
public corporations. In general, the consensus was that Malaysian public corporations
had poor corporate governance, which led to their lack of flnancial resilience to
surr.ive the financial crisis. Many public corporations sr-rffered frorn poor corporate
performance and some even collapsed (Mitton, 2002).
k Mrlrr,"r,.-dA Poor corporate governance allowed corporate managers and Iarge shareholders to
governance received
transfer tl,e y,ealth of the corporations to enrich themselves. Prior empirical studies
prominent atlention
observed that corporate abuses rn Malaysian public listed con-rpanies inciuded poor
during the financial
board oversight, numerous conflict of interest transactions involving directors and
crisis in i997-1998
Poor corporate
rnajor shareholders and severe lackof transparency in financial disclosure (Mak, 2006).
was , Further, in general, sharehoiders were sceptical of the abilrtt, of the board of directors
SOVernance
idenrified as one of to safeguard their interests against rampant and blatant abr-rse of power of corporate
rhe key causes of the ruanagers and major shareholders.'1'he board also tailed to detei:t breacl-res of internal
financral crisis financial controls.Investors, in general, nad almost cornpletelylost contldence in the
Nlirlaysian capital markets (Finance Committee Report on (.orporate Cloternance,
1999). As a resuit, the Malaysian stock exchange nearly collapsed if not for govcrnment
lr.;;-,.. ---l intervention.
identified the Follolving the financial crisls, corporate governance of public corporations have
weaknesses in come under increasing scrutrny by regulators, the investing public and acadenticians
corporate Eovernance
alike. 'fhe call to rmplement a higher quality of corporate governance had been
and established a
greater than ever before. The poor state of corporate govcrnance led the gotrernntertt
set of guidelines for
to accelerate the forrnulation of a comprei-rensive and co-ordinated reform to improve
listed companies to
implement. Tlrese corporate governance in Malaysia. The Malaysian gor,ernment, thror.rgh the Ministry
guidelines are called of Finance, had established a high-level Finance Committee (tire Committee) on
the Malaysian 24 March 1998 to conduct a detailed study on cort)orate go\rernance and to make
Code on Corporate recommend ations for improvements.
Covernance (MCCC) The prirnary aim of the Committee -,vas to cstablish and cler.eiop a world-class
corporate go\rernance framework mainl1, for pLrbiic corporatiotts, for the market
Ar Mrhysanprbil to foilow. The Committee comprised 12 members represcnting ahnost a1l sectors
listed companies did of buslness and regulatory communities including the Securities Commission, the
nor have a proper Frnancial Reporting Foundation, the Malaysian Accor:nlirrg Slandards Board, the
standard ofcorporare Registrar of Companies (now known as Companies Lommission of l\lalaysia), the
governance, the Kuala Lumpur Stock Exchange (norn,known as the Bursa Ir4alaysia), tl-ie Centrai Bank,
government Federation of Public Listed Companies and the Association of Banks.
established a
T'he Committee had two working groups, namely (i) rvorking group on best
commitree to look
practices in corporate governance, training and education and (2) working group on
into rhis issue.
lau, reforrn issues in corporate governance. The Committee fourid that the corporate
governance quality in Malaysia prior and during the financial crisis was lacking
and ihere was a need to impror.e it. Moreover. the Committee l'e1t that firrns needed
guidance in raising iheir corporate governance c,lalit)', rvhich shc,uld be on par lvith
the internationa I level.
b

CorporateGovernance 129

The most significant outcome of the Committee was the establishment of the
Malaysian Code on (Jorporate Governance (MCCG) in 2000, which consisted of the
recommendations to strengthen the statutory and regulatory framework for corporate
governance, enhancing the checks and balances and self-regulatory mechanisms
towards good governance. The recommendations were aimed at strengthening the
internal processes within the company, and in particular, the role of the board of
directors (Nathan, Chiew and Soo,2000).
The MCCG set out a set of principles and best practices aimed at enhancing frh. -", "b,il;
the quality of corporate governance. The Committee opined that good corporate of rhe MCCC (2000)
governance rests firmly with the board of directors whilst the shareholders and was ro improve rhe.
auditors play secondary roles (Shim, 2006). The MCCG (2000) placed great emphasis qualiry of corporate
on the governance role of the board of directors by setting the best practices for governance in
improving board structures and procedures. Malaysian lisred
The Bursa Malaysia adopted this comprehensive code on corporate governance in companies.

its Revamped Listing Requirements (2001), now known as the Bursa Malaysia Listing
Requirements (BMLR). This approach essentially meant that it v:as mandatory for
pubiic corporations to disclose rn their annual reports the manner in which they have
fGy f*rt *.*
rhe MCCC (2000)
"f
implemented the MCCG's (2000) principles of corporate governance and the extent of
were strengrhening
compliance with its best practices recommendations. The underlying priiicipie in the rhe role of the
enforceability of the MCCG (2000) is that compliance nith the recommendations in board of direcrors
the MCCIG (2000) is r.ciluntary, but compliance with the disclosure provisions under in monitoring rhe
the B\{ 'R is mandator}, (i.e. a hybrid approach). professional managers
The Securities Commission (SC) had undertaken various initiatives to increase and ro enhance rhe
awareness among directors on the significance ofcorporate gover nance and the need to financial reporting
strengthen the lbundation of the governance structure in their respective companics. and transparency.
L-or example, in 2003, the SC n-randated the directors of public corporations io acquire
48 points o1'continuing professional education annually. This requirentent eruphasises
the irnportairce of training the directors in order to enhance their knor.vledge and
eflectiveness.
In the foilorvtng section, we shail take a look at the MCCG. The discussion
is based on the first vcrsion introduced in 2000. The recommendations of the
N4CCG serve as a benchmark for public corporations to emulate and for the rnarket
participants to assess the quaiity of corporate governance in Malaysian public
corporations.

5.5 THE MALAYSIAN CODE ON


CORPORATE GOVERNANCE
]'he NICCG (2000) is primarily aimed at listed firms given the paramount
responsibility that the board of directors has in promoting shareholders'
objectives and safeguarding firms' assets. The Malaysian government revised the
MccG (2000) in 2aa7, incorporating changes, amongst others the settr:rg up of
an internal audit department that reports directly to the audit comntiltee and
making it ntandatory to have only non-executive directors in the audit committee
(MCCG, 2OA7).
l0 Business Ethics

5.5.1 The lmplementation Approach


In developing the MCCG (2000), the Committee had considered three implementation
Thr",. rpprr*-.|*t al approaches as wideiy adopted in various jurisdictions in the worid. The three
rhe implernentatron
approaches are prescriptive, non-prescriptive and hybrid. The prescriptivc approach
of corporate
governance are specifies corporate governance practices and requires legal compliance with them"
prescriprrve, non- It provides hard and fast rules that may be easier to report compliance with, but it
presciiptive and encourages a'tick in the box' attitude to foliowing lules (Shim, 2006). The Sarbanes-
hybrld. The Malaysiai-r Oxley Act20A2 in the United States adopted this rather rigid approach. In contrast,
auihoriries adopted the non-prescriptive approach places prominence on the disclosure of actual practices
the third approach undertaken and allows firms a complete flexibility to determine their governance
needs. This approach permits maximum creativity and flexibiiity, but makes
comparisons difficult. The Greenbury report in the United Kingdom adopted thrs
flexible approach.
The hybrid approach takes elements of both the prescriptive and the non
prescriptive approaches. Under this approaeh, broad guidelines are introduced, which
should oe flexibly implemented in the 'comply or explain' reporting styie" Firms are
provided rvith a framework for disclosure of the implementation of various provisions
of the corporate governance code. This approach recognizes that there are significant
differences in corporate governance practices, depending on the size, circumstance
and financial capability of firms. In addition, this approach encouraged the market
to recognize the importance of corporate governance provisions. The U"K. Clombined
Code on Corporate Governance (1998) adopted this approach. Figure 5.3 iiluslraies
the three approaches to the implementa.ion of the corporate governance code.

Specifies details of corporate

Prescriptive approach
Effi@ governance and requires legal
compliance with them.
It is mandatory to comply.

Gives firms flexibility to


determi ne their ccrporate

Hi"d rpffih I
Non-prescriptive
approach $ffi@ governance practices but
disclosure of such practices
prescribes the is a must.
best practices for
the directors ro
follow and gives Broacl guidelines issued for
them flexibility firms to emulate.
to implement the
recommendations
Flybrid approach
Bffi@ The extent of compliance and
non-compliance must be
based on their needs disclosed in annual reports.
and circumstances.
However, companies
are required to Figure 5.3: Three implementation approaches to corporate governance
disclose the level
of compliance and
reasons for non- The Committee members, upon revielving the i:trree approaches, decided on
compliance ro the adopting the hybrid approach, outlined in Sectiun I of the N{CCG (2000). Firs'., they
best practices in rhejr argued that it -!vAS necessary to prescribe corporate governance best practices diie to
annual report.
CorporateGovernance 13'1

the fact that there were no established standard of corporate governance in Malaysia.
Hence, the prescriptive approach of requiring actual disclosures of corporate
governance practices was not adequate to address this lack ofstandard.
Second, the Committee strongly felt that good corporate governance is not mereiy
a matter of prescribing the desired practices and expecting fuli adherence to hard and
fast ruies. Instead, directors as controllers of.the firm need to be guided and given
some freedom to apply the guidelines based on their needs and with common sense
(Shim, 2006)" In other rvords, each company should be allowed to flexibly de.relop its
own approach to corporate governance.
Companies may be able to develop alternative ways to the best practices. These
alternative ways may be as good as the prescriptions. By doing this, companies are
encouraged to consciously address their governance needs. However, the prescriptions
of best practices musl be accompanied with a rule mandating disclosure on the ievel of
compliance and reasons for non-compliance.
The non-prescriptive approach is also ruled out, because of the absence of a
benchmark for good corporate sovernance, and most importantly:.ts adoption gives
too much flexibility to the companies. In so doing, the Committee takes cognizance
of the fact that the qualit,v of corporate governance is lacking in Malaysia and the
intention of the Malavsian governmeut is to raise such quaiity;thus, necessitating some
lorm of benchmark for frrms to emulate. In short, directors should be encouraged to
consciouslv address the governance needs of their firms, as outlined in Section 2 ol
rh<\i('CtJtl0U).

5.5.2 The Structure


-irl,e
MCCf; (2000) rs dn idecl into four parts-(1) broad principles, (2) best fTh. Mccc (rooo)
practices, (3) principles and best practices for other corporate particrpants, is divrded inco for-rr
and (4) explatrator-r' notes. 'Ihe first part outlines the recommendations on thc parts:
broacl princrpies of good corporate governance for Malaysia. The purpose o1'the - Broad principles
principles i-i i(-1 gi\.e flexibility to companies in appil,ing the principles depencling . Besr practices
on their needs anci rndivrduai circumstances. The Committee recognrzes tirat . Principles and
rn inrprovrng corporate governance, a combination of statutory regulation, seif best practices for
regulation and market regulation is the most appropriate approach for Malaysian other corporare
partici pants
firms, as specified in Sectron 1 of the MCCG (2000). The broad structure of the
. Explanatory nores
MCCG (2000) is depicted iir Figure 5.4,
The BMLR makes it mandatory for companies to explain in a narrative statcntent
in thc anniral rcport thc cxlent to u,hich they have applied the relevanl rrinciples.
Ihis conrpulsor-v reqLtrrenrcnt is meant to allow the market participants, namell,
shareholders and other uscrs of annual reports, to evaluate companies' performance
and governance prac,tices. 'I he Committee believes that the market should be ailor^,,ecl
to assess llie extent of firms' compiiance to the corporate governance principles. The
market rs then able to 'puntsh' non-compliance if shareholders are dissatisfied with
the explanatron for failure to comply. There are 13 broad principies covering fcur key
areas, namely (1) board of directors, (2) directors'remuneration, (3) shareholders ancl
(4) accorintability and audit. Figure 5.5 shows the 13 broad principles in four key areas.
Some of the brietprinciples of corporate gor.ernance are as follows:

r Th,' board and its directors are to be properly structured with sufliciently
expcrienced, skilied and knorvledgeabie members.
r The cornposition of the board should be balanced by executive, non-executive
ancl independent directors.
I "1,/ FJLISIneSS EthiCS

Figure 5-4: The structure of the Malaysian Code on Corporate Governance (2000)

r Committees of the board should be estahlished to crrr1. out revierr,s atrd


recommend important matters concerning audrting, rtlnruncralion and
nomination, among others.
r There should be reasonable svstems to er.aluate and access nsks and internal
control, so as to form risk management pracrices.
r Sufficient care should be devoted to financial reirorting and disclosure,
r Constructive communication and dialogue rvith shareholders ar-rd rndivrtlr-ral
directors shouid be encouraged.
The second part sets out best practices for companies in designing their approach
to corporate governance. This part provides a set of guidelines for firms to adopt in
implementing the board principles on corporate gvvernance as set out in Part One.
Complirnce to the best practices is voluntary but firms are reqr-rired to explain the
extent of compliance and explain any deviations from such besr practices. f his second
part sets out 33 best practices covering three kev areas including board of dtrectors,
accountability and audit and reiationship with s| areholders.
CorporateGovernarrce 133

1 Directort Remuneration
J
l-i
J'I Shareholders l

'

11. Financial reporting


12. Internal control Accountability and Audit
t-
13. Relationship rvith auditors
''
-:. * Figure 5.5: The l3 broad princrples

Tire MCCG (2000) dedicates most of the guidelines for sti'engthening the board
structure and procedures as well as enhancing accountability 3n.1 audit processes. Less
attention seems to be allocated to the relationship between the board and shareholders
bv t,irtue of having only one guidance note under this area. The third part consists
rtf exhortations to other participants such as instiiutional shareholders and auditors,
wh ich are purei-v voh:ntary and aimed at en hancing the roles of externai auditors and
shareholders. 'l'l're fourth part providcs explanatory notes on the principles and best
practices set out in Parts One and Two.
Sirnilar to the U.K. Cornbined Code (1998), the MCCG (2000) requires
lirtns to ciisclose the extent to which they have complied with the MCCG (2000)
recommendations and to give reasons for non-compliance. The disclosure, as stated
in paragraph 15"26 of the BMLR, is to be made in the form of a narrative statement
(kt'rolvn as corporate governance statement) to be included in firn-rs' annual reports.
In essence, irnder the hybrid approach, the requirement to 'r:omply or explain' is
rot a passive thing tn which firms are not free to choose non-compliance tf ,'ompliance
'" loo much trouble. Fims need to recognize that in order to reassure shareholders,
'r.rch explanation often makes clear how and lvhen the area of non-compiiance rr,ill be
'. medied.
'fhe SC revised the MCCG (2000) in 2007, incorporating changes, amongsl
'hers the setting up of an internal audit department that reports directly to the audit
'- omnrtttec and making it mandatory to have only non-executive directors in Llie audit
r:ommittee. In 2011, the SC introduced a five-year Corporate Governance Blueprint
/the Blueprint), which provides the action plan to raise the quality of corporate
b.i\rernance in Malaysia by strengthening self and market discipline and prt;moting
,lreater internalization of the culture of good governance. The Blueprint focuses on
:,ix corporate governance areas, namely shareholder rights, the roles of institutional
..rl'estors, ltoards, gatekeepers and influencers. ciisclosure and transparency and
;,ublic and private enforcement. The recommendations of the Bluepnnt are to be
implemented ovtr a five-year period"
4 Busrness Ethrcs

Recently, the SC launched the Malaysian Code on Corporate Governance (MCCG)


(2012), which incorporated the recommendations of the Blueprint and supersedes the
MCCG (2007).The MCCG (2012) focuses on clarifying the role of the board in providing
leadership, enhancing board effectir.eness through strengthening its composition and
reinforcing its independence. Firms are also encouraged to establish corporate disclosure
policies and to make public commitment to respecting shareholder rights. The MCCG
(2012) came into effect on 31 December 2012 and iisted frrms are required to report therr
compliance with its principles and recommendations in their annual reports.
We shall now turn our discussion to the theories of corporate governance, which
will further enhance our understanding of the corporate governance framework in
terms of its origin and remedies for poor corporate governance.

5.6 THEORIES OF CORPORATE


GOVERNANCE

In this section, we shail exan-rine several corporate governancc theories such as the
U.d.""*.d"g -_-| agency, stakeholder, property rights and social institution theories. Hor,ver.er, the trvo
rheories ofcorporare
most commonly uscd thcorics in accounting and financc-rclatcd ficlds arc thc Agcncl'
governance is
imporranr in order and Stakehoider Theories. Agency Theorl' criginated from the fields of finance and
to identify the eccinomics. Stakeholder and Social Institution Theories, meannhile, arise lrom a Inore
obligatron of a public social-oriented vien on corporate governanct" Property Rights Theory originates
corporation and from the larv discipline that emphasizes property rights and the right of indrviduals
to make sense of to conlract. These theories serye three common purposes (1) to offer insights as tcr
the reasons behind rvhose interest that a crrpora[ion shor-rid serve, (2) to explain the behaviour of those
the occurrence of contribr.rting to corporate governance problems in public corporatiot-rs, atid (3) to offer
corporate governance solutions to alleviate those problems.
problems"
Briefly, agency theory suggests that firms solely exrst for advancing tlie interest ol
shareholders, which is basicaliy a narrol,v agenda. Hence, the objective of a corporation
This section I should be to maximize sharehoiders'r,vealth. This objective can be attainecl b,v ensuring
highlighis four that the shareholders earn the best possible returns of investment in the fbrms of annual
corporate dividends and share price appreciation. The controllcrs should exercise the polrer
governance-related
bestor,red upon them by the shareholders in a way that can fulfil this narrow objectrve.
theories: Agency,
Stakeirolder T'heory, on the other hand, argucs that tlre objective o1'the firm should be
Stakeholder, Property
broadiy defined to include the advancement of the stakeirolders' welfare in addition to the
Rights and Social
Institurion Theories.
traditionai objective of shareholder wealth maximization. Str, the controllers shall strive to
promote the interests of shareholders without neglecting the rvclfare of stakeholders.
Next, the property rights theory argLles that a corporation is tlie private properti
of shareholders who exercise their rights to incorporate and to contract. By virtue ol
having property rights, shareholders have the right to controi thc corporation" 'fhe
property rights of the owners in a corporation must be fully protected by the larv. The
social institution theory, on the other hand, indiczites that shareirolders can exercise
their right to incorporate because the state aliows thenr do so. Without the sanction
of the state, corporations will not exist. Hence, corporations should not be treated
solely as organizations that serve the interests of indii,idual shareholders, because they
should promote the interests of the public at large.
Next, we shall examine each of the theories in turther detail. Let us begin u,ith
the Agency Theory.
CorporateGovernance 135

5.6.1 Agency Theory


as a contract under rvhich otre
Jensen and Mecklin g(1976) defined'agency relationship'
party (the principal) hires another party (the agent) to utdertake specified functions
tn the principal's behalf. The principal delegates some decision-making authority to
the agent to cnable the agent to perform the.assigned tasks. The principal also trusts
that the agent wili always act in the best interest of the former by discharging his or
her fiduciary duty. The agents are expected to protect the interests of the pri,rcipal and
discharge their duties diligently.
In i public corporation, the agency relationship exists in the contractual fAg.".y Th.*y
relationship between the shareholders (principal) and controllers (agents). fhe attempts to explain
controllers are the directors of the public corporation. Shareholders eiect the rhe narure of rhe

directors to control the resources of the company and represent their interests in relationshiP berrnreEn

the cor poration. Shareholders delegate authority to the directors to make most shareholders and
rhe professional
decisions on their behalf. The board of directors appoint a team of senior managers
managers,
to manage the daily operations of the corporation. They make key operational
clecisions pertaining to the al,cication of corporate resources. As such, the senior
managers can be considered as indirect agents of the shareholders. Shareholders
."p..i the directors to closely morritor the senior management team to ensure that
thet.ni11 rneet the objectives placed upon them. In return, the controllers enjo,v
a
good ren-luneratiorr packages and incentives so as to motivate them to fulfil their
duty tc promote thc shareholders'interest.
In this sysLerrr of corporate ownership, problems arise r,vhcn thc controllels clo Cgs*y Tl*-y
not necessarily make decisions and allocate resources in the best interests of the proposes thar
sharcholclers, In other l'ords, the controllers do not consistently strive to etlsure corporate governancc
the ac|ier.ernent of the shareholder wealth maxinrization objective. Agency Theory problems exisi ciue to
rhe selfish tenderrcies
.Lssumes that this situirtion exists due to the conflict of goals between shareholde rs
of tl-re professional
and controllers. f'he controllers, by nature, prioritize their own self-interests or are
managers that
opportunistic. They are hkeiy to display ego;stic behaviour, which is to make decisions
prompt thern ro
that are ruotivated b,v self-interests. Il academic terms, this situation is knor'r'n as the engage rn conflict oi
principal agent problem or the agency problem. interest siruations.
Self-interests motivate the controllers to divert the corporation's resortrces to
activities that are detrinental to the objective of maximizing shareholders' r'r'ealth
(Jensen and Meckling, 1976; Williamson, 1985). Examples of the controllers'
irersonal asenda inclucle paying higher bonuses to themselves regardless of cortlpanl'
performarice, enloying paid holidays, buying expensive club memberships, acquiring
?. corporate jet and l'raving a luxurious office. The corporation pays for tirese perl.s,
rvhrch ]eads to the reduction in shareholder wealth.
The controliers are in a unique posrtion to pursue self-interests in a public
corporation lvhere the orvnership is separated from control. In this type of cr-rrporate
orvnershrp, shareholders do not have effective control over the managenlent t.,f tl-re
corporation, because the controllers have most of the decision-making powers. Irl this
situation, if the controllers har.e the chance to control the company without effective
supervision by shareholders, they are likely to give iower priority to the obj.ctive of
maximizing the rn,ealth of shareholders.
The shareholders are unable to effectively monitor the controilers due to
information asymmetry. This situation exists because shareholders do not have access
to the infirrmation about the corporation, unlike the controllers. They largely depend
on the controllers to furnish the relevant infonnation. This is because the controllers
know more about the coinpany and they are in a position to control such information.
lnfbrmation asymmetry leads to two agency problems, nameiy adverse :relection and
moral hazard. Adverse selection problem arises when shareholders are unabie to
36 Business Ethics

ascertain whether the controllers actually perform their tasks as expected. 'l'he moral
hazardproblem occurs when the shareholders cannot be sure whether the controilers
are pursuing their own self-interests or truly striving to perforrn their tasks for the
benefit of the shareholders.
It is also important to note that often times the controllers do not own the
corporation. They are merely salaried employees and likely to behave differently than
the owner of the corporation toward the long-term success of the corporation. They
have the tendency to work inefficiently and focrrs on short-term profits only in order
to demonstrate success. Focusing on short-term profits enables them to maximize
their bonuses and give them high salaries and perks, Shareholders, on the other hand,
expect the controllers to seek out profitable new long-term investments to ensure the
survival of the company in the long run. As salaried employees, the controllers stand
to lose little compared to the shareholders if the corporation goes bankrupt due to the
former's seif-interest-inspired agenda. The managers may look for other employment
whereas the shareholders stand to iose their entire investment.
The dir.ergence of interests between shareholders and controllers leads to the need
for the former to take steps to exercise control over the latter. The primary purpose
of exercising this control is to align the interest of the shareholclers and controllers.
Agency Theory argues that it is expensive and time-consuming for the shareholders
to do so. They have to incur agency cost, which is the costs that arise from the neeci
of the shareholders to monitor the activities and performance of the controllers. 'lhe
shareholdes need to determine what the controllers are doing, nhici-t is not an east,
task due to the information asymmetry Hence, tl"re shareholders need to put rn place
control mechanisms that are costly in terms of the monev spent, resources consurned
or time taken.
We will review the various control mechanisnrs in Section 5.7 of thrs cl'rapter.
Briefl1', they may include, amongst others, incentive schemes ancl contracts, external
and internal auditors, shareholder activism or engagenrent and regulation. Ttre
control mechanisms are encapsulated in the concept of corporate gorrernance.
Public corporations need to impiement effective corporate governance to alleviate
the problerrrs associated lvith the agency relatrorrship betrveen shareholders ancl
controllers. The primary aim of corporate governancc is to ensure the alignment of
tire interests of the shareholders and controllers so that the loss of sl-rareholder value
resulting from the controllers' opportunistic behar.iour can be rninirnized.
Agency conflict betrveen the shareholders and conLrollers lvi11 result in a loss of value
M*rg.r*#--1 to the shareholders in two ways. First, shareholder value is adversely affected through
prioririze rheir self-
interests tend to
the transfer of u.eaith from the profits available to sharel'rolclcrs to the controllers rvhen
errgage in acriviries the latter engage in opportunistic behaviour. Second, shareholder value r.r,ill be iorver
rhat will reduce r,r'hen the corporation establishes the costly control meci'ianisnrs to oversee the activitie-s
rhe wealth of of the controllers. it is true that the control mechanisms n ill help to mitigate the effects
shareholders. of agency conflict, but it rvill be impossible to eliminate everv opportunity for Liehaviour
fuelled by self-interest. As such, some ioss of shareholder value that will be incurred vra
transfer of wealth from the shareholders to the controllc,s rs simply inevitable.
Similarly, agency costs may increase the uncertainty of the corporation's future
cash flows (|ensen, 1986), which may adversely affect the corporation's ability to
provide good returns to shareholders. Shareholders that invest in corporations ivith
rampant agency problems wilt likely demand higher premium lor rvhich they need
to expend additional resources to monitor controllers tvith vested self-interests
(Lombardo and Pagian o, 2002).
Next, we shall examine an alternative thc,;ry of corporate governance that
promotes a broader agenda of public corporations as opposed to the narrow agcnda
CorporateGovernance 137

of the Agency Theory-stakeholder Theory. It has been receiving greater prominence


in recent years in view of the disastrous effects that corporations can bring to the
livelihood of their various stakeholders-

5.6.2 Stakeholder Theory


Traditionaily, corporate objectives tend to give priority to creating value for
shareholders as the main supplier of capital, In the Agency Theory, thc bilateral
relationship between shareholders and controllers is paramount. Corporate directors
are argued to owe a duty to shareholders only and hence, are obligated to'maximize
returns fcrr them (Friedman, 1970). This belief has shaped the ways in which corporate
governance mechanisms, such as board of directors, play a role in aligning the interests
of shareholders and controllers.
However, in the last decade, we have witnessed a grou'ing interest in corporate I S"k.h"id.r Th.*y
responsibility in view of the disastrous impacts of firms' operations on the well-being offers a more
of itakeholders such as employees, creditors and customers. For example, thousands inclusive approach to
of Enron's employees lost therr jobs and pension fund savings when the corporation corporate governance
by broadening the
collapsed due to financial mismairagement and abuse of top executive pol\rer. In 2008,
accountability of
rve also observed how investors lost their investment when giant investment banks in
rhe professional
the US such as Lehman Brothers, Salomon, and Smith Barney collapsed. Also in 2008,
managers to serving
we learned from the nerr.s horv Sanlu Corporation endangered the lives of thousand
borh the inrerests of
infant> in China and worldwide when they purposely used hazardous ingredients in shareholders as well
their baby milk powder. Figure 5.6 provides a typical representation of'Stakeholder as other srakeholders.
Theorv.

Iigure 5"6: StakeholderTheory

In view of this contemporary perspective, policies and corporate governance


rnitratives have highlighted the need to broaden the corporate governance agenda to
not only focus on the interest of shareholders but also on the needs and reqi.rirentents
of all corporate stakeholders (Solomon and Solomon, 2A04). This i'iew is known as
stakeholder perspective or theory. Stakeholder Theory basicall,v extended the agency
relationship beiween controllers and shareholders to include stakeholder groups
JO Business Ethics

(Ezzamel and Watson,1997). Each stakeholder group has differing interests or stakes.
A stake can be viewed as having an interest or share in r,rndertaking. Freeman (1984)
defined stakeholder as an individual or a group that has various iinds of stakes or
legitimate claims in the business.
Stakeholders are said to have an interest in a corporation given the fact that
whatever business decisions, policies, practices and actions taken by the company
may affect the stakeholders in the same way the stakeholders may have influerr.., on
business practices and policies. Stakeholder Theory' is relevant given the increasing
pressure for businesses to voluntarily spend on ad,n ancing the welfare of the social
stakeholders as well as protecting the environment (Robins, 2009). Ilusinesses are also
pressured to report such spending in annuai reports.
According to ]ones (1995), a public corporation is viewed as a nexus of contract or
relationship bett'een controllers and stakeholders. Fience, the controllers are nol only
the agents of shareholders but aiso contracting agents of those stakehoiders. Tricker
(1984) advances the notion that public corporations have corporate accountabiiity
to a wider range of stakeholders and socieiy at large. The controllers should also be
made acccttntable to stakeholders and proiect their rights in managing the public
corporation towards achieving business goals. In so doing, the controllers a-re expected
to balance the interests of shareholders with public interest.
Kay and Silberston (1995) argue that although shareholclers enjoy many of the
benefits usually associated with ownership, they are not stricti,v the orvneri of the
public corporation. In fhct, tl-ie shareholders is just taken as one of the stakeholder
groups. T'herelbre, they shouid not be gir.en priority in a public corporalion" With
this argument in mind, the centrai proposition o1'the Stakeholder Theory is thai
tl-re objective function of the priblic corporations shor-rltl not bc confined to the
tlaximization of shareholders' u,ealth only. 1r'rstead, pLrblic corporations sl'rould also
recognize the welfare of other groups that have long-terru relationships n,ith them,
and therefore an interest or stake in their long-term success (I)lair. 1995).
The wider objective of a firnr is not only seen as more equitable but also brings
benefits to both the shareholders and stakeholders. Hcnce, tire corporate governance
reforrn derived from this theory should be tl'iat of u,ider ctrrporate goals thin focusr ng
on shareholder profits only. For example, the creditors make up an important
stakeholder group of a public corporation. Whilst the1, d6l not irave a direct ituk" i,
the public corporation, their interest is to ensure that the firncls provided is channelled
fbr its intended use and the public corporation is able to fulfil iti obiigations stipulatecl
in the lending agreements. Sirr-rilarly, the interests of empio,vees sholld be taken intcr
account in decision-making to give them enough sa.I-eguards, ensure their saf-ety and
rnaintain heaithy working conditions. Gir,,en the fact that business activities may
harm the environment, the managers aiso need to take aclequate measures to ensure
conservation and protection of the environment.
The intensive ethicai debate since the 1950s has influcnced businesses to tre
more humane, ethical and transparent (Maignan and F-errel, 2003). Moreover, pubtic
corporations adopting the stakeholder approach in managing thcir resources sirould
be respected. Thus, public corporations adopting the corplraie governance approach
that is consisteni with the stakeholder theory are likely to be vierved as ethical
organizations-they are concerned about the interests of stakeholders, including
communities, instead of focusing on wealth rnaximization a1one. 1n addition, public
corporations with a reputation for fair and reliable collaboiation tend to eljoy
successfui cooperative outcomes with their stakeholders (for-res, 19g5). In contrasi, if
they do not take social factors into accouilt, thei: interests are jeoparclized (l,alrtos,
2A0D.
Corporate Governance .139 ,,

In summary, the stakeholder perspective provides an alternative explan ation to the


debate on corporate governance. It can be viewed as an extension ofthe agency theory
in rvhich the roies and influences of other interested parties in a public corporation
play crucial roles in determining its governance structure. It extends the concept of
agency reiationship in which the controllers do not only have fiduciary duty to protect
the wellarc of shareholders but also the stakeholders of the public .o.poruiiorri.
Next, we shall look at the other two alternative theories of corporate governance,
namely the Property Rights Theory and Social Institution Theory.

5.6.3 Property Rights Theory


As noted earlier, a corporation is its own legal entity, as if it were a person. The
prinrary purpose of a corporation is to conduct business, which requires it to brilg
together various parties such as shareholders, controllers, customers, suppliers and
empioyees for the said purpose. These parties have their own stake or cliim against
the corporation. Often, these ciarms are conflicting, which makes it challenging for
the controllers to determine according to whose interest the corporation shtulcl be
managed. Further, ailocating resources to other constituents other than shareholders
will result in a reduced r,vealth for the latter.
The Property Rights Theory offers a solution to this predicament. It proposes that
fProp"rry Rh*
a corPora'ion should first and foremost serve the interests of its owner. In practical
Theory argues rhar
terlrs. this theory asserts that the primary objective of a corporation is to make profits rhe owners have
ibr ils shareholders. This argument is based on three premises. Firsr, when the orvners properry righrs over
r'r'ish to corlduct a husiness in a corporate form, they are said to be exercising thcir ihe corporarion rhar
'i'asic
itldividual rrghts to incorporate. They use the corporation as a rneans to can\. ihey have invesred in.
out their trusiness. 81' doing so, the owners are said to be merely exercising their They have rhe righrs
rndiviclual right to coutract, that is to conduct their business ,,r,ith their orvn propertv. by virrue of owning
Second' lhe corporatioti issues shares to the uwners as evidence of on,nerihip. 'Ihe the shares of rhe
share is considered as property of the owners, and by extension, the corporatjon ald corporacion.
its assets are considered their private property. Third, owners have certain property
rtsitts accorcled to them and these rights are protected by the law. The right to control
is cortsidered as a fundamental property right of the owners. The other right is to
assume responsibilitv over the way the corporation is run.
Given this background, controllers must give priority to the interest oi the
sharcholders rn4ro o\,trn a corporation" I'hey do not have rights to deploy c()rporirte
rcsources for thc purpose of serving the interests of other constituents su;h
as thc
enrpiovees, cttstomers and suppiiers (Friedman, l97A).ln short, this theory
asserts
that irL a corporation, shareholders are supreme i.e. the interests of shareholclcrs
are
primar1..
'fhe
Protection of the welfare of other constituents is accordetl by the cr)ntract
that governs the relationship between the corporation and each constituent. 11
aldition, the government is responsible for pioviding such protection througlr
the enactment of various regulations. Hence, ih. irt.r.rt of cuitomers,
employe*es
a.nd suppliers should not be of concerned to corporate governance.
Iistead,
the focus of corporate governance is to strengthen t^he abiiity of shareholci.ers
to
controi the corporation. This aim could be achieved by making sure the
controllers
are accountahle to shareholders through various control mechanisms
such as
shareholder voting rights, internal and eiternal audit, highiy independent
boar.i of
directors and ir rclepenclent directors.
Next, Ive slrall examine the Social Institution Theory, rvhich is simiiar to the
Sta l-.ehoider Theory.
4A Busrness Ethir:s

5.6.4 Social lnstitution Theory


Recall the concept of separation of ownership and control in public eorporations"
This concept has implications on the nature of corporate property. According to this
concept, shareholders surrendered control and responsibility over their wealth to the
controllers. in this sense, they are not regarded as true owners but merely the main
providers of finance. The controllers have great power [o control the resources of
public corporations. Then an important question arlses--according to whose interests
should they manage the resources?
This theory asserts that corporations do not.exist by themselves" Instead, it is
fhirh..r)r rtg*t 1 the society that allows them to conduct their businesses and supports their survi'ral
rhat corporations will
The society gives its approval through the state. In other words, the state regulates
not exist wirhout the
supporI and sanction
the use of corporate property. Hence, their existence is a privilege, not a right. So,
of rhe sociery. Hencg corporations should not ignore the need to ensure that their activities and decisions
rhe managers of rhe do not cause harm to society as a whole. In view of this argument, the controllers are
corPorarions have required to exercise their powers in trust for the entire society (Dodd, 1932)' This
ro ensure they do theory, honever, does not deny the fact that that public corporations need to make
nor get involved in profit for their sharehoiders. It is just that they must not achieve this objective at the
activiries or make expense ofthe society.
decisions rhar will Dodd (1932) argued that public corporations were economic institutions that
harm rhe sociery.
served both the interests of societl, and sharehoiders. Public corporations have become
pubiic institutions instead of merely private properties of the shareholders. As such,
ihey have social responsibilities torvards t}-re employees, customers and the society
as a nhole. In this respect, the controllers shoulcl not be seen as exclusive servants to
shareholders. They need to balance the conflicting interests of the various stakeholders
in their public corporation. The controllers have to assume public responsibilities to
do well and avoid harm.
Let us now look at the common corporate governance mechanisms that can
be implemented in a public corporation. We first need to be clear about the aim of
these mechanisms. Corporate governance mechanisms are aimed at ensuring that
the controllers make decisions and allocate corporate resolirces with the objectrt'e of
maximizingwealth forthe sharehoiders and to promote the wellare of the stakeholders.
\Are should also bear in mind that these mechanisms shor,rld work in a comprehensive
and interdependent way to ensure their effectiveness.

5.7 CORPORATE GOVERNANCE


MECHANISMS

In this section, we will take a look at a few common e oi porate governance mechanisms
T-".".g*l.t I that could be put in piace to protect the interests of the o\{ners and stakeholders. We
"f
corporate governance
should consider these mechanisms as monitors of the or-res rvho need monitoring, the
mechanisms are
internal and exrernal
controliers. Some of these mechanisms are availablc within the corporation; hence
mechanisms. they are classified as internal governance mechanlsms. The tnternal mechanisms
that are most commonly examined are the board of directors, independent directors,
board committees, board compensation pracrice-r, director's traitting, internal c ontrol
system and internal audit, external audit and shareholder aciivism.
CorporateGovernance 141
:

Meanwhile, the market for corporate control or takeover market and the
regulation or iegal svstem are the two commonly researched external governance
mechanisms. However, in this section, we will focus briefly on the role of regulation
only. The market for corporate control is not very active in Malaysia, but it can be a
powerful governance mechanism to discipline errant managers. Figure 5.7 illustrates
the position of monitors in the corporate structure.

:ttoriidite Constituents Monitors Controllers

Figure 5.7: The position of monitors in the corporaie structure

5.7.1 The Board of Directors


In the tramelvork o{'Agency Theory, ti're board of directors is a r.erv importr,nt and fTh. b"rrd
porverfr-rl control mechanism to mitigate agency probiems. Owners eiect directors to "r
directors is rhe
lhe board, and in theor,v, the board of directors is the on,ners' first line of del-ence most important
against any aLtempt to expropriate their wealth by professional managers. The boar.i corporate governance
of drrectors' :ole is to provide an rndependent oversight of management (Walsli. mechanrsm. I hey
and Seward, 1990), hold management accountable to shareholders for its actions should be the
(Mizruchi, 1983), and ensure shareholders'wealth is maximized (Denis, 2001). In a shareholders' first line
nutsheli, the board of directors govern and oversee the management of the company of defence against
rhe self-inreresis of
and ensure that the managers give priority to the interests of the shareholders Case
for Review 5"1 illustrates the importance of accountability of the board of directors to
shareholders lor their actions.
42 Business Ethics

-B""d The management consists of a group of individuals employed by the board tcr
"f
d*..;J run the company and perform its daiiy operations. In reality, however, the value of
drreccly acr,ounrabie
the board's contributions is not apparent, and in fact, it is a subject of much debate.
to shareholders.
They should be the
Boards have been known to be a 'rubber stamp' to management decisions i.e. lack of
gatekeepers for ihe independence against the influence and control of the management team and often
shareholders ancl times failed to safeguard the interests of shareholders aswitnessed in corporate scandals
cn(Lre a'l Jc(lclOnS such as Enron Corporation, WorldCom, Adelphia, Tyco International, HII{ Insurance,
are in line wrth and most recently, American International Group, Lehrnan Brothers, Salomon Smith
the oblectives ancl Barney and Satyam Computer Services. In the Malayslan concentrated ownership
inrerests of rhe environment, the board of directors may be dominated by family members who are
shareh olders inclined to extract benefits for themseives at the expense of minority shareholders.

Securities Commision (SC) took NasionCom Directors to Court

Accountability of direcrors is central io corporate governance. Dtrectors musr be accounrable ro


shareholders for rheir acrions and rhe exercise of power vesred upon them The SC had called upon
company ciirecrors ro acr in good farth and fulfrl the accountabiliry aspecL of therr duty ln thc spirit
of accc-,untabiltry, direcrors and officers must reaiize that rhey are purting invesiors at risk by reporrirrp
misleading and inaccurare information about their corporate performance and value. The drrecrors
were ac.cused of submirring false informarron wirh regard ro NasionCom's 2005 i'inancial stalemenls
Ihe SC's invesrigarion revealed that NasionCom's group revenue of RM-l94,984.186 as reflecred
rn rrs 2005 financial sraremenrs conrained a toral of RM143,-] 09,727 sales thai were nor Lransac[ed
These sales were recorded in rne financial statements of rwo NasionCcm subsidiaries, namely
Nasroncom Sdn Bhd and Express Top-up Sdn Bhd.
ln rhis enforcemenr actron againsr NasionCom directors, the 5C had shov,rn rhar they roo;
accourrrability of directors seriously. They would nor hesitate to prosecute direcrors who were found to
have violated ihe rules on accounrability. The direcrors and companies should noi iake the enforcernent
acrion lightly for which the lack of accountabrliry could undermine ihe invesror confidence The SC
would take corrective acrion ro ensure irs credrbility as the marn regulatory force of the Malaysian
financial markets. lts regularory role is crucial to the vibrancy and effrciency of ihe [inancal markets

(Adapred from Minoriry Shareholder Warchdog Croup, 20 April 2007)

The increasing incidents ofcorporate scandals in the last ten years have brought
Tr*.-ffip*,;;l about an aggressive effort to reform boarci of directors. The r.arious reform initiatives
element of a
mainly stem from the realization that the board can be a potent monitoring mechanism
board of direcrors
is independence
if certain aspects such as the board structure is improvcd anrl gir.en more attention
from rhe influence
by lawmakers, regulators and sharehoiders. Important structural elements of a board
and control of include the board leadership structure and the number of inciependent directors.
rhe professional With respect to the board ieadership structure, the variahle of greatest interest
managers. is the nature and characteristic of top leader.,hip positrons in a firm, nanrely the
chairpersoir of the company and the chief executive o{ficer. Elements of board
'' :'.''
Corporate Governance ,tr.43..
ri;:

structure determine the effectiveness of board monitoring. Effective board monitoring


is a crucial component of a robust corporate governance mechanism. Firms tend
to benefit from strong board monitoring capability because it helps to curb the
opportunistic behaviour of managers and enhance the credibility and reliabiiity of
financial reporting; thus, reducing information asymmetry and agency problems.

Roles of the board of directors


Shareholders appoint members of the board of directors in a generai rneeting to fB"*dr;f d-'"e.ro"
represent their interests in the company. Shareholders give them power and authority have borh leadership
to control and allocate the company resources and make decisions on their behalf. ln and control roles.
return, the board ofdirectors is accountable to the shareholders. Perks (1993) defines
accountability as the obligation to give an account. As such, the board of directors as
a collectivc group is required to justify its actions and decisions in controlling and
managing the company to the shareholders. Keasey and Wright (1993) posit that
ensuring accountability of the board and management is one of the two key elements
of a robust corporate governanc 'nechanism. The other element is the supervision
of management perfortnance. In a nutshell, the board of directors has two important
roles--leadership and control.
In their leadership role, the boards of directors formuiate company policics
lnd determine the overall strategic direction of the compan?v. They are expected to
supervise aqd scrutinize the strategic formulation process led by the Chief Executive
Officer (tEO) [o ensure that the strategy is in linc rvith thc vision and mission of
the cornpanl'. They need to ensure that the management team mar,?ges the business
u'ith the objective of providing good returns to shareholders and at the same tinte is
a1 tentive to tl're interests of stakeholders.

In their control role, the boarcl of directors is required to monitor the perforrnance
and activities of the executive management team so that they consistentll. pursue
shareholders' obiectives and interests. They carry out the responsibility as caretakers
or guardians for shareholders in a transparent and accountable manner. 'fhey are also
r"equired to cnsure thal the company coinplies with all larvs and regulations gor.e rninu
the business.

Board leadership structure


fhe board of directors must have a clear division of responsibiiities betu,een the
chairperson of the board and CEO so that there is a balance of power and to prevent
faEo drdt,y **,r"
.creates a very
ol']e person lt om having unrestricted power to make decisions. The chairperson ol thc . powerful execurive in
board and CIIO are pcir'verful positions in a company. Hence, the roies of chairpersor-r a corporation. Hence,
and CEO should not be exercised by one person. The chairperson is responsible fbr corpbrare governance
leading the board of directors and ensuring its effectiveness. In order to ensure thal code recommends
meetings are properly facilitated, and the board properly ied, thc board rvili nor mal11, two different persons
i:lect among tlremselves a chairperson of the board. In summary, roles of a chairperson holding these two
.rre as follorvs: key positions in a
company to prevent
I To lead the board as a whole, and in particuiar, in the meetings of the board one person from.
of directors ar-rd general meetings. having unfetrered
e To ensure the proper practices and procedures are observed in the calling of powers.
meetings and to decide on agenda items that would emphasize on important
issues lacing the company as lvell as strategic issues.
c 'Ib ellsure the whole board plays a fuli and constructive part irr de,.,eloplng
and determining the company's strategy and overali business and con'rniercial
objectives.
44 Buslness Ethics

r To ensure clear and timely information in relation to the company is given to


the board.
r To ensure effective communication between the company, the shareholders,
executive management and other stakeholders.
r To take a concerned view of the developmental needs of each member of
the board such as the induction programmes and continuous education and
training.
r To promote the highest standards of integrity, probity and corporate
governance in the company.
r To be concerned with future succession planning of the board and executive
management.
r To report and sign off on the company's financial statements.

The CEO, on the other hand, is the leader of the management team at and below
board level. He has the daily executive management power, controls the allttcations of
organizational resources and impiements board decisions and company policies. In a
nutsheir, the CEO performs the following roles:
r To ensure that the company business is properly and efficiently managed.
r To assist the chairperson in drar,ving up the agenda fbr board meetings by
providing input in relation to important strategic issues facing the business.
r To ensure that the executive team implements ti-ie decisions of the board and
its committees.
r To highlight and update the chairperson on compiex and sensttite issues
that might affect the company and maintain a consistent dialogue with the
chairperson.
r To consult lt,ith the chairperson and llie coml)any secrelary on board-
approved procedures and matters reservecl for the board's decisions.
The chairpersor. and the CEO positions make up the board leadership structure
of a company. Board leadership structure can be categorized into dualit,v and non-
duality. Duality structure means the posts of chairperson and Cl,O are held by the same
individual. Non-duality structure, on the other hand, necessitates difl'erent individuals
holding each position separately. Both elements are the primary determinants of an
independent board. Board leadership structure, in this instance, provides an insight
into the degree of board independence. Tireoretically, non-duality structure signifies
greater board independence because it avoids the concentra[ion of porver ln c,ne
individuai who can dominate decision-nraking. in particuiar, influencing decisions
that are not in the best interests of the shareholders.

lndependent directors
An independent director simply mealls a director who does not have any. personal or
s"-r
"f
;'eCt;I
"f-rd business relationships with the company or its officers, u,hich could interfere ivrth
must have a
sufficient number
the exercise of independent judgement or the abilit.,' to act in the best interests of
of independent
a compan)'. A higher ratio of independenl directors' participation implies greater
directors to ensure degree of independence of the board from the executir.e management's influence in
rhat rhey are making decisions. Boards that are more indepenclent are seen as effective monitors
independenr from of management as opposed to boards that are infested by drrectors with famiiy or
the influence of business ties to firm manageinent (Shamsui Nahar, 2004).
rhe professional The relatrve independence of the board can be implied by looking at the ratio
managers. of independent directors' participation in the buard. A higher ratio implies gi'eater
CorporateGovernance 145

independence of the board. Independent directors are also known as independent


non-executive directors. As non-executive directors, they do not have executive
management responsibilities in the company i.e. they do not get involved in managing
the company on a daily basis. They dedicate their time to attending meetings and
deliberating on company issues and evaluating proposals given by the management
team.
Independent directors are usually individuals with vast skills and knowledge in ll;J6."d.*
managing companies and serving board of directors. They also have well-establisheC direceors provide a
networks or connections with regulators and industry players. They can bring in check and balance

technical and non-technical expertise to the board. These elements help the executive element in the board
of drrecrors. I hey
managernent to see 'a big picture' or macro-environment factors by looking at issues
ensure that rhe
from a broader perspective in setting the strategic direction as well as formulating
corporate manager5
strategic plans for the company. Independent directors can challenge the view of the
do not control rhe
management by asking questions until they get an acceptable answer. This scrutiny is decision-making of
done in order for the management to consider every possible risk and potential of the the board and steer it
-
company, say, in a strategy formulation exercise. to promote rheir self-
bther than contributing their speciaiist knowiedge and expertise in the interesrs and personal
deiiberation and decision-making process of the board, independent directors provide agenda.
a check and balance mechanism against the domination of the executive trairagement
team because they have no relationship or affiliations u,hatsoever with the company
and its officers" Hence, the element of biasness may be controlled in which they may
make an independent or objective stance on conflict of interest issues as well as
scrutinizing corporate activities and management proposals obiectivell'.
In short, independent directors piay a very important control role to ensure that
the board of directors allvays strives to protect and pursue the interests of shareholders
in its decisions. They monitor the performance and activities of the management team
so as to ensure they are in line with shareholders' objectives. Independent directors
are relied upon to give outside and objective views to challenge the ideas presented by
the management team and to control the CEO from abusing his power and making
decisions that benefit hirnself only.

Board committees
The purpose of establrshing board committees within a board structure is primarily fB".rd....l,**
to assist the board in decision-making as well as supervising the management team. are meant to
f he MCCG (2000) recommends that firrns establish board committees to divide rvork help the board of
among board members so that they can accomplish more in their iimitecl time, u'hici"r directors to examine
ultimately contributes to an effective board. Most importantly, boarci t.ommittees specific issues of
remunerarion,
are needed to support the control role of the board The three most common board
nominatron of
committees in Malaysian listed firms are tire nomination, rentuneration and audit
directors, top
committecs.
executives and audirs.
They report to the
lrlom inatio n co m mitte e board of directors.
The role of the nomination committee in corporate governance is paramoui-rt. This
committee is a crucial component of an effective board.It is responsible for selecting
and nominating the right candidates for directorship and top managemen' team for
the board's sanction (Ruigrok, Peck, Tacheva, Greve and Hu, 2006). The corrtmittee is
also respo'rsible for ensuring a periodic review of size and composition of the board is
carried out so as to reflect the needs of the business. A nomination comriittee should
be composed of majority independent directors.

I
I

t
I

I
t.
5 Business Ethics

n co m mitte e
Re m u n e rati o

A remuneration committee forms part and parcel of a desirabie board stmcture


and procedures to enable the boa-d ofdirectors to be a potent corporate governance
mechanism. The MCCG (2000) states that the main task of remuneration committee
a
is to devise a board compensation plan that is linked to individual director's
performance and corporate performance as well as industry benchmarks" T'he board
of directors as a lvhole makes the final decision on llre remuneration of each director
based on the recommendation of the remuneration committee. A remuneratiorr
committee shouid be composed of majority independent directors.

Audit committee
Malaysian Bourse has made it compulsory for public corporations to establish an
audit committee beginning 1 August 1994. The arrdit committee's formation and
composition are fully regulated by the stock exchange listing requireinents in
Malaysia. The audit committee is seen as the most crucial oversight body within a
board due to the fact that it helps to ensure the quaiity of the financial and control
systems. Furthermore, according to the Agency Theory, an independent and
effective audit committee reduces the severity of information asymmetries between
shareholders and corporate managersi thus, attenuating agency costs. The audit
committee rvorks closely with the external auditor in ensuring the independence
of the financial reporting process. It oversees the audit and verification process of
financral reports. The audit committee ensures that the external auditor is able to
exercise his professional judgement ano it is not inflr-renced bv tl're closeness of- the
relationshtp u,ith the client con-rpanv or rts officers/directors, rnonclar,Y rervards or
remuneration ent icement.

Board compensation practices


'I'he board of drr-ectors as a wirole must deliberate on thc issues of board compensation
R"r"*ar--r* I practices focusing on the extent to nhich the director-s and managers are remuneraled
of direcrors and
top executives
in way,s that align their interests u,ith those of thcir firr-ns ()r^'nL'rs. )ettsetr artd
plays a crucial Meckling (1976) underscored the irnportance of ir-rcentive alignment solutions to
role in corporate agency problems rvhen they proposed tirat executive compe nsation should be designed
governance. in such a way that can reduce the degree of conflict of interest betrveen shareholders
Appropriately and managers.
devised remuneration Theoretically, an eft-ective compensation system is the one that motivates
systems can morivate managers to forego their opportunistic behaviour .rnd focus on value nraxirnization
managers ro forego activities. The cornpensation system should consist o1 a combinatron of short-term and
their'self-in terests long-term cornponents. The short-term cotrrponent includes annual salary increment,
and realign rheir
bonus or any other benefit-in-kind for the executives.'I'1ris cornponent is meant for
interests with those
reu,arding strong current performance and motivating executirres to strive har.lcr
of shareholders.
in creating value for shareholders. The long-term component inciudes the incentive
plans such as the sirare option scheme to encourage ri-Ianagers to focus on building
long-term sustainability of the firm and to discourage short terrirism.
Tlie MCCG (2000) places great emphasis on the aspects of board remuneration
in which it shouid reflect the responsibilities and commitment of the board members.
The principles adopted by the MCCG (2000) with regard to directors' remuneration
are as foilou,s. First, directors' remuneration package should be linked to individual
and corporate perfbrmance so as to ensure that it is abie not onlv to attract, motivate
and reward good performers but also to a.,'oid pavrng excessive pay. Second, eact, firm
needs to have a remuneration cornmittee, mainly or u,holly conlposed of non -executive
CorporateGovernance 147

directors, whose tasks being to make recommendations to the board pertaining to the
remuneration of the executive directors. Finally, the board as a whole is responsible to
make decisions relating to directors' remuneration.

Directors' induction and training


A director's induction programme is a one-off in-house programme organized by the fD"..r*r *.d
company to introduce newly elected directors to the company and its ke' officers" co be skilful and -
The overall purpose of induction is to minimize the amount of time taken for the new knowledgeable
director to become effbctive in his or her new job. The development of an induction to carry our rheir
programme should be tailored to the needs of the company and individual directors. fu ncrions effecrively.
Nevertheless, there are four common aspects of a director's induction programme: So, they need ro
conrinuously update
r To convey the organization's norms, yalues and culture to the nerv starter. and upgrade their
r To communicate practical procedural duties to the nelv director, including skills by atrending
company policies relevant to a new employee. appropriate training
r To convey an understanding of the nature of the compai)y, its operations, programmes.
strategy, key stakeholders and external relationships.
r To establish and develop the new director's relationships with colleagues,
especially those with whom he or she will interact with on a regular birsis.

Directors' training is a continuous professional deveiopment programme


organized either in-l-rouse or externaliy for all directors. Directors must strive to
continuously extend their hnowledge and skills in ordcr to bc cffcctivc. Thc,v nccd
io undergo professional development programmes so that they can keep abreast
of char-rges in the regulatory requirements such as company law, securitics lalv,
taxation larv and corporate governance code, acquire and update their skills anci
knowledge in risk management, strategic and management supervision, as weli as
harness their professional expertise such as infl.rencing, conflict resolution and
chairing skiils.
Effectir,e corporate governance can be achieved if directors are competent
and skilfui irr carrying out their expected roles in directing and controlling the
company. In Malaysia, continuous training for every director is compuisory for all
public corporations. This requirement is stipulated in the Bursa Malaysia Listing
Requiremcnts. Every director must attend Mandatory Accreditation Programmc
(MAP) and Continuing Education Programme (CEP).
MAP is a one-off event to train directors on various aspects of securrties and
company larvs. CEP is compuisory for directors to attend annually to ensure
they continuously update themselves on developments in the securities indr:strv,
particularly in areas of corporate governance and regulatory changes. Conrpanies
can organize various types of training programmes for their directors such as
mentoring, schemes, forinai directors' training courses> formal personal developnrcnt
programnres, seminars and conferences and in-house company workshops.

5.7.2 lnternal Control and lnternal Audit


internal control system is an important eiement of corporate governance because
it helps to enhance the accountabiiity of the board of directors in ensuring that
shareholder s' assets are adequateiy safeguarded against the exposure to risks and
expropriation. T'he IJ.K. Turnbull Report (1999) and the MCCG (2An) recommend a
sound internal control system, which is meant for facilitating operations- rdentrfying
and nranaging risks within an organization for the achievement of the urganization
or shareholders' oDjeetir.es.
18 Business Ethics

The board of directors is fully responsibie for establishing ancl reviewing the
h.,;'d;;l--l effectiveness of an internal control system. The management team is responsible for
procedures help the
implementing and monitoring tht' internal control system. The internal control systern
company ro prolect
its investmenrs and
can assist the board to ensure adherence to internal policies, safeguard the company
assets. lt is subjecc
assets, prevent and detect fraud or error and ensure accuracy and completeness ofthe
to an inrernal audit accounting records.
process. The effect of a faiied internal controi system cart be devastating as demonstrated
by the collapse of Barings Bank Plc. in the 1990s. Hence, it is an important aspect
of the board's accountability to shareholders. The MCCG (2000) has off'ered some
guidelines in setting up and evaluating firms' internal control system. Moreover, the
Bursa Malaysia has made it mandatory for public corporations to disclose the process
and adequacy of their internal control system and risk management framework in
a form of a narrative statement in the annual report and accounts. Specifically; the
general objectives of internal control are as follo.*'s:
r To ensure the orderly and efficient conduct of business in respect of systems
bcing in place and fully impiemented. Controls mean that business Processes
and transactions take piace without disruption with less risk or disturbance
and this, in turn, adds value and creates shareholder value.
r lb safeguard the assets of the business. Assets include tangtbles and
intangibles, and controls are necessary to ensure they are optirnally utilized
and protected from misuse, fraud, misappropriation and theft"
I 'lb prevent and detect fraud. Controis are necessary to unco-r,er any operational
or financial irregularities that nught bc the result of thefl or fraud
r To ensure the completeness and accuracl, of accounting records" Ensuring
that all accounting transactions are fu1l,v and accurately recorded, that assets
and liabilities are correctly identified and valued, and that all costs and
revenues can be fuiiy accounted for.
r To ensure the tirnely preparation of financiai information, lvhich applies to
statutory reporting of year end accounts, fbr example, and also management
accounts, if appropriate, for the facilitation , rf effective management decist*rtt
making.
The board of directors relies on lhe irrternal audit function to review the
;*""t*a;-----l effectiveness of the internal control system. Internal audit function complements
[uncrion assists the
the role of internal control system in reducing the frrm's overallrisk exposure. Given
board of directors
to review the
the importance of monitoring and reviewing firms' exposure to various rrsk factors,
effeciiveness of the internal control systems har.e become part of the ,iubject matter of auditing. In thrs
company's internal respect, internal auditors piay an important role in helping the board to review the
conrrol procedures, system of internai controis and the financial reporting process. Most importantly,
internai audits can mitigate the extent of information asynrmetry and agency risks in a
firm by attesting to the reliability of a firm's publishcd financial statements (Ashbarrgh
and Warfield, 2003).
The internal audit department is established to prov ide a service to the organization
in which it performs an independent appraisal activity on the internal control and
risk management system. It is actualiy a control rvhich functions by examining and
evaluating the adequacy and effectiveness of othcr controls within a company. In
view of the crucial role of an internal audit department in providing an independent
assurance and verification of the effectiveness and adequacy of the internal controi
and risk management system in a company, it is pertinent for the chief internal arrditor
to report directly to the audit committec. This r:rporting structure helps to support
CorporateGovernance 149

and strengthen the need for the internal audit team to function and act, independent
of executive management.

5.7.3 External Audit


In a contractual relationship between shareholders and djrectors, the latter are fE""r.rkr.,dL
entrusted with the control over the resources of the former in the mosl efficient function verifies
and effective way. Hence, the corporate governance model that encapsulates this the accuracy and
reiationship of accountability is based on the idea that when ownership is separated reliability of financial
from control, directors need to be accountable to shareholders. reports on behalfof
One method of showing accountability is by way of quality corporate and financial shareholders.

reporting through the participation of an independent external audit. In fact, quality


reporting by management is one of the most important corporate governance goals
(Gramling et a\.,2004). J.he annual external audit by an independent external auditor
is particularly aimed at achieving that goal. The external audit serves as a monitoring
tool to alleviate the agency cor,s due to the separation of ownership and control
(Ashbaugh and Warfield,2A$) and enhance the confidence of shareholders (Fan and
\\rong,2005).
External auditors are viewed as important gatekeepers to protect the interests
of capital providers from financial manipulation and compliance risk. In vierv of
this crucial role, it is pertinent for tire external auditor to be objective and fair in
perfcrnning its function. Shareholders will not trust a firm's financial statcmcnts if
they are not confident with the objectivity and fairness of the e,,ternal auditor. It is,
therefore, pcrtinent for the external auditor to be indepenclent from any influence or
pressure from the executive n-ranagement team of a firm.
The independence of the external auditors may also be questionable if they
also provide non-audit services with substantialiy greater fee income than the audit
fees to the same client companv. Corporate scandals such as Enron, WorldCorr
and Satyam Computer Services have l,ighlighted the failure of externai auditors in
ensurinq their independence from the influence of the management teanr, which
ultimately led them to condone the dissemination of inaccurate and false tlnancial
reports to stakehoiders.

5.7.4 Shareholder Activism


Shareholder activism is the exercise and enforcement of tl-re voting rights of fG;r,;h...'
shareholders against the board of directors at the company s annual generai not be passive
'h"rtd
meeting (AGM). Shareholder activism arises when sirareholders believe that the owners where they
board of directors has failed in its duty to pursue and protect sharel'rolders' intcrest. allow the board and
Sharcholders, for example, can withhold r.otes for directors r'oho do not attend board managers to fully
meetings or who have conflicts of interest. They can, in fact, vote against the proposed conrrol their own
:itrategy if they are not convinced that it can boost the performance and competitive company.
advantage of the company. Some examples of shareholder activism by institutional
shareholders in the US are as follows.

r California Public Einployees' Retirement System (CaIPERS), a public en.rployee


pension fund withheld votes against five directors of Hewlett-Packard Co. for
approval of non-audit work for the auditors.
r Shareholders at Hewlett-Packard rejected a plan fbr generous sel,rrrance
packages at its AGM.
)tl FJrrsrness tthrcs

r CaIPERS urged General Electric's shareholders to demand that its executives'


share options be performance-related.
r Glass, Lewis & Co, a proxy advisory firm, withheld votes against three
directors of PeopleSoft Inc., citing unusual customer rebate aimed at fendino
off a hostile bid from Oracle Corp.
r Illinois Board of investment, a pension fund, withheld votes against the
chairman and two board members of Safeu'ay Inc.
r Shareholders at Shell threatened a revolt over its directors' remuneration"

Another important element of shareholder activism is having a two-way dialogue


Th.brrd.f I between shareholders and the board of directors. The purpose of this dialogue is for
directors should
the shareholders to have a say in the decision making process of a board of directors. In
rnainiain a regular
dialogue with
reality, activism is usually championed by institutional shareholders. In this respect,
shareholders and the the chairman of the board is responsible to ensure that the board has regular meetings
larrer should make with the institutionai shareholders.
use of rhis channel Issues of concern that are normally discussed during the dialogues include the
of communication companlr's financial performance, internal controls, succession planning in the
ro relay their board of directors and the company's acquisition or disposal strategy. Examples of
grouses and ro seek large and important institutional shareholders in Malaysia are the Social Security
explanation from rhe Organization (Pertubuhan Keselamatan Sosial), National Equity Corporation
former abour any (Permodalan Nasional Berhad), Pilgrimage Board (Tabung Haji) and Armed
issues of concern.
Forces Fund Board (Lembaga Tabung Angkatan 'l'entera). These four organizations
founded the Minority Shareholder Watchdog Group (MSWG) in the year 2000 as a
part of the government's initiatives to protect the interests of rninority shareholders
through shareholder activism. Other institutional shareholders include insurance
companies, unit trust fund companies, pension fr-rnds and professional fund
managers.
MSWG has been actively championing shareholder activism in N4alaysia by
providing a platforn, and a collective voice to both retarl and institutional rninoritl'
shareholders. MSWG also advises on voting at general meetings of public corporations.
Among others, MSWG monitors public corporations in rvhich its founding meml:crs
have equity stakes on issues such as questionable practices by management of public
listed companies, breaches and non-compliance lr.ith the corporate governance code
and failing financial performance.
Corporate governance would improve if shareholders play a nlore active role in
making their views knorvn to their company andior use their voting po\\rer against
the board ofdirectors ifthe board does not sufficiently address their concerns and do
not act in the best interests ofshareholders. Activrsm can encollrage better corporate
goyernance because it pressures the management to avoid negative publicity. An,v
act of reprimand by shareholders is seen as bad publicity for the board of directors
or management. So this can keep them on their toes at all times. Also it is more
constructive for shareholders to shou, disapproval o1 a company and its boarci of
directors than simply selling off the shares they hold.
In summary, it is pertinent for the shareholders of public corporations to behave
like owners in rvhich they need to show great interest in the running of the company.
Shareholders must be willing to work together wilh the board rn achieving their
wealth maximization objective i.e. ownership with responsibility.
Corporate Governance i 51

5.7.5 Reg u lation


T'he primary objective of regulation is to restore and enhance public confidence in lR{,,l..ry' .
the business environment by introducing stronger self-regulatory standards and framework airns ro
ru1es. In Malaysia, the main regulatory forces entrusted with the duty to protect regulate corporate

investors include SC, Bursa Malaysia Securities, Bank Negara Malaysia, Companies behaviour to ensure
it is in line with rhe
Commission of Malaysia and the Royal Malaysian Poiice Department. Table 5.1 shorvs
established standards
the relevant provisions of laws and their significance in providing protecttr,n for the
and rules: . ,'
investors in MalaYsia"

Table 5.1
Regu lators,
Securiries Commission Capiral Market and Services Mostly related to securities offences.
Acr 2007 (CMSA) and the
S.317A of CMSA gives rhe SC power ro
re I eva nt
Securities Conrmission Act
prosecute directors for breach of fiduciary legislation and
(1ee3) duties their significance
in protecting
l
l,qulsa ,lnllaysia Securicies ,, 1 Li5ring,iequilem.enr1,(].Q01) , t1p,91g1 mandator,y-:dilqlosure obligations
i nvestors
on Public corPorarions

Bank Negara Malaysia Banking and Financial Mainly regulates Iisred banks and financiat
lnstitutions Acr (1989), now institutions in relation to ownership
known as Financial Services and directors'appointments and
Acr (2013) disqualifications

Companies Commission of Companies Acr (1965) S.132 relatesto the fiduciary duiy ol'
Malaysia directors of both pi-ivare and public
companies

The Royai Malaysian Poiice Penal Code Prosecutes criminal breach of trusl cases

Departmenr under sections 405 ro 409 and chearingi


fraud under secrions 415 ro 4)0

(Source: The Srat Starbzweek, 2A10)

Bricfly, the roles of regulation in corporate Sovernance include:


r Ensuring timely disclosure of critical information.
r E,nsuring compliance with various regulations, such as occupational health
and safety and environmental law
r Ensuring proper discharge ofduties by directors and executives, etc.
-lhe focus of the reguiators is on strengthening the lau.,s and tak-ing srvift
f L^r^,r -d ,.g.il.il"*
enforcentent action in a firm and fair nlanner against errant market players rt'ho hart-n require mandatory
investors or damage the integrity of the capital market. Laws and reguiations serr,e compliance failing
as control ntechanisms to ensure companies, directors, executives and emplovees which companies
obev the laws and observe good corporate governance practices. Laws and regulatiot-t.s and their officers
usuaily mandated full compliance failing u.hich penal punishment may be meted out can be sublecied to
various penalties and
to errar,t parties.
punishment.
Non-adherence to regulations by companies and directors may learl to the
occurrence of compliance and reputation risks. Case for Review 5.2 illustrates the
enforcement action that can be taken by a regulator of corporate goverlrance for
breach of a law by top executives of a public listed corporation.
Business lthics

Securities Commission (SC) Charges Three Former Executives of Transmile

SC took three former execurives of Transmrle ro couru and charged rhem for aberrrng the company
in making misleading statements. Two of rhe former executives were ai:o independent non.executive
direcrors and members of the audic commitree As members of rhe audir commirree, they had
knowingly allowed Transmile to issue misleading srarements with regard to its f inancial performance
to Bursa Malaysia Securities Berhad. SC also offered compounds of RM500,000 each to the two
independent non-execuaive direcrors.
This swift enforcement action showed rhat rhe SC would not tolerate any abuses of power and
wrongdoings by those in fiduciary duty to prorect shareholders'interests. They could expect that
,.,,9!e,5C would take srern action against the cransgressors that caused massive losses to rnvestors.
This action is nor only timely bur also sends a dererrent message ro orher garekeepers such as
. manjgement, externai auditors, internal audirors and shareholders tirar their foremost role is to
protect and enhance the o'edibility of the Malaysian capital marker.

(Adapred fram Minority Shareholder Watchdog Group. n d )

Recall in Section 5.6, the MCCG adoptecl a hybrid approach to ttre implementation
of various corporate governance best practices. h-r thrs approacl-r, a f'erv of the best
practices have been made compuisory for public corporations to implement. The
mandatory requirement came trbout u,hen the Bursa Malaysia Securrties incorporated
those best practices rnto its Listing Requirements. l'he Bursa Malaysia Securities inay
impose fines and/or publicly reprimand d jrectors and public corporations for failure
to comply n ith the provisions of the Listing Requ irements. The mirndatory corpor ate
governance-related provisions are listed as follorvs:

r One-third of the board of directors nrust consist of independent directors-to


raise the bar on independence ofthe board.
r The board must have an audit committee at all times.
r The audit committee must coi'nprise a minimum of three directors with the
majoritybeing independent-to cnhance the independence of the committee.
r At ieast one audit commrttee member must be a member of the accounting
profession, having suitable qualifications in thc discipline.

Next, we wiii take look at some comnlorl ethical issues rn corporate go\rernance,
a
which mainiy stem from the conflict of interest betlveen the shareholders and
controllers. Most importantiy, the various issues illustiate the importance of corporate
governance in public corporations.
CorporateGovernance 153

i5,B ETHICAL ISSUES IN CORPORATE


GOVERNANCE

In this final section, we will examine a few common corporate governance issues
in public corporations. If you look closely, most of the issues originated from the
unethical practices of corporate managers. Ineffective corporate governailce provides
an opportunity for them to commit such misconduct. Hence, one may conclude that
corporate governance and inculcating an ethical climate should come hand in hand
in a quest io combat or minimize the tendency of corporate managers to abuse their
power to the detriment of various stakeholders.
We shall focus our discussion on the following common issues of corporate
governance:
r Financialmanipulation
r Inflateddirector'sr:'uuneration
r Excessive business risk taking and lack ofrisk control
r Poor communication of information

5.8.1 Financial ManiPulation


The board of directors is accounl,able to report the financial health and status of the l%t**p-r"
corporation to shareholders. Shareholders, investors and othcr users relr'' on financial scandals exhibited a

statemelts to make rlreaningful analysis about the performance and prospects of the common feature-
that was accounting
corporation, lvhich in turn aid them to nrake inforrned decisions. Hence, accuracy,
irregulariiies
tiilteliness and completeness of information are paramount to them. Further, financial
and frnancial
reports should show balanced assessment of the corporation's financiai position. As
manipulacion.
stated earlier in this chapter, tlre contrcilers have an Llpper hand in assessing and
controlling the information about the corporation than the shareholdcrs. In fact,
rhey are the ones who prepare the financial reports for shareholders, \Are have learned
'I'ransmiie,
from the scandals of Enron, WorldCom, Satyam Computer Services and
hou, the controllers manipulated financial reports to their advantage to the extent
of causing giant corporations to collapse. The following cases for i-evien' 5.3 and 5.4
summarize the gravity of this issue-er.en the judiciary meted out a strong deterrent
sentence to the offenders.
On a related point, the board of directors must ensure that the corporation
prepares financial reports in accordance with tl're established accountiugs standards-
l{oit i-po.tantly, t}re financial reports should be subject to an independent audit.
Recali i1 the earlier section, we discussed the role of an external auditor in providing
a.ssurance and verification of the reliabiiity of financial reports. One important
question remains-is the auditor irrdependent from the influence of the corrtrollers?
The independence ofan external auditor is crucial to ensure shareholders have access
to reliable and complete information about the financral health of the corporation.
The case of Xerox Corporation and KPMG LLP illustrates this issue.
'1
54 Business Ethics

Transmile Berhad

The company had issued fake invoices to a few clienr companies for delivering some services. Some
of these client companies were dormant Transmile deliberately issLied such fake invoices in order ro
inflate profits in the income statement. The Securities Commission (5C) found thar rwo independent
directors and also members of rhe audir commitree aberred the issuance of misleading financial
statements. SC compounded them RM500,000 each. The KL Sessions Courr sen[enced rhe rwo
former independenr direcrors ro one year imprisonmenr and a fine of RM300,000 (rn defaulr of six
monrhs imprisonment).

(Adaprcd fro m www.sc.co m. my)

MEMS Technology Berhad

Two directors aurhorized the issuance of misleading financial statements io Bursa Malaysia Securiries
Berhad. The income s[atemenr reported inaccurare revenue figures, which consisied r-.f fic,r,iLious sales
of RM30,000,000. Both direciors pleacied guilry irr the Kuala Lumpur Sessions Courc bui. r'eceived a iight
sentence of RM300,000 fine each. The SC appealed rhe sentence in rhe High Courr and succeeded.
The Courr imposed a custodial punishment by senrencing them ro six months imprrsonmenr and
upheld rhe fine. The rwo directors appealed to the Courr of Appeal bur were unsuccessful

(Ad a pred fro m www.b u r sa m al ayst a co rn)

The Securities and Exchange Commission (SEC) rn the US would be charging several KPMC errployees,
includrng a former auditor and two cLlrrent employees, for rheir role in rhe accounrrng srandal in
Xerox KPMC was the auditor of Xerox in 2000 r,nrhen rhe SEC discovered a huge oversraremenr of
profirs in its accounrs f rom T997 unril 2000 KPMC had approved tire accounrs in Xerox's 2000 annual
report afier rhe company made mrnor restatemenrs only.
The SEC had evidence that KPMC knew about this accounting irregulariry bur approved ri-re
accounts anyway. The inflated revenues had mrslec the public abour the company's financial postrion
The SEC contended that KPMC partners allowed their close relationships wirh Xerox ro iinparr rherr
ludgement and role as gatekeepers for the publrc Thrs lack of independence led to rhe legal action
by the SEC.

(Adapred front Pulliam and Bandler, 2003)


CorporateGovernance 155

In the cases of Enron and WorldCom, the external auditors had failed in their duty
to protect the interests of shareholders. Enron's external auditor, Arthur Andersen, for
example, was involved in various conflict of interest situations that jeopardized their
independence. The audit partners had business dealings with Enron's top executives
and they freely socialized with each other after work. Many of Arthur Andersen's
audit partners left the firm to join Enron in top positions. They were aiso responsible
for preparing financial reports in Enron. The audit partners were found to have
helped Enron's top executives to 'adjust' their accounts to show a more i.rvourable
financial health, which misled shareholders into believing that Enron was doing
well financially. In actual fact, Enron had huge debts that caused the giant energy
corporation to collapse. This action was motivated by self-interest.

5.8.2 InflatedDirector'sRemuneration
The board of directors is responsible for deciding the remuneration package of the fwhilr*.*r*rr,i*
controllers and they usually make such decisions at their own discretion. For example, system can alieviare
in Malaysia, the law does not require the board of directors to seek shareholders' agency conflict, ir
approval for remunerating directors cxcept for the share option scheme. Shareholders may also creaie a
certainly do not mind the corporation paying the controllers high salaries and benefrts corporate goVernance
so long as the remuneralion package commensurate with the financial and individual problem when ir
is excessive and
I performance of the controllers. The controliers should be rewarded for outstanding
iacks alignment to
perforniance to provide an incentive for innovation and risk-taking as well as to
performance.
attract scarce talent to run large and complex public corporations.
In the framework of agency theor1,, the directors'remuneratron is an important
nrechanism to align the interests of the shareholders witir those of its controllers.
I-lorveyer, this mechirnism does not alrvays work well and it is often subject to abuse.
Ihe main criticism of directors' remuneration is it has become too excessive to the
extent of eroding shareholders' value. The following examples sholv the abuse of
drrectors' remuneration in public corporations around the rvorld.
r in 2009, shareholders of Royal Dutch Shell criticized the board of directors
during the general meeting for paying huge amount of salaries to its executives
despite failure to meet their perforrnance targets (Chazan and Lublin, 2009).
N4ore than halfofthe shareholders voted against the rerruneration proposal.
r In 2008, critics argued that it was irresponsible for the CEO of the AIG Group
to pay big bonuses to its executives when the corporation u.as at the brink of
bankruptc,v if not for the government baii-out. Worse, the corporation used a
portion of the US government bail-out money to pay the honusesl
r ln Australia, the founder and CEO of HiH Insurance, i{ay Williams, handed
out millions of dollars in bonuses to senior executives a fer,r, months hefbre
the company went bankrupt (The Star, 2008).
r L,nron's board of directors aiso announced millions of dollars in bonuses to
its top executives just before the corporation filed for bankruptcy in 200i.

It is also an issue of concern to sharehoiders when the controllcrs are given free
rein to decide their olvn remuneration. They may reward themselves u,ith huge salaries
and other rewalds such as bonuses, pension scheme and other benefits i,vhen the
corporation is not doingneli finenciaily. Hence, corporate governance code cails for
a clear proc':dure to be estabiished for determining the remuneration packages of the
controllers, They should be reivarded based on clear criteria, and most intportantly,,
they should not be allorved to decide their own remuneration package.
l5b Bustness Ethtcs

5.8.3 Excessive Business Risk Taking and Lack of


Risk Control
_-] The controllers must be mindful of the relationship between risk and return in
a,*;''.';" making investment decisions. In general, investors want to be compensated with
exposed to various
higher rewards for the higher risk that they take. investors expect that when a
rypes of risks.
Managers who
corporation takes on additional risks in a business the profits and dividends are
prioritize self-interests to increase as well. It is an issue of concern to corporate governance when the
may rake excessive controllers make decisions to increase profits without giving adequate attention
risks ro promote to the risks associated with the decisions. In this instance, sharehoiders may be
rheir own agenda, exposed to unnecessary risks, which could lead to losses.
which might result in Shareholders expect the controllers to grow the business, and in doing so, to take
shareholders facing additional risks. The controilers may expand the business by way of taking over other
huge losses. companies, for example. But takeover is a risky strategy and it invoives huge funds.
The controllers may be motivated to go for an acquisition spree in order to 'build an
empire' and enhance their prestige and power. They might not give due regard to
risks in the event the takeover fails. As such, shareholders expect that the controllers
will put iu place a suitable risk management system to identify and manage various
risks associated with the business. The following case of HIH Insurance illustrates the
disastrous effects of failure to account for risk m.rnagement system.

The Collapse of HIH lnsurance

HIH lnsurance was rhe second largest general insurer in Australia prior to its collapse in early 200i.
Thousands of its policy l'rolders ended up with worthless policies Fmployees lost their lobs The general
public losr confidence in the insurance industry in Australra. \,\rhat had happened to HIH insurance? The
HIH Royal Commissron repori indicared that corporate governance farled rn the company The CEO
was given free rein ro conrrol ihe company and he had lack of acco.rntabiliry to the board of directors
The investigation also revealed rhar money was wasied on poor and extravagant business
acquisitions. HIH re-enrered ihe US rnsurance market in 1996 and expanded rts UK business tn 1991.
HiH d'd nor have any adequate local market knowiedge before making such decisions The board of
direcrors failed ro put rn place adequate safeguards to manage risk cxposurc in this strategy. lr also
acquired poorly performing FAI Insurance Ltd irr 1998 for a whopping AtlDS300 millron lllH had
ro borrow ro finance rhe acquisirion. ln September 2000, HIH had tc write-ofl its inves:ment rn F,\l
lnsurance.
HIH larer admirred thar ir had overpaid for FAI's acquisirion. The iasr poor in'!/pstment decision that
led ro l--tlH s collapse was the escablishment of a loint venture wrth Allranz Australia Ltd in 2000 HIH sold
off irs,profirable business units ro suppori this joint venture, resukin3 in a negative cash-flow soon after.

(Adapted frorh Dellaportas et al., 2005)


CorporateGovernance 157

5.8.4 Poor Communication of lnformation


Shareholders rely on information to make various decisions. However, they do not
have direct accessto company information. The controllers have the information nrh" a-*ir, .
shareholders have rhe
because they are directly involved in managing the daily affairs of the company.
right to be informed
They do not only have the information but alsolontrol the manner and the timing of rhe developmenrs
in which the information is reported to shareholders. Not only sharehoiders expect in a company. The
to receive information in a timely and accurate manner, they also wish to be abie to board of direcrors is
raise their concerns and want the board of directors to listen to their views. 'Ihe board responsible ro ensure
of directors, in this instance, is responsible to ensure that the corporation has a clear rhey have an effective
communication policy with shareholders. communicacion ..
The board of directors must establish various communication channels to mechanism wirh rhe

communicate with its shareholders. Amongst others, the board can use the following shareholders,

channeis;

I The annual reports and accounts-it is common for corporations to provide


online versions of tl" annual reports, which can be easily u.."rribl. to
shareholders.
r The dialogue during annual general meeting rvhere shareholders are able to
interact directlywith the chairman of the board on issues of concern to them.
r Electronic communications such as an interactir.e conlpany website and
email to convey importance updates or news about the .o-puny and share
price performance.
r Establish a dedicated investor relations department to handie shareholders'
enquiries and to disseminate the latest information about the cornpany to the
press and other media channels.
r Engage in regular dialogue u,ith institutional shareholders on performance
a nd corporate governance-reiated matters.
Shareholders require accurate and timeiy information becausc information may
affect the share price performance of the corporation. Thev need to be informed Ehar.hdd.r-.q*.
in timely, accurare and
a timeit'manner so that they can make informed decisrons. fhe
follorvinq case lbr complere information
review illustrates the importance of providing timely information to shareholclers,
in order to assess rhe
especially material information about the company. performance of rhe
company and ro make
business decisions.

Whati Coing on in Kenmark?

Kenmark is a furniture manufacturer based in Porr Klang, selangor. lt was firsr


esrablished in Tarwan
way back in 1978 lt began operation in Malaysra in 1989. The Malaysian
operarion was lisred in Bursa
Malaysia in 1997. The founder of the corrrpany,.lames Hwang, was responsible
for ihe rapid expansrol
of Kenmark's business rn Singapore, Australia, London, Hong <ong, Viernam,
US and China. Kenmark
:l a large supplier of goods ro wal-Marr and orher global reraiiers
158 Business Ethics

ln 20T0, the founder and managing director and two other direcrors suddenly disappeared, Ieaving
rhe rwo independenr directors and employees in a lurch. The factory operarrons were rmmediarely
halted and employees feared losing rheir;obs. The managing director's disappearance was repor"red in
the news and a few credirors and.banks were apprehensive abour Kenmark's abiliry to repay its debts
due ro the uncertainry. They forced sell the shares pledged to rhem causing the share price r.o tumble.
Apparenrly, Kenmark had also defaulted in various credir faciliries and a few of its key executives had
resigned. The company share price declined sharply following rl're uncertainry. Abour RMl00mrl in
rnarket value was wiped out wirhin a span of one week.
Bursa Malaysia Securities rnitiared enforcemenr proceedings against Kenmark, rhe managing
director and two other directors for various breaches of disclosure requirements under rlre I isting
Requirements. They had failed to make an immediate announcement to rhe Bursa /vtaiaysra on rhe
disappearance of the managing director, resignation of key executives, cessation of irs opetarrons in
Vietnam and Malaysia, defaulrs in various credit facilities and failure to submit quarterly financial
reports ro Bursa.

(Adapted from The Star, Starbizweek, 2006)

The iearning outcomes for this chapter are summarized as follows:

1. Explain the meaning of corporate governance.


According to Tricker (i984), the term 'governance' is derived from the Greek word gubernare,
which rneans 'to steer'. The Malaysian Code on Corporate Governance (2000) defined corporate
governance as 'The process and structure used to direct and manage the business and affairs
of the company tolvards enhancing business prosperity and corporate accountability with the
ultimate objective of realisrng long-term sl'rareholder value, whilst taking into account the interests
of other stakeholders.' In a nutshell, corporate governance erlcompasses a broad spectrum of
internal and externai mechanisms intended to mitigate agency risk by increasing the monitoring
of managements'actions,limiting managers'opportunistic behaviour. and improving the quaiity
of firms' information flows.

2. Explain in what way that the separation of ownership and control in public corporations could
lead to corporate goyernance problems.
The controi or management of public corporations are distinctly separate from ownership.
Corporate ownership and control is divided between two parties -shareholders and the board of
directors. The shareholders own the firm and the board of directc,rs controi the public corporation.
This structure of public corporation gives rise to the various corporate goyernance prolrlems that
we had witnessed so far. The structure leads to the detachmerit of shareholders as owners of the
public corporation from control oitheir or,vn propertl They rel1,,sn the controllers to protect their
CorporateGovernance 159

interests but why would the controllers care about the shareholders? They might pursue thetr own
interests, because by nature they are greedy, and lvith power in their hands, they are in the best
position to enrich themselves at the expense of the shareholders.

3. Elaborate on the meaning of conflict of interest in the context of the relationship betrveen
shareholders and professional managers.
The controllers do not own the corporation. They are merely salaried empioyees and likely to behave
differently than the owner of the corporation toward the long-term success of the corporation.
They have the tendency to work inefficiently and focus on short-term profits only in order to
demonstrate success. Focusing on short-term profits enables them to maximize their bonuses
and give them high salaries and perks. Shareholders, on the other hand, expect the controilers to
seek out profitable new long-term investments to ensure the survival of the company in the long
run. As salaried employees, the controllers stand to lose little compared to the shareholders if the
corporation goes bankrupt due to the former's personal agenda. The managers may iook fbr other
employment whereas the shareholders stand to lose their entire investment.

4. Explain the implications of the Malaysian corporate ownership structure on corporate


governance.
In a concentrated ownersllip environment, there exists one large shareholder and a fringe of
minority shareholders. The classic owner-manager conflict in diffused ownership is mitigated due
i-tr the large shareholder's greater incentives to monitor the controllers. However, a second type of
conflict appears (referred to as 'Iype II Agency Problem) in which the large shareholder that is also
a controller may use its controlling position in the firm ro extract private benefits at the expensc:
of rninorit,v sharehoiders through managerial entrenchment or various other forms oI self-interest
related partv t raitsilcti( )ns.

5. Descritre the naiure of the principal-agent relationship in the context of corporate governance.
In a public corporation, agency relarionship exists in the contractual relationship betr,r,een the
shareholders (principal) and controllers (agents). Sharehoiders expect the directors to closely
rnonitor the senior rnanagement teanl to ensure that they lvili r-neet the objectives placed upon
them. Agency problenis arise r'vhen the controllers do not necessariiy make decisions and allocate
resources in the Liest interest ofthe shareholders. In other the controllers do not consistentllr
"vords,
strive to ensLlre the achievement of shareholder rveaith maximization objective. Agency theory
assumes that this situation exists ciue to the conflicting of goals between shareholders and
controllers. The controllers, by nature, are fr-relled by seif-interest or opportunistic tendencies. They
are iikely to displa,v egoist behaviorir-to make decisions that are nrotivated by self interest.

6. Explain the Stakeholder, Property and Social Institution Theories that are applied to the
corporate governance discipline.
. Stakeholder Theory-This theory arglles that corporations should serve a broader agenda of
maximizing wealth tbr shareholders and protecting the weifare of stakeholders. 'l'hrs wider
objective is necessary because the company's actions and decisions have impacts on the weil-
breing of their stakehoiders. The larger the size and operations of a corporatiori, the greater the
impact of its actions or decisions on stakeholders.
* Propertl Rights Theory-v-11is theory asserts that a corporatiun is a private property of
shareholders who exercise their rights to incorporate and to contrirct. By virtue of having
p;operty rights, shareholders have the right to control the corporation. The property right of the
owners in a corporation must be fr:lly protected by the law.
IOU Busrness tth rcs

. Social lnstitutions Theory-This theory indicates that shareholders can exercise their right
to incorporate because the state allows them to do so. Without the sanction of the state,
corporations will not exist. Hence, corporations should not be treated solely as a body that
serves the interests of individual shareholders, but also to promote the interests of the public
at large.

7. Describe the role of various corporate goyernance mechanisms in protecting the interest of the
shareholders and stakeholders.
. Board of directors-The board of directors can be a potent monitoring mechanism to minimize
agency conflict in a public corporation. They must be accountable to shareholders and supervise
the management team on behalf of shareholders. The board of directors must be independent
from the influence of the top executives, especially in making decisions. They should give
priority to protecting the interests of shareholders in making decisions. Board independence
can be strengthened by separating the roles of chairperson and CEO and appointing a sufficient
number of independent directors to sit on the board.
. Board committees-The three common board committees in Malaysia are the nomination,
remuneration and audit committees. Board committees are primarily responsible for helping the
board of directors make decisions on board appointments and remuneration and supervision
of the financial reporting process. The independence of board committees is crucial to ensure
they can effectively safeguard the interests of shareholders. For example, the remuneration
committee is meant to prevent directors from setting their own pay package whilst the audit
committee ensures that financial information is reliable.
. Board cornpensation practices-Whilst a directors' incentive system can heip to align the interest
of the controllers with those of shareholders, it can also cause corporate governance problems.
This situation is possible if the directors are given free rein to decide their own rernuneration.
So, ihe board of directors with the assistance of the remuneration committee musl ensure that
the remuneration package is linked to performance. Further, there must be clear procedures for
determining the pay packages of directors.
. Directors' induction and training-Directors must continuously update their knowledge and
skiils to be effective in performing their function. They need to keep abreast of developmerrt
in various relevant laws governing a business, corporate governance requirements and risk
management. In Malaysia, continuous training for every director is compulsory for all public
corporations. This requirement is stipulated in the Bursa Maiaysia Listing Requirements. Every
director must attend Mandatory Accreditation Programme (MAP) and Continuing F)ducation
Programme (CEP).
. Internal control and oudit-internal controi system is aii important element of corporate
goyernance because it helps to enhance the accountability of the board of directors in
ensuring that shareholders' assets are adequateiy safeguarded against the exposure to risks
and expropriation. Internal control system can assist the board to ensure adherence to internal
policies, safeguard the company's assets, prevent and detect fraud or error and ensure accuracy
and completeness of the accounting records. Internal audit function complements the role of the
internal control system in reducing the firm's oyerall risk exposure. [t is actually a control which
functions by examining and evaluating the adequacy and effectiveness of oiher controls within
a companlr.
. External audit-External auditors are viewed as important gatekeepers to protect the interests of
capital providers from financiai manipulation and compliance risk. In view of this crucial role,
it is pertinent for the external auditor to be objective and fair in performrng its function. [t is,
therefore, pertinent for the external auditors to be independent from any influence or pressure
from the executive management team of a firm.
CorporateGovernance 159

interests but why would the controllers care about the shareholders? They might Pursue their own
interests, because by nature they are greedy, and with power in their hands, they are in the best
position to enrich themselves at the expense of the shareholders.

3. Elaborate on the meaning of conflict of interest in the context of the relationship betrveen
shareholders and professional managers.
The controilers do not own the corporation. They are merely salaried employees and likely to behave
differently than the owner of the corporation toward the long-term success of the corporation"
They have the tendency to work inefficiently and focus on short-term profits only in orcler to
demonstrate success. Focusing on short-term profits enables them to maximize their bonuses
and give them high salaries and perks. Shareholders, on the other hand, expect the controilers to
seek out profitable new long-term investments to ensure the survival of the company in the long
run. As salaried employees, the controllers stand to lose little compared to the sharehc-rlders if the
corporation goes bankrupt due to the former's personal agenda. The managers may look fbr other
employment whereas the shareholders stand to lose their entire investment.

4" Explain the implications of the Malaysian corporate ownership structure on corporate
goYernance.
In a concentrated ownership environment, there exists one large sharehoider and a fringe of
minority shareholders. The classic olvner-manager conflict in diffused orvnershrp is mitlgated due
to the large shareiroider's greater incentives to monitor the controllers. However, a second type of
conflict appears (referred to as Type II Agency Problem) in which the large shareholder that is aiso
a controiler may use its controiling position in tire firm ro extract private benefits at the expense
of rnrnority sharehoiders through manageriai entrenchment or various other forms of self-interest
relaled part)'- t ransact ions.

Describe the naiure of the principal-agent relationship in the context of corporate governance.
In a public corporation, agency relationship exists in the contractuai relationship between the
sharehoiders (principal) and controllers (agents). Shareholders expect the directors to closely
monitor the senior management team to ensure tha{ they r,r,ill meet the objectives placed upon
them. Agency problems arise rvhen the controllers do not necessarily make decisions and ailocate
resources in the best interest ofthe shareholders. In other lvords, the controllers do not consistentll.
strive to ensure the achieveilent of shareholder weaith maximization objective. Agencl, theory
assumes that this situation exists ciue to the conflicting of goals between shareholders and
-fhe1'
controilers. The controliers, b1, nalure, are fuelled by self-interest or opportunistic tendencies.
are likely to displa,v egoist behaviour-to make decisions tliat are nrotivated by self-interest.

6. Explain the Stakeholder, Property and Social Institution Theories that are applied to the
corporate governance discipline.
. Stakeholder Theory-This theory argues that corporations should serve a broader agenda of
maximizing wealth for shareholders and protecting the weifare of stakeholders. This wider
objective is necessary because the company's actions and decisions have impacts on the weil-
being of their stakeholders. The larger the size and operations of a corporatron, the greater the
impact of its actions or decisions on stakeholders.
, Pro?ert/ Rights Theory-*This theory asserts that a corporation is a private property of
shareholders who exe;cise their rights to incorporate and to contract. By virtue of having
pi'operty rights, shareholders have the right to control the corporation. The prcperty rigirt of the
owners in a corporation must be fuily protected by the law.
4/
IOU LJusrness tth!c-s

. Social Institutions Theory*-This theory indicates that shareholders can exercise their right
to incorporate because the state allows them to do so. Without the sanction of the state,
corporations will not exist. Hence, corporations should not be treated solely as a body that
serves the interests of individual shareholders, but also to promote the interests of the public
at large.

7. Descritre the role of various corporate governance mechanisms in protecting the interest of the
shareholders and stakeholders.
. Board of directors-The board of directors can be a potent monitoring mechanism to minimize
agency conflict in a public corporation. They must be accountable to shareholders and supervise
the management team on behalf of shareholders. The board of directors must be independent
from the influence of the top executives, especially in making decisions. They should give
priority to protecting the interests of shareholders in making decisions. Board independence
can be strengthened by separating the roles of chairperson and CEO and appointing a sufficient
number of independent directors to sit on the board.
. Board committees-The three common board committees in Malaysia are the nomination,
remuneration and audit committees. Board committees are primarily responsible for helping the
board of directors make decisions on board appointments and rernuneration and supervision
of the financiai reporting process. The independence of board committees is crucial to ensure
they can effectively safeguard the interests of shareholders. For example, the remuneration
committee is meant to prevent directors from setting their own pay package whilst the audit
committee ensures that financial information is reiiable.
. Board cornpensation practices-Whilst a directors' incentive system can help to align the interest
of the controllers rvith those of shareholders, it can also cause corporate governance problems.
This situation is possible if the directors are given free rein to decide their own rernuneration.
So, the board of directors u,ith the assistance of the remuneration committee must ensure that
the remuneration package is linked to performance. Further, there must be clear procedures for
determining the pay packages of directors.
. Directors' induction and training-Directors must continuously update their knowledge and
skiils to be effective in performrng their function. They need to keep abreast of developrnerrt
in various relevant laws governing a business, corporate governance requirements and risk
management. In Malaysia, continuous training for every director is cornpulsory for all public
corporations. This requirement is stipulated in the Bursa Malaysia Listing Requirements. Every
director must attend Mandatory Accreditation Programme (MAP) and Continuing E)ducation
Programme (CEP).
. lnternsl control and audit-Internal control system is an important e]ement of corporate
governance because it helps to enhance the accountability of the board cif directors in
ensuring that shareholders' assets are adequateiy safeguarded against the exposure to risks
and expropriation. Internai control system can assist the board to ensure adherence to internal
policies, safeguard the company's assets, prevent and detect fraud or error and ensure accuracy
and completeness of the accounting records. Internal audit function complements the role of the
internal control system in reducing the firm's overail risk exposure. [t is actually a control which
functions by examining and evaluating the adequacy and effectiveness of other controls within
a compan)'.
. External audit-External auditors are viewed as important gatekecpers to protect the interests of
capital providers from financiai manipulation and cornpliance risk. In view of this crucial role,
it is pertinent for the external auditor to be objective and fair in performing its function. [t is,
therefore, pertinent for the external auditors to be indepcndent frrtm any influence or pressure
from the executive management team of a firm.
CorporateGovernance 161

i
Shareholder activism-Shareholder activism is the exercise and enforcement of the voting
rights of shareholders against the board of directors at the company's annual general meeting
(AGM)- Shareholder activism arises when shareholders believe that the board of directors
has failed in its duty to pursue and protect shareholders' interest" Another important
element of shareholder activism is.having a two-way dialogue between shareholders and the
board of directors. The purpose of this dialogue is for the shareholders to have a say in the
decision-making process of a board of directors. In reality, activism is usually championed by
institutional shareholders.
Regulation--The primary objective of reguiation is to restore and enhance public confidence
in the business environment by introducing stronger self-regulatory standards and rules. The
focus of the regulators is on strengthening the laws and taking swift enforcement action in a
firm and fair manner against errant market players who harm investors or damage the integrity
of the capital market. Laws and regulations serye as control mechanisms tr:r ensure companies,
directors, executives and employees obey the laws and observe good corporate governance
practices.

8. Describe the various ethical issues in corporate governance.


, Financial manipulation
The controllers controi the information about the company. They might manipulate financial
information to serve their own agenda. It is common for errant controllers to report inaccurate
financial information that is misleading to shareholders. Shareholders require the controllers to
communicate corporate information in a timely and accurate manner so that they can rely on
the information to make informed decisions. Corporate scandals such as Enron, WclrldCom,
Transmile and Xerox Corporation have highlighted the disastrous effects of financiai
: manipulation. There vr,ere also instances w{rere the external auditor had failed in therr duty
to protect shareholders by ensuring reliability of financial reports. In those cases, the auditors
compromised their professional independence by helping the management of the client conlpan)/
to'adjust' their accounts.
. InJTated director's remuneration
When directors are given free rein to decide their orvn remuneration, they are likely to abuse
this power and relvard thernseives excessively. Shareholders object to remuneration packages
that do not reward directors based on clear performance measures. The cases of Royal Dutch
Shell, AIG Group, HIH Insurance and Enron demonstrate hor,r, top executives blatantlv paid
huge bonuses to themselves despite poor performance.
" Excessive business risk taking and lack of risk control
Risk taking is important in business because it provides opport,:nities to earn returns. I{owever,
the controllers may take on high risk projects without putting in place adequate risk safeguards
to protect the company from losses. They may undertake risky ptojects to serye their own
agenda for gaining prestige and power and at the same time exposing the assets of sharehoiders
to unnecessary risk. Hence, the board of directors is responsible to establish risk management
and internal control systems so as to safeguard shareholders' assets and investment.
, Poor communication of information
Shareholders rely on information to make informed decisions. However, the controllers might
not release or communicate corporate information to shareholders in a timely and accurate
manner. Often, sharehoiders are kept in the dark about the developments within the company.
The board is responsible for ensuring timely dissemination of material information to the general
i;rvesting public. As owners, sharehoiders also expect the board to listen to iheir concerns and
views. The board should have a clear communication policy to proviCe suitable communication
channels for shareholders to interact directlv u.ith them.
162 Business Ethics

Adverse selection Arises when shareholders are unable to ascertain whether the controilers actually
performed their tasks as expected

Agency cost Costs that arise from the need of the shareholders to monilor the activities and perfbrmance of
the controllers.

Agency problems Arise when the controllers do not necessarily make decisions and ailocate resources in
the best interest of the shareholders. In other words, the controllers do not consistently strive to ensure the
achievement of the shareholder wealth maximization objective.

Agency relationship A contract under which one party (the principal) hires another party (the agent) to rI
I

undertake specified functions on the principal's behalf. The principal delegates some decisron'rnaking t
authority to the agent to en..blc the agent to perform the assigned tasks. I
,
L-
I
!
Annual general meeting A yearly meeting called by the board of directors for the purpose of reporting to the r
shareholders on the current performance and futtire prospects of a corporation. ;
I

Audit committee A body established within a board to oversee the financial repor llng process.
r
l
Board of directors An elected group of individuals r,vho ha'',e legai duty to control the resources and make *-
I
decisions on behalf of tl-re corporations' shareholders. t
l

Board monitoring An internal corporate governance mechanism primarily rllcant to suprervl5q ths !
I

management team orr beiraif of the shareholders. r


?
I

Concentrated ownership A situation where the ordinary share ownership in a public corporation is iargelv l
L
held by individuals, a grollp of individuais, family members, institutions and the government. I

i
Conflict of interest Occurs rn,hen an individual's self-interest conflicts with the obligation of the individual L-
to act in the best interest of another. E
r
,
t
Controllers Consist of both directors and the senior management team of a public corporation. k
s

Controlling interest Gives sharehoiders greater control or voting rigirts to influence the decisrc,ns of the i
corporation. I

*
$
Corporate governance Encompasses a broad spectrum of internal and extcrnal mechanisrns intencled to I
I
initiga'.e agency risk by increasing the monitoring of rnanagements' actions, lirniting managers' opportunistic k'
behar.iour, and inrproving the quality of firms' information flows. 6
r
I
Corporation Legally, an artificial legal person, created under the laws of a particular state or countr),. I
I
I
E
Directors' remuneration The compensation of executive directors and corporate executives, including I

salar,v, honuses, share options and other benefits. i


L.
g
B
7
Egoist An individual rvho puts his or her own selfish interests above rii other considerations. 7
I
i
a
Externalaudit An independent verification process to give assurance on the reliability of finanr:ial reports.
$

k
CorporateGovernance 163

lxternal corporate governance control Monitoring mechanisms that are available outside a corporation to
control the activities and behaviour of controllers.

iarnily ownership Shares of a public corporation owned by family members.

6overnment ownership Shares of a public corporation owned by the government or its agencies.

lndependence Can be achieved when the board of directors, as well as extertral and internal auditors, are free
fi.om the influence of the management team and free from any interests or relationship
rvith the management
team.

lnternal audit Established within an organization to perform an independent appraisai activity on the
internai control and risk management system'

lirternal corporate governance control Monitoring mechanisms that are available within a corporation to
rontrol the activities of the controliers.

Minority shareholders Sharehoiders that orvn a small percentage of shares in a public corporation. Technicaily,
shareholders that own less than five per cent of total shareiroldings are classified as minority owners.

Moral hazard Occurs nhen the shareholders cannot be sure whether the controllers are pursuing their own
self-intcrests or truly striving to perform their task for the benefit of the shareholders.

hiomination committee A body establisl-red r,r,ithin a board of directors to assist in seiecting and norninating
the right candidates ior directorship and the top managemellt team for the board's sanctiotl.

Performance The achievement of economic and business obiectives.

performance-based remuneration Remuneration that is linked to the overall performance of a corporation.

lXemuneration committee A body established within a board of dire,-tors to heip design directoi.s'
compensatii;n package.

Share options The right to buy a share in the future at the price of the option at grant date.

Shareholder The legal owner of a corporation; a person, group or institutiott owning one or more shares in
: corporation.

5hareholder activism 'I'he exercise and enforcemer-)t of the voting rights of slrareholders against the board of
ilirectors al the cornprany's annlral general meeting (AGN'{).

litake Having an interest or share in undertaking.

lrakeholder Any party that can affect or be affected by the decisions of an organizatioti; an individual or a

group that iras various kinds of stakes or legitimate clairns in the business.

Type I Agency Probtem A situation where the controliers of a public corporation do not share or pursue the
same objeciive as expected of their shareholders.

Type ll Agency Problem A situation where a large shareholder, that is also a controller, is using its controlling
rcsition in a public corporation to extract private benefits at the expense of minority shareholders.
164 Business Ethics

1. Explain the meanings of agency relationship and agency costs.


2, Identify and explain the three implementation approaches of the corporate governance codes"

3. Explain why it is usually desirable ior the chairman of the board of directors ancl the chief executive
officer to be different individuals.
4. Describe briefly the role of the three board committees.

Super lnfrastructure
Super lnfrastructure is listed on the Bursa Malaysia Securiries Berhad. The company is a medium-sized
developer of infrastructure projecrs with rhree offices rn Kuala Lumpur, Penang and lskandar Malaysia,
Johor. The founder and chief executive officer, Rrcky Lee, rs a high-profile entrepreneur wirh a penchanr for
a luxurious lifestyle and risky strategies. A fcw months ago, hc had cxtravagantly spcnr RM250,000 on gold
watches as gifts and insralled a marble and gold barhroom in his office. He also boughr a whopping RM1
million worrh of paintings to adorn rhe guesr area outside his luxurious office.
Ricky is a very dominanr personality in the company. He has a strong hold on the company by virrue of
holding borh the chairman and chief executive officer (CEO) posts. His views are hardly challenged by orher
board members. lt is not surprising that there is hardly any debaie or disagreemenr during board meerings.
Shareholders are very concerned about Ricky's dominance in the board and his pursuit of whar they regarded
as very rrsky straregies. They are certainly unhappy with Ricky's lavish lifesryle at the company's expense. Ricky
just brushed these concerns aside. He said, "l know how to run rhe business and rhey should jusr rrust me to
do my job." Lasi year's earnings were down 20 per cent. Ricky was unperrurbed by the decline in earnings and
boasted rhat he knew how ro rurn rhe profirs of rhe company around this year.
The board of directors comprises Ricky Lee as chairman cum CEO, four executive and rwo non-execurive
directors and two independent directors. Three of the execurive direcrors are Ricky's close family members.
The company has esrablished remuneration, nominarion and audir commirrees. Ricky Lee is rhe chairman of
both rhe remuneration and nomination comrnitrees These rwo commitrees hardly meer to discuss issues
such as che board's nomination and executive remuneration packages. lr is widely known amongsr board
members anci top executives that Rrcky regards corporate governance as irrelevanr to real business.
Super lnfrastructure recenrly appointed an exrernal audiror upon recommendarion by Ricky. This
appoinrment received great atrention in the financial press, parricularly highlighting rhe facr thar rhe same
audit firm also provided consultancy services on Ricky's acquisirion srraregy abour ren years ago.

Questions:
1. Explain the nature of agency problem rhar exisrs in Super lnfrasrrucrure.
2. Assess rhe corporate governance structures within Super Infrastrucrure rn light of corporare governance
best practices.
3. Recommend any improvements you consrder necessary for the corporaie governance struc[ures oisuper
I nfrastrucrure.
CorporateGovernance 165

Ashbaugh, H. & Warfield, T. D. (2003). Audits as a corporate governance mechanism lrom the German
market. lournal of [nternational Accounting Research,2: 1-21r.

Azham, M.A. (2002). Ethnicity, foreigr investment and strong pragmatic government: towards interpreting
accounting progress in Malaysia. Paper presented at the seminar in Universiti Teknologi MARA (UiTM),
Shah Alam, Selangor.

Berle, A. & Means, G. (1932). The modern corporation ancl private property.I'{ew York: Macmillan.

Blair, M. (1995). Ownership and control: Rethinking corporate governance for the twenty-first century"
\4Iashington: Brookings Institution.

Boatright, J.R. (2007)" Ethics and the conduct of business (5'h Ed.). New |ersey: Prentice Hall.

Chazan, G. & Lublin, I.S. (20Co). Shell Inr.estors revolt over executive pay plan. The Wall Street lournal"
<online,wsj.comiarticle s I 587242745166837 3491 5>. Accessed on 20 May 2009.
-fhe
The Walt Street lournal,20 May 2O09.Ciaessens, S., Djankov, S. & Lang, L.H,P. (2000). separation o{'
orvnership and control in East Asian firms. lournal of Financial Economics,58: 81-112.

Crane, lf. & Matten, D. (2010). Bttsiness ethics (3'd Ed.). Oxford: Oxford University' Press.

Dellaportas, S, Gibson, K., Alagial-r, R. Hutchinson, I\4., Leung, P. & Homrigh, H. (2005)" Ethics, got)ernance
and accountability: a professional perspective. Queesland: ]ohn Wiley & Sons Australia Ltd"

Denis, D. (2001). Trventy-five years of corporate governance research and counting. Review of Financiol
Economics,l0 \91-212

Dodd, E. M. (1932). For whont are corporate managers trustees? Harvard l.aw Review" 45: 1148.

Ellul, A., Guntay, L & Le1, U. (2006). Externai governance and debt agency costs of family firms. <http://ssr n"
com/abstrac\=68737i>. Accessed on 17 November 2009.

Ezzamel, N4. & Watson, R- (1997). \Arearing two irats: The conflicting control and management roles of
non-executive directors.lnK. Keasey, S. Thompson, & M. Wright, eds., Corporate goveniance: Economic,
nlarLageffieti, and finartcial issues. Oxford: Oxford University Press.

Fan, P.H. & Wong, T"J. (2005). l)o external auditors perform a corporaie governance role in emergine
nrarkets? Evidence from East Asia. ]ournal of Accounting Research, 43 (1): 35-72.

Freeman,ll. (i984). Strategic managen"rcnt: A stakeholder approach. Boston: Pitman Publishing.

Friedman, M. (1970). The social responsibilitl, of business is to increase its prof its. l'{ew York I'ime s Magazirre ,

JJ.

Gramling, A.A., Maletta, M.]., Schneider, A. & Church, B.K. (2004). The role of internal audit function in
corporate governance: A synthesis ofthe extant internal auditing literature and directions for future research.
I o ur n al of Ac c o unt i n g Lit er at ur e, 23 : 19 1 -2 4 4.

Haslindar, i., Fazilah, A.S. & Afizar, A. (2009). Board Structure and Corporate Performance: Evidence front
Public-Listed Family-Cwnership in Malavsia . Global Reyiew of Business dv Economic Resecrch,5 (2): \85 2A4.
166 Business Ethics

|ensen, M. (1986). Agency costs of free cash flows, corporate finance, and takeovers. American Economic
Review, LXXXVI: 322 -329.

|ensen, M. & Meckling, W (1976). Theory of the firm: Managerial behaviour, agency costs and ownership
structure. lournal of Financial Economics, 3: 305-360

|ones, T.M. (1995). Instrumental stakeholder theory: A synthesis of ethics and econom ics. Academy oJ
Management Review, 20: 404- 437.

Kay, I. & Silberston, A. (1995). Corporate governance. National Economic lnstitute Review, 84: 84-97.

Kean, O. & Cheah, K.G. (2000). Corporate governance codes: A comparison between Malaysia and the UK.
Corporate Goyernance, B Q): 725-132.

Keasey, K. & Wright, M. (1993). Issues in corporate accountability and governance: An editorial. Accounting
and Busines s Res earch, 23 (91,\): 291-303.

Lantos, G.P. (2002). T'he ethrcalitv of altruistic corporate social responsibility. Journal of Consunter Marketing,
l9 (3): 20s-BA.

Lombardo, D. & Pagiano, M. (2002). Law and equity markets: A siinple model. In J.A. McCahery, ed.,
Corporate governance regimes: Convergence ond diversity (pp.39 - 44). London: Oxfbrd University Press.

Margnan, L & Ferrel, O Cl. (2003) Nature of corporate responsibilities-pcrspertive from Arnerjcan, French
and German conslrmers. lournal of Business Research,56 (1)' 55-67.

Mak, Y.T. (2006). From confortnaflce to performance: Best corporate governonce prottices for Asttul conlpaltics.
Singapore: N4cClrar^,, if il 1.

Maiaysian Code on Corporate Governance (2000). <http://r,r-lvw.micg.net/codeprinciplecodc/


MalaysianCGcode_mar2000.pdf>. Accessed on 12 September 2008.

Secrrrities Commission Nllaiaysia (" d ). Malaysian Code on Corporate Governance \20A7). <http: /11r1,1r11i.

sc.com.my/eng/irtrnllc gicg2O07.pdf>. Accessed on 1 2 September 2008.

Malaysian Institute of Corporate Governance (MICG). Internul control: Guidance for directors on the
combine code. Turnbull Report (1999). <http://www.micg.net/codeprinciplecode/lnternal%20Controlso/020
Guidairce%20(Turnbull).pdf>. Accessed on 3 October 2008.

Minority Shareholder Watchdog Group (MSWG) (n d.). Se.curitics Commrssiot'r (SC') charges three f'ctre
executiyes of Trttnsnile. <www.rrlswg.org.my>. Accessed on 16 July 2006.

Minority Shareholder \\ratchdog Group (MSWG) (n.d.). SC took NasionConr directors to Court. <\,v\{w. rnswg.
org.n,y>. Accessed on 20 April 2007.

MEMS Technology Berhad. <lvww.bursamalaysia.com>. Accessed on l2 November 2012.

Mitton, T. (2002). A cross-firm analysis of the impact of corporate governance on the East Asian financiai
crisis. lournal oJ Financial Economics, 64:2L5-241.

Mizruchi, M.S. (1983). Whu control whom? An examination of the relation betr,veen management and boarCs
of diree tors in large American firms. Academy of Management Review. B: 426 35.

Morck, R. & Yeung, B. (2003). Agency problems in large famiiy businsss groups. EntrepreneurshiT T-heory
and Practice,367-387.
fsrporate Governance 167 1

Nathan, R.S., Chiew, S.1,. & Soo, WF. (2000). 2"d Asian roundtable on corporate goverfi{tnce.
<http:/lwww :

o ecd.or g I datao ecdI 6 I 40 I l93l2l2.p df>. Accessed on 1 1 |une 2009'

perks, R.W. (1993). Accounting and society. London: Chapran & Hall.

puliiam, S. and Bandler, J. (2003). Leading rhe news: KPMG role is likely to face fraud charges-SEC set to
York, 23 Jantary
file civil action against accounting firm for role in Xerox's audits. Wall Street lournal, New
2003, P 3'

Clentre (UPENA).
Rashidah, A.R. (2006) . Effectiue corporate governance. Selangor: University Publication

Robins, F. (2009). The future of corporate social responsibili ly. Asian Business dr
Management. 4:95-Il5'

Ruigrok, W., Peck, & Hu, Y. (2006). The determinants and effects ofboard nomination
S., Tacheva, S., Greve, P.
committees .lournal of Management and Governance, N (2):119-148.

Securities Commission Malaysia (".d.). Transmile Berhad. <www.sc.com.my>. Accessed on


12 November
2012.

Shamsui Nahar, A. (2004). Board composition, CEO duality and performance of Malaysian
listed firms.
Corporate Governance, 4 (4): 47'61.
13 (3): 300-
Shim, S. (2006). Governance in the markets: Malaysian perspective . Journal of Financial Crime,
322.

Solomon, I.F & Solomon, A. (2004). Corporate governance and accatmtability. Chichester: |ohn
Wiley & Sons,
r.l
l,Lu.

The Star, Starbizweek (2006). What is going on in Kenmark? <www.thebiz.thestar.cotr)"mv>. Accessed on 5

June 2006.

The Star, Starbizweek (2010). Getting away with white collar crime- 3 |uly 2010.

The Star (2008). Wrecked lives while a director walks free.20 January 2008.

Tricker, R.I. (1984). lnternational corporate governance. London: Prentice Hal1.

Walsh, l.P. & Seward, |.K" (1990). On the efficiency of internal and external corporate control mechanisms.
Academy of Managentent Review,15: 421-58.

1\/illiamson, O.E. (i985).T'he economic institutions of capitalism. New York: Free Press.
CFIAPT'ER

Corporate Social
Responsibility

:i: l:,

.;{}

LEARNING OUTCOMES

At the end of this chapter, you should be able to:


x Defrne stakeholders.
r Expiain a firm's primary and secondary stakeholders.
a Contrast the Sharehoider Theory with Stakeholder Theory.
r Describe the different forms of Stakeholder Theory"
n Explain the meaning of corporate social responsibility.
r Examine the critical arguments for and against corporate social
responsibility.
x Analyse a firm's corporate social responsibility performance ilsrng
Carroll's four-part model.
I Summarize Keith Davis's modei of cor;>crate social responsibility.
T Distinguish between corporate responsibiiity and corporate social
responsiveness.
CorporateSocial Responsibility 169

INTRODUCTION

It is widely accepted that corporate managers have a responsibility


to the shareholders, I, - f*
""*.",rgh
who are the o*n..r of the firm. In the finance-dominated Agency
Theory perspective, firms to merely focus

this responsibility is interpreted as maximizing shareholder wealth. In fulfilling such on creating and
of expanding wealth for
,.rpor.iUitity, corporate managers are required to always act in the best interest shareholders.
all sharehold.rr. ihr., shareholders should be given priority in a firm's decisions
and business dealings. However, in reality, corporate managers do
not only.deal with
shareholders but also interact with other constituents in their daily
activities. These
constituents are called stakeholders, rvhich can greatly influence the firm's
ability
to be a going-concern entity and continuing success. Likewise, the firm's decisions
greatly iff..I tfr. well-being of its stakeholders. As such, corporate managers
have

io take into consideration ihe social objectives in their pursuit of econontic goals.
putting it differently, there is an increasing support for broadening accountability.of
corporate managers to focus n. t only on the interests of shareholders but aiso
the
needs and expectations ofall stakeholders.
*_
t'
In the past two decades or so, rve have witnessed a growing concern on the fs*k.h"ld.r*r" b.
r negative effects of firrns' activities on consumers, employees, local communities adversely affecred by

a.ri the natural environment. The effects of the firm's operations can be felt across
i frrms'actions so it
--i
L is right for the firms
*" national boundaries because many firms have become so large due to their global
to be responsible for
cxpansion. In fact, manv multinationai firms have a net worth that is greater than the their actions.
Gross Domestic Products of some poor and deveioping countries. The,v have so much
power that can be abused at the expense of various stakeholders. We lvili learn more
about this topic in ChaPter 12'
This development serves as an irnpetus for the growing interest in corporate
social responsibility. So a few pertinent questions arise out of this growing interest
and concern-do corporate managers have sociai responsibility to their stakehoiders?
What is the nature oi such responsibilrties? I{orv do firms prioritize and manage the
multiple and often conflicting demands of their various stakehoiders? Is it sufficient
for corporate managers to mereiy react lo the demands of their flrms' stakeholders?
Should they be n-,oi. ptoo.tive in anticipatrng their stakeholders' needs and take
actions to address those needs? We are trying to explore the response to these questions
in this chapter.
This &apter covers the topic of corporate social responsibility. First, we will
look at the definitions of stakeholders to set the context of our discussion. Second,
we lvill examine the types of stakeholders and their stakes in a ftrm. Thi'd, we wlll
explore tire different fbrms of stakeholder theories, nameiy normative, descriptive and
initrumental. Then, u,e will learn about the concept and nature of corporatc social
responsibility by examining two models of corporate social responsibilitl', namelv the
Cairoll's t-cur-part and Keith Davis's models. Next, we will examine the debate oi
corporate social responsibility. The debate focuses on two issues: (l) arguments for and
uguin.t a firm to be socially responsible, and (2) the nature of the social responsibilities
oi a firm. Finally, we will delve into an action-oriented concept of corporate sociai
responsibility known as corporate social responsiveness. However, to begin with, we
first need to learn about the primary constituent that will benefit from the corporate
social responsibiiity concept, n'htch is the stakeholders.
174 Business Ethics

6FTIATHoLDERS --
6.1 DEFir\irr
-
There are many ways of defining a stakeholder, some of which are shon n in Table
6.1. There is no consensus as to how best to define stakeholders" One of the earlier
definitions focuses'on the bi-directional or two-way relationship between a firm
and its stakeholders (Freeman , 1962). Stakeholders are any group of irdiridrals who
are able to affect and is affected by activities and decisions of a firm in pursuit of its
objectives.
Sh..h"k.rr..y t*l Common stakeholders of a firm include shareholders, ernpleiyees (including the
taken as one of r-he management), customers, suppliers and communities. Sometimes, stakeholders can
stakeholders. be in an organized form such as employee or trade unions, consumer associations,
community activists and environmental groups" Larger and more compiex
organizations can have many more stakeholders than these. For example, stakeholders
of a large multinational corporation or a public university can have a variety of
stakei.older groups compared to a convenience store or a night market trader in a
local neighbourhood.
Businessmen are required to fulfil their social responsibility due to the concern
of the effects their actions might bring on the welfare of others (Davis, i967)" Eval
and Freeman (1993) extended the definition of stakeholder b1 suggesting a test to
determine whether a group or an individual can be considered as a stakeholder of a
firm. This tcst is bascd on trvo principles, namely the principle of corporate riehts and
the principle of corporate effect. In thc first principie, firms are required to respect
the rights of others whilst the second principle says that firins are responsible for the
effects oftheir actions on others.
Clarkson (1995b) emphasized that stakeholders are any group or an rndivrdual
u,ho have a'stake,' 'claim' or'interest'in a corporation. Recall in Chapter 5 we stated
that a stake is a share or an interest in something- in our context, a firm. If an
individual has a stake in a firm, he or she has an important connection to the flrrn
A shareholder has an interest in a firm by virtue of holding a share of the busincss. A
very important element of this definition is that stakeholder"s are risk-bearers in which
'without the element of risk, there is no stake'(Clarkson, .l995b).
A stake may be taken as a claim too. Recall in Chapter 5 we deflned a claim as
a demand or assertion for something that is due Claims can be direct or indirect.
Each stakehoider group has different expectations about what it wants and different
ciaims or stakes upon the firm. For example, employees demand to be paid fair u,ages
and to be provided lvith a safe aird heaithy workplace. Meanwhiie, customers wanl
to be charged a fair price and demand that a firm ensures its products are safe for
consumption.

Table 6.1
Some early Freeman (1962) Can affect or is affected by rhe achrevement oi rhe firm's objectives.'
definitions of
stakeh olders

Evan and Freeman (1993) 'Benefit from or are harmed by, and whose righrs are violared or
respected by, corporate aciions.'

Clarksorl
CorporateSocialResponsibility 171

Based on Evan and Freeman (1993), Crane and Matten (2010) defined a

stakeholder as:
'... an individual or a grouP which either is harmed bv, or benefits from, the
corporation; or whose rights can be violated, or have to be respected, by the
cor po ra I ion

This definition captures tire essence of the relationship between a firm and its
stakeholders. Each firm has different groups of stakeholders depending on thc- nature,
operations and location of its business. In fact, a firm may have to deal with different
stakeholders depending on different situations, tasks or projects. Hence, in view of
this variation, it is difficult to clearly identify a specific group of relevant stakeholders
in any given time and situation. Nevertheless, a firm can generally identify its
stakeholders as customers, employees, suppliers, shareholders, community, etc'
In summary, a stakeholder refers to a specific person or groups of people, who have fFl*d r*-,*ff..
an interest or a claim in a firm and can affect and be affected by the firm's decisions stakeholders and in
and actions. The management of the firm ought to determine how the interests of such turn stakeholders
groups can be incorporated or represented in their decisions and actions. Further, can also affect rhe
firm. So, stakeholders'
corporate managers need to take a more inclusive approach in managing the firm by
inrerests have to be
taking into consideration the effects of their decisions and actions on stakehoiders
considered in firms'
rather than taking an exclusive approach of focusing on maximizing shareholders
decision-making.
u,ealth only. They cannot deny that the survival of the firm very much depends on
their int.,raction and treatment of both the shareholders and stakeholders.
Next, r,r,e will look at tl-re different types o{'stakeholders. There are many wa\rs
to categorize or classify stakehoiders. In this book, we will focus on primary and
secondary stakeholders.

6.? TYPES OF STAKEHOLDERS


A firm's stakeholders can be categorized into primary and secondary stakeholders IP,-"ys,.k.hdd."
(Clarkson, 1995a). Primary stakeholders have a direct stake or claim in a firm. They are rhe most
are said to have a direct ciaim because a firm engages in a direct economic relationship influenrial so firms
or transaction r,r,ith them. The economic relationship is derived from cor;tractual have to treat them

connection between the firm and its stakeholder groups. For example, shareholders well

contribute capital, customers purchase products and services and suppliers suppl1,
materials to the firm. This classification emphasises to what extent that the stakeholders
affect the firm. The participation of the prirnary stakeholders is necessary tc-r ensure
that a firm is solvent, so clearly the firm must strive to keep this group huppy. lf an,v
primary slakeholder group, such as customers or suppliers, becomes dissatisfied and
withdraws their participation in a firm, the firm will be seriously damaged or unable
to contiliue as a going concern.
Secondary stakeholders have an indirect stake or claim in a firm. They do not Il..".drty
have a contractually determined direct economic relationship with the firm. They will srakeholders may -
rrot affect the ahility of the firm to continue as a going concern. Nevertheless, failure not be as influential
to address their concerns may alfect the firm's reputation and public standing. For as the primary
example, farlure to quickly address negative publicity highiighted in the rnedia due stakeholders, bur
to product safety issue may damage the firm's reputation. Similarly, failure to ensure rhey can negarively
affect the reputarion
food products are safe for consumption may prompt the government to in'pose strict
of firms.
and often more costly regulation of the firm's production processes. Table 6.2 outlines
the two types of stakeholders and their stakes in a firm.
172 Business Ethics

Table 6.2
Types of Shareholders Profits-return on nvestment
i

stakeholders ancJ :' i'r:::1!'i1-1 r:'::: ;:: tsefe .,;,r',&


their stakes
' and healthy working cohditions'and faii'wa$e! "'l :.t]
Customers High quality products ar a fair prlce
i:. :r: i' , ,i : ;;: .' -, Consistent market and prompr payments

Local lnvestment in the lc-.,ial communltles

Covernmenr Source of revenue rhrough business taxation; ensures


compliance wirh the laws and regulations

Source of business news, influences public opinion

Trade bodies Adherence ro trade teguiatto,rs

:j.L :: ,. I

groups
Soci-r pressure groups Protection of rhe environment and socier-al welfare

In the next section, we shall anaiyse the relative importance of stakeholders using
three relationship attributes-legitimacy, po\ver and urgenc)'. A firm has multiple
stakeholders and their claims may be competlng. Hence, this arralysis enables the firm
to assign relative importance or priority to competing stakeholder clairns.

6.3 ANALYSI NG STAKEHOLDERS'


RELATIVE IMPORTANCE

Firms deal rn,ith multiple stakeholders, and rather tl-ran addressing the demands oi
each stakehoider individually, they respond to the demands simultaneously. However,
it is unlikely that firms will give the same prioritl' or imptrr tance to all stakeholders'
Agle, Mitchell and Sonnenfield (i999) proposed that firms determine the importance
or salience of their stakeholders by analysing tl-riee attributes of each stakeholder--
legitimacl,, power and urgency.
---I This analysis is important for tlvo related re3sons. First, tl"re analysis helps corporate
^n.trt*,
srakeholder attribures managers to deternrine the relative influence tirat each stakeholder has over the firm. Thus,
is imporrant to they can identify rvhich stakeirolders have the most influence over the firm's ol'rjectives
determine rhe and strategy. Second, stakeholder salience determines whether a firm will take ineasures
salience of each to address their interests and how soon or fast they will rcacl to rneet the demands of
srakeholder group. a particular stakeholder. Corporate managers will usually attend to tire demands oi a
stakeholder group that have the most influence. For erample, pritnary stakeholders have a
high degree of legitimacy, power and urgency in a firm" Thus, managers are likely to place
greater importance on this type of stakeholders (Mitchell et al., 1997).
Srh.*. ,
----l Firms need to continuously perform the analysis of stakeholder attributes
"f
stakeholder will because it is likely that the importance of each attribute to a stakeholder may change
determine how fasr throughout the relationship and over time. For examplc. a stakeholder may be
firms respond to its influential at one stage but that does not mean it wili continue to be powerful at other
demands. times. An organizational life cycle will also delermine the degree of poweq legitirnae y
and urgency of a stakeholder. This issue will be explored in further detail in Sectiori
6.3 of this chapter.
CorporateSocial Responsibility 173

Legitimacy refers to the extent of validity or an appropriateness of a stakeholder's llh". r*lb,*t


claim to a stake. Primary stakeholders have a legitimate interest in a firm. For example, of srakeholders are
shareholders, employees, customers and suppliers have high degree of legitimacy due legitimacy. power and
to their contractual relationship with the firm. High legitimacy of claims increases urgency.

a stakeholder salience to a firm. In short, legitimacy of a stakeholder's claim will


determine rvhich stakeholders 'really count' (Mitchell et a|.,1997).
Power refers to the abiiity to exert influence over a particular decision. Primary
stakeholders have a high degree of power that they can exert in the firm. Their
concerns are taken into account in the firm's decision-making process. For example,
employees in top management actively participate in decision-making and their views
are regularly consulted.
Finally, urgency refers to the extent to rvhich stakeholders' demands or claims call
for an immediate attention from the firm. A delay in addressing an urgent demand
or claim is unacceptabie The urgency of a claim or demand depends on its degree
of sensitivity and the importance of the relationship to a firm. For example, the firm
needs to immediately address the concerns of employees'unions due to an impending
threat of strike. Likeu,ise, the trrn is required to response or act immediately to a
threat of consumers' boycott due to the poor quality of its products and services.
In the prer.ious chapter, r,ve have reviewed the Stakeholder Theory and in the
next section, we will look at the three perspectives of the theory, which provide the
justifications or reasons for corporate managers to adopt the stakeholder approach to
manag a firm.

6.4 rHnrr prnSrrCtrvEs oF


STAKEHOLHOLDER THEORY

ln Chapter 5, we have examined the salient points of Stakeholder Theory. In a nutshell, fThr.. frrr"
this theory argues that firms have a wider fiduciary responsibility to a broad range of "r
Stakeholder Theory
stakeholders other than to their sharehoiders. This argument is based on the fact that attempt to explain
a firm's actions and decisions have an impact on its stakeholders. The larger the flrm, or jusrify why firms
the greater the impact it brings to its stakeholders. Hence, the firm cannot simply should treat rheir
ignore their stakeholders and focus on shareholders only. In this section, ne sliall stakeholders well.

revierv the drfferent perspectives or forrns of Stakeholder Theory, namely normative,


descriptive and instrurnental (Donaldson and Preston, 1995). Lach of these three
perspectives attempts to explain the motivations for firms to respond to stakeholder
concerns or justify Stakeholder Theory.

6.4.1 Normative Perspective


According to Donaidson and Preston (1995), normative perspective is the core of
the Stakehoider Theory. It attempts to explain the motivation for a firm to take into
consideration its stakeholders' viervs in decision-making. It is important ior us to
note that firms have moral or ethical obligations to look after the welfare of not only
shareholders, but also ail their stakeholders. This moral obiigation is derived from
the bi-directional understanding of stakeholder relationships. Stakeholders affect the
firm and are also affected by the firm's acl;.ons. So, firms' actions or de,:isions have
to bc ethical. Corporate managers must take into account the effect of their actions
174 Business Ethics

or decisions on stakeholders. Likewise, although honouring stakeholders' interests


might not promote the strategic interests of the firms, they must not simply ignerre
them because doing so is deemed unethical.
Normative perspective is based on Kant's Theory of Duty, which was discussed
in Chapter 3. Firms have civil duties that are important to increase or maintain the
net good in society. Failure to perform these duties will result in a lack of cohesion
in society. This perspective rejects egoism, dictating that neither the firm nor the
individual stakeholders should exist solely to serve its own ends (lones and Wicks,
1999). In short, normative perspective is categorical in which it says
'Firms should not
(should) do this because it is wrong (right) thing to do.' Stakeholders should be treated
based on some underlying moral or philosophical principles'

6.4.2 Descriptive PersPective


Descriptive perspective attempts to describe and explain the behaviour of firms
and :lreir managers in dealing with various stakehol<iers. For example, corporate
managers will treat stakeholders well if they have all the lhree attrihutes of high
legitimacy of claims, great power to influence decisions of the firm, and urgency of
isiues to be addressed. Stakeholders that do not possess such attributes are deemed
Iess important. Jawahar and Mclaughlin (2001) assert that firrns do not always treat
their stakeholders as equally important at all times. Instead, the treatment of each
stakeholder group varies across the organizational life t.ycle.
Firrns are likely to consider some group of stakeholders as more important
than others because of ti-reir ability to influence the needs of the {irms at an)/ glvel')
organizational life cycle stage. For example, during the start'up stage, firms are
relatir.ely unstable and issues of deveioping a business plart, obtaining fund,s arrrl
tirr-ring to entcr a rnarketplace are of great significance to the firms' sun'ival. So, at
this stage, firms are likeiy to place great importance on shareholders, creditors and
customers. Shareholders are the primary source of funds to fir-rance the business
whilst custoners are important to generate revenues for the flrms. In contrast, at the
decline stage, firms will place great importance irn their customers in order to gairt
a new market or to improve market share. In short, the strategy that firms adopt in
their relationship with stakeirolders depends on the reiative inlportance oia particular
stakeholder group in relation to other stakeholders.

6.4.3 Instrumental Perspective


This perspective argues that a firm must manage its stakeholder relations lvell rn
order to niake profits. For example, if a firm selis def"ective products and ,,harges
unreasonably high prices, customcrs will not buy its prcc1r-rcts and many o{'its extsting
customers lvill migrate to competitors. Hence, corprtrate managers have to brlance
and meet the needs of various stakeholders. ]ones (1995) argued that firms will be able
to gain a competitive edge over other firms if they treat their stakeholders based on
mulual trust and cooperation. Stakeholders, in this instance, are considered part of
a firm strategy to achie.re corporate performancc goals such as profit maximizatiott
and financial growth. Hence, this perspective argues that there is a justification for
treating stakeholders wel1, because such ireatment is necessary tor firms ttl achieve its
economic goals.

:
t.
II
l
r
I
I
I
t
$
G
f
i
Corporate Social Responsibility , . t75
': : I

After reviewing some forms of Stakeholder Theory, we are now ready to delve into
the concept and nature of corporate social responsibility.

: o.3 THE CONCEPT AND NATURE


OF CORPORATE SOCIAL
RESPONSIBII-ITY

Corporate social responsibility (CSR) means that firms are not only responsible to Il-.r *- r.q,r*d .
shareholders but also accountable for the effect oftheir actions on various stakeholder adopt CSR for which
groups. Firms have an obligation to take actions that protect and enhance the weli- their acrions affecr
being of their stakeholders other than promoting their own inrerests. Firms are the welfare of rhe
expected to protect the welfare of their stakeholders by avoiding negative impacts that stakeholders.
their actions can bring onto them. For example, firms should ensure their products
are of good quality because defective products can cause injury or even death" As ft.rr
enhancing the welfare of stakeholders, firms can do so by generating positive benefits
for society. For example, firms can give financial support for the social activities of
the locat community. In his iandmark article arguing the case for and against business
taking on social responsibilitl', Davis (1973) defined CSR:
'... the firrn's consideration of, and response to, issues beyond lhe narrttw
e t,ononric, technical, ttnd legal requirements of the
Jirm. It is the Jirrn's obligation
to evaluote in its decision-n'Laking processes the effects of its decisions on the
external social ,,stem in a manner that will occomplish social benefits along
wilh lhe traditional economic gains whi;h the firm seeks. It n'teans thett socinl
responsibility begins where the law ends. A firm is not being sociolly responsible
i,f it rnerely con'Lplies with the minimurn requirements of the lau,, becau.se this
is y,hat any good citizen would do.'

The CSR concept promotes the idea that firms cannot exist in a vacuum.
They need the support of both sharehoiders and other stakeholders to survive.
Firms have economic and legal obligations to their shareholders as rveli as other
responsibilities to the stakeholders. So, other than being responsible fbr the actions
that affect stakeholders, firms need to take into account the interests of stakeholders
rn their decisions. In short, firms do have responsibilities beyond making a profit
for shareholders. CSR extends the fiduciary responsibility of corporate managers to
stakeholders because they also have legitimate claims on the firra. Thus, we can see
that this concept represents the stakeholder model.
In Malaysia, Bursa Malaysia Securities launched a CSR framework for public ITrn, A4rl4,srI
listed firms in2006. The framework emphasizes that CSR is more than phiianthropy four dimensions of
and community initiatives. CSR is defined as 'open and transparent business practices CSR are community,
that are based on ethicai values and respect for the community, employees, the wor:kplace,
environment, shareholders and other stakeholders to deliver sustainable value to rnarketplacq and rhe
society at large' (Bursa Malaysia, 2AAq.In 2A07, Bursa Malaysia made it compuisory environment.
for all publrc listed firms to disclose CSR initiatives in the financiai reports in a form
of a CSR statement. The CSR framework highlights four dimensions of sustainable
practices as shown in Table 6.3 below.
w
I /b Busrness Ethrcs

]J
Table 6.3
Bursa Malaysia's .:
lnvestmenrs or donarions rn capital, time, producis, servrces, management
CSR Dimensions knowledge and orrrer resources that bring posirive impact on local communirres
I
,tt*

I
Markerplace Activities io encourage and influence shateholders, vendors and customers to
behave in a sustainable manner across the value charn

I
The government of Malaysia has introduced a few initiatives to encourage I
corporate Malaysia to embark on CSR" Amongst others, flnns makirrg donations to
approved institutions or organtzations enjoy higher tax deductions, and in 2002 the
government introduced the CSR Prime I'[inister's Award to recognize and appreciate
the conlribution of the corporate sector to society. Public Bank Berhad, one of'the
iargest and most profitable commercial banks in Maiaysia, won the inaugural award
I
in2007.
In the next two sub-sections, rve will examine the nature of firrlrs' social
responsibilities. We will look at two modeis for this purpose. The most established
lI
and accepted model of CSR that explains the nature of firms' social responsibilities is
the four-part model of corporate social responsibility by Carroll (1979). 'J'he second
model is derived from the notion that i-i-re exercise of corporate powers comes with the
responsibility to improve the welfare of the society. Keitti Davis pioneered tiris idi:a in
u,hat he called the 'iron Law of Responsibiiity'.
It
i
6.5.1 Carroll's Pyramid of Corporate Social
Responsibility T

l
F-rt *ad a ---l Carroll (1979) suggest there are four levels of social responsibility-econortic, icgal, i

fulfil all four layers ethical and philanthropic. The definition of each responsibility helps us to understarrd I

b-
of responsibiliry the nature of firms' social responsibilities and the expectations of thc societ,v of
r
concurrenrly. each responsibility. Each of the four responsibilities is interreiated and can be best
expiained by imagining a pyramid that has four layers. At the base of this p,vramid of
corporate social responsibility is economic responsibility followed by iegal, etl-rical and
philanthropic. This pyramid is depicted in FigLr',e 6.1. Irrrms need to sirrrultaneously
fulfil all the four layers of responsibility. Hence, a firm's total corporate responsibility
is the sum of its economic, legai, ethical and philanthropic- responsibilities, whrch
aims to promote long-term benefits to society at large.
Econoil-------_l Economic responsibiiity requires firms to be profitable so that shareholder:, can
responsibility requires earn a reasonable rate of return on their investrnent and employees can be gainfully
firms to be profitable employed to support their lives. Likewise, customer: require firms to produce quality
for rhe benefit of goods and services at a fair price. Suppliers seek to do business with the firms in order
srakeholders. to survive. In short, the first responsibility of firms is to be a functioning economic
unit and a going-concern entity. Firms should be committed to maintaining a strong
competitive position and a high level operating efficiency in order tr:r achieve a
successful position on the market. Carroll (1979) suggest that all firms are requrred to
meet these economic responsibiiities.
:

CorporateSocialResponsrbility 177

Desired by sociery

Expected by society

Requrred by sociery

Required by ,oii.ry

(Source: Crane and Marren,2010)

Figure 6.1 : The pyramid of corporate social responsibility

Legal responsibility requires flrms to obey ail lau.s and adhere to regr-rlations that I L.grtr.rp".tbill,y
are reievant to business operations. Lau.s codify society's moral views, thus society requires firms ro obey
imposes iegal obligations on businesses. For example, company laws require the laws in rheir business
directors to discharge their fiduciary duty to managing the assets and investments dealings.
of a firm. This duty requires them to always act in the best interests of sharehoiders.
Likewise, firms are required to honour all contractual obligations to all business
partners. According to Carroil (1979), the fulfilment of lega1 responsibilities is
required of all firms.
Ethical rcsponsibility requires firrns to do wl-rat is riglit, fair and just in its dealing Erh"rk.tp"r.rrbrlr,y
with all stakeholders cven if the law does not compel them to do so. Firms Lave to act requires firms ro
in a ntanner consistent tvith expectations of societai mores and ethical norms. For avoid harm and do
example, stakeholders expect firms to avoid questionable practices that could harm what is right, just
them. Thus, the management of a firm must strive to practice ethical leadership. and fair.
These expectations of the stakeholders are based on the fact that the lay,s are not
enough to govern all corporate behaviour and actions. Firms are expected to fulfil
these responsibilities beyond the requirements of economic and Iegal resp,rnsibiiities
(Carroll, 1979).
Philanthropic responsibiiity is something that is desired or expected by the society m.-g, g""d
rather than being required of firms. Firms voluntarily fulfil th