Governance and Sustainability

1 GOVERNANCE AND SUSTAINABILITY
MASTER OF BUSINESS ADMINISTRATION
GOVERNANCE AND SUSTAINABILITY
STUDY GUIDE
Copyright © 2015
REGENT Business School
All rights reserved; no part of this book may be reproduced in any form or by any means, including photocopying
machines, without the written permission of the publisher.
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TABLE OF CONTENTS
SECTION 1 Governance and Sustainability Study Guide 3
SECTION 2 The Impact of Underlying Mechanisms on Governance 7
SECTION 3 Arguments for and Against Corporate Social Responsibility 43
SECTION 4 Different Theoretical Models of Stakeholder Management 73
SECTION 5 Key Features of Theories of Ethics 97
SECTION 6 Application of Ethical Theories in a Business Context 119
SECTION 7 Conceptions of Environment and Sustainability 136
SECTION 8 Evaluate How Ethics and Responsibility in Business are Affected by

166
Organisational Structures and Cultures
SECTION 9 Reflect on Values and Levels of Integrity in being a Professional 186

Manager
SECTION 10 Ways in Which Corruption Affects the Economy and Business 204
Bibliography 213
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SECTION 1
GOVERNANCE AND SUSTAINABILITY
STUDY GUIDE
1. Introduction
Welcome to Governance and Sustainability.
This module forms a core part of the Masters in Business Administration (MBA) programme at
Regent Business School. Upon successful completion of this module you will be able to
competently and strategically support and apply information and Governance and
Sustainability practices in your role as a manager. You will also have a thorough
understanding of how the application of Governance and Sustainability plays a critical role
in advanced markets and emerging markets.
This module is designed and developed for Regent Business School students for an in-depth
look. Governance failures both locally and internationally have filled the media and have
negatively impacted on confidence in the free market system. The sheer size and complexity
of business makes it difficult to understand all the potential problems which lie in wait for
apparently successful organisations. Globalisation and the pervasive use of technology add
further complications.
It is also acknowledged that human activity has an influence on the environment and eco-
systems in general. Sustainability is the need to allow the natural world to refresh itself while
providing sufficient resource for human life. The module outlines the need for corporate
governance in the private and public sectors.
This module contains theory, frameworks, models and exercises on Governance and
Sustainability. It is recommended that the module be studied in parts in conjunction with the
prescribed textbook and recommended reading.
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Some sections are covered in detail while others require students to read the sections
comprehensively in the prescribed text book.
Structure of this Study Guide

This Study Guide is structured as follows:
Provides an overview of
SECTION 1: the Governance and
Introduction to Governance and Sustainability Study Guide Sustainability Study
Guide and how to use it.
SECTION 2:
The Impact of Underlying Mechanisms on Governance
SECTION 3
Arguments for and Against Corporate Social Responsibility
SECTION 4 This part of the Study
Different Theoretical Models of Stakeholder Management Guide details what you
SECTION 5 are required to learn.

Key Features of Theories of Ethics Each section details:
Specific learning
SECTION 6
outcomes
Application of Ethical Theories in a Business Context
SECTION 7 Essential reading
Conceptions of Environment and Sustainability (textbooks and journal
SECTION 8 articles)
Evaluate How Ethics and Responsibility in Business are An overview of relevant

Affected by Organisational Structures and Cultures theory
SECTION 9 Questions for reflection
Reflection on Values and Levels of Integrity in being a
Professional Manager
SECTION 10
Ways in which Corruption Affects the Economy and Business
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2. HOW TO USE THIS MODULE

This module, Governance and sustainability, should be studied using this Study Guide
together with the prescribed text.
The prescribed textbook for Governance and Sustainability is:
Wixley, T. and Everingham, G. (2010) Corporate Governance. Third edition. SiberInk
Recommended Reading
A number of recommended texts will also be listed. You are encouraged to read the
recommended texts to enhance your knowledge and your learning experience.
Learning Outcomes
At the beginning of each section in this Study Guide you will find a list of learning outcomes.
These outcomes detail the competence which you should have achieved on completion of the
section.
Module Title: Governance and Sustainability

Credits: 10
Module outcomes
On completion of this module, the learner should be able to:
 Analyse the impact of underlying mechanisms on governance
 Evaluate the arguments for and against corporate social responsibility
 Analyse different theoretical models of stakeholder management
 Assess the key features of ethical theories
 Evaluate the application of ethical theories in a business context
 Critically evaluate different conceptions of environment and sustainability
 Investigate the relationship between organisational structure and business
ethics and responsibilities.
 Reflect on values and levels of integrity in being a professional manager
 Assess the impact of which corruption on the economy and business.
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SECTION 2
THE IMPACT OF UNDERLYING MECHANISMS ON GOVERNANCE
Chapter outcomes
On completion of this section, the student will be able to:
 Analyse the impact of underlying mechanisms on governance
 Determine Legislative enforcement related to Corporate Governance
 Compare and contrast The Cadbury, King, Greenbury and Hampel committees reports
on Corporate Governance.
 Evaluate the underlying mechanisms on Corporate Governance.
Readings
 Wixley T and Everingham G (2010) Corporate Governance Third edition. SiberInk
 Stanwick PA and Stanwick SD (2009) Understanding Business Ethics First edition.
Pearson; and
 Mongalo T (2010) Corporate Law and Corporate Governance Third edition. Van Schaik
2.1 Background to Corporate Governance

The importance of corporate governance has been felt globally and there is always a sense of
urgency among stakeholders, including Governments. This is especially the case since the
frequent occurrence of scams which has depleted investor confidence.
In light of this the need to study corporate governance has become imperative in view of the
number of international scams, fraudulent activities and other irregularities that the business
world has seen from the third quarter of the last century with the floodgate of such
misdemeanours opened up after the Watergate scandal which engulfed the US in a huge
crisis which affected the country’s highest office of the Presidency. Subsequently there was a
succession of flawed activities like the intelligence failure of the US and the British
governments to unearth the stockpile of Weapons of Mass Destruction in Iraq even after the
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occupation of the Allied forces. Even the Indian government was caught unaware during the
occupation of Kargil by Pakistani forces, which resulted in a war – albeit on a small scale
(Mathur, 2005).
The discussion around corporate governance will be lacking if one did not make reference to
the Enron Saga. Since this issue, investors have increasingly focused on corporate
governance issues since several high-profile corporate bankruptcies occurred during 2001
and 2002. Corporate governance issues kept Tyco, MCI Worldcom, TXU Energy and Enron in
the media spotlight as the companies failed. Regulatory requirements also drive corporate
governance efforts (Gregory and Simms, 1999).
Companies engage in corporate governance to align the long-term goals of shareholders,
management and employees, which includes recognizing a civic duty to benefit the locales in
which the companies operate (Mathur, 2005).
Looking at the total apathy of persons towards the health and well-being of corporations that
they have been running, corporate governance must carefully be planned and deliberate
manner to look after the interests of the stakeholders of the company. In the past, the pathetic
surrender of ecological issues by the industrial and business communities has posed serious
threats to the well - being and existence of the planet. Corporates have to totally eschew their
age-old concepts of bottom line and their relentless pursuit of increased profits. It has become
imperative for corporates to find leverage in the triple bottom line, taking environmental,
ecological and ethical issues into consideration, if they want to survive and thrive in the 21 st
Century (Mathur, 2005).
? THINK POINT
Conduct research and discuss one South African governance matter and one global matter,
both of which would have a global impact.
2.2 How did Corporate Governance Develop?

Gregory and Simms, (1999) state that corporate governance is a broad term that has to do
with the manner in which the rights and responsibilities are shared among owners, managers
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and shareholders of a given company. In essence, the exact structure of the corporate
governance will determine what rights, responsibilities, and privileges are extended to each of
the corporate participants, and to what degree each participant may enjoy those rights.
Generally, the foundation for any system of corporate governance will be determined by
several factors, all of which help to design the final form of governing the company.
According to Gregory and Simms, (1999), the concept of corporate governance was born out
of the conflict of interests between a company’s owners and its hired managers. This conflict
arose when the ownership of companies became separated from the control of the company,
which meant that the organisation’s owners (principals) no longer managed the company,
since the responsibility to manage the company was shifted to the managers (agents) of the
company.
Within any corporation, the structure of corporate governance begins with laws that impact
the operation of any company within the area of jurisdiction. Companies cannot legally
operate without a corporate structure that meets the minimum requirements set by the
appropriate government jurisdiction. All founding documents of the company must comply
with these laws in order to be granted the privilege of incorporation. In many jurisdictions,
these documents are required by law to contain at least the seeds of how the company will be
structured to allow the creation of a balance of power within the corporation.
Tatum (2003) is of the view that much of the basis for corporate governance is found in the
documents that must be prepared and approved before incorporation can take place. These
documents help to form the basis for the final expression of the balance of power between
shareholders, stakeholders, management, and the board of directors.
The by-laws, articles of incorporation, and the company charter will all include details that
determine who has what authority in the decision making process of the company.
2.3 The Law Surrounding Corporate Governance

Along with the laws of the land and the founding documents, corporate governance is further
refined by the drafting of formal policies that not only recognise the assignment of powers in
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accordance to the by-laws and corporate charter, but also help to further define how those
powers may be employed. This helps to allow the company some degree of flexibility in
maintaining a balance of power as the company grows, without undermining the rights and
privileges inherent in each type of corporate participation (Tatum, 2003).
However, according to Williams (2007) the most straightforward and generally accepted
definition is that of the Cadbury Committee which states that, “Corporate Governance is the
system by which companies are directed and controlled.” This is correct but it glosses over
some of the complexities and gives credence to a biased view of the Hampel Committee -
between its ‘contribution to business prosperity’ (which is the good) and ‘accountability’ (at
best a necessary evil). Hampel (1998) believes that public companies are among the most
accountable organisations in society and wants to see the balance corrected - namely in
favour of business prosperity.
According to Mongalo (2010), in corporate governance, the emphasis is on matters such as

 who controls the company
 safeguards the controls imposed on the use of power by controlling the directors
 the importance of the corporate institution
 duties and responsibilities of those controlling companies
 the role of shareholders in corporate governance
 the importance of company meetings
 protection of minorities within companies
 insider trading and its importance in corporate governance
 winding-up and its consequences on those controlling companies.
Mangalo (2010) further avers that corporate law is seen as being mainly concerned with
making available the corporate form for two primary purposes, namely:
 To facilitate and regulate the process of raising capital for the business operations of
the company - this is known as corporate finance; and
 To impose controls on persons who derive their power from the finance that corporate
form has put at their disposal. This is regulating the organs that are concerned with the
governance of a company – namely Corporate Governance
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Corporate governance is generally understood to mean the way or systems by which

companies are directed and controlled. The systems of corporate governance exist for the
purpose of effectively restricting and monitoring the powers vested in decision – makers.
From this perspective, the Code of Corporate Practises and Conduct states that the Board of
Directors is the focal point of the Corporate Governance system - the Board plays a vital role
in corporate decision - making, (Mangalo 2010; Wixley and Everingham, 2010).
The Companies Act 61of 1973 (later replaced), together with the company’s articles of
association, play a very important role in determining who is responsible for corporate
governance. These two sources indicate that the management of the company must be
effected through two primary bodies, namely the company in annual meeting and the Board of
Directors elected by the General meeting.
The Articles of Association provides that corporate governance is entrusted to members at a

general meeting, state that the directors shall exercise all the powers of the company unless
such powers are required to be exercised by the company in general meeting. Wixley and
Everingham (2010) state that prior to the emergence of the corporate law reforms, directors
had unlimited powers, but this has changed since the introduction of several legislation which
directors must take cognizance of when they are running companies.
Despite the common law and statutory corporate governance that were established, it was
realized in the 1980s that these may not be adequate in ensuring good corporate governance,
especially in listed companies as these are the main economic drivers. As a result corporate
governance reforms were introduced to apply to listed companies. This is not to say that there
was no corporate governance prior to the 1990s when the King Reports were introduced.
Previously they were couched in the form of legislation, common law and other statutory
enactments such as the Insolvency Act, 34 of 1926. These were the traditional or
conventional corporate governance regimes. After the 1990s an additional source of
corporate governance principles in South Africa was introduced - namely the Code of
Corporate Practises and Conduct – which was a preface to King II, (Mangalo, 2010).
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In the aftermath of economic scandals such as Enron and the fall of Arthur Anderson and
WorldCom, corporate governance reforms were undertaken in earnest from the beginning of
the 1990s. From questionable earnings to outright fraud, businesses came under increasing
scrutiny from shareholders, other stakeholders and regulators alike. As stated earlier, investor
confidence in the UK was badly shaken as a result of such scandals. The same has
happened in the USA in the aftermath of Enron and WorldCom. Corporate problems of the
1980s as well as those of today involved ‘creative accounting, spectacular business failures,
the apparent ease of unscrupulous directors in expropriating other stakeholders’ funds, the
limited role of auditors, and the claimed weak link between executive compensation and
company performance (Keasy and Wright (1997) cited in Mongalo (2010). In light of this, the
drawbacks of the traditional corporate governance were addressed to alleviate the problems.
The South African and British panels as well as other interested bodies undertook a major
review of Corporate Governance.
Some of the major issues in corporate governance include:

 The controversy surrounding executive pay
 The structure of the Board of Directors
 The nomination of Board members
 The role of independent, external and internal auditors
 Accounting standards
 Disclosure of non-financial
 The role of remuneration and nomination committees; and
 They role of non-executive directors and shareholders in monitoring the activities of the
executives
2.4 The Cadbury, King, Greenbury and Hampel Committees

As a result of widespread mismanagement of company assets by a number of South African
and British company directors in the 1980s, many crucial changes were made to the
corporate governance regimes. These changes were the recommendations made by the
Cadbury, Greenbury and Hampel Committees, the initiatives of the London Stock Exchange
and the accounting profession in the UK. The initiatives of the UK were a catalyst and an
awakening to the South African corporate world.
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After this the King Committee was established in 1992 under the auspices of the Institute of
Directors in Southern Africa to review corporate governance and make recommendations to
the corporate world (both public and private), and particularly to the JSE for it to implement
some of the recommendations in its listing requirements and thus improve the standard of
corporate governance. In 1994 the King Committee issued a report and a Code of Corporate
Practises and Conduct, (Mangalo, 2010; Wixley and Everingham, 2010).
2.5 The King Report on Corporate Governance

The King Report on Corporate Governance is a ground-breaking code of corporate
governance in South Africa issued by the King Committee on Corporate Governance. Three
reports were issued in 1994 (King I), 2002 (King II), and 2009 (King III). Compliance with the
King Reports is a requirement for companies listed on the Johannesburg Stock Exchange.
The King Report on Corporate Governance has been cited as "the most effective summary of
the best international practises in corporate governance" (Mangalo, 2010).
2.5.1 History
In July 1993 the Institute of Directors in South Africa asked retired Supreme Court of South
Africa judge Mervyn E. King to chair a committee on corporate governance. He viewed this as
an opportunity to educate the newly democratic South African public on the working of a free
economy. The committee's report was to be the first report of its kind in South Africa.
Committee members included Phillip Armstrong, Nigel Payne, and Richard Wilkinson
(Mangalo, 2010).
2.5.2 Approach
Unlike other corporate governance codes such as Sarbanes-Oxley, the code is non-
legislative, and is based on principles and practises. It also espouses an ‘apply or explain’
approach, unique to the Netherlands and now also found in the 2010 Combined Code from
the United Kingdom.
The philosophy of the code consists of the three key elements of leadership, sustainability
and good corporate citizenship. It views good governance as essentially being effective,
ethical leadership. King believes that leaders should direct the company to achieve
sustainable economic, social and environmental performance. It views sustainability as the
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primary moral and economic imperative of this century; the code's view on corporate
citizenship flows from a company's standing as a juristic person under the South African
constitution and should operate in a sustainable manner, (Mangalo, 2010; Wixley and
Everingham, 2010).
2.5.3 King I
In 1994 the first King report on corporate governance (King 1) was published, the first
corporate governance code for South Africa. It established recommended standards of
conduct for boards and directors of listed companies, banks, and certain state-owned
enterprises. It included not only financial and regulatory aspects, but also advocated an
integrated approach that involved all stakeholders.
It was applicable to all companies listed on

 the main board of the Johannesburg Stock Exchange
 large public entities as defined by the Public Entities Act of South Africa, No 93 of 1992
 banks, financial and insurance companies as defined by the Financial Services Acts of
South Africa, No 14 of 2007;
 large unlisted companies
It defined "large" as companies with shareholder equity over R50 million, but encouraged all
companies to adopt the code, (Mangalo, 2010; Wixley and Everingham, 2010).
The key principles from the first King report covered:

 Board of Directors makeup and mandate, including the role of non-executive directors
and guidance on the categories of people who should make up the non-executive
directors
 Appointments to the board and guidance on the maximum term for executive directors
 Determination and disclosure of executive and non-executive director’s remuneration
 Board meeting frequency
 Balanced annual reporting
 The requirement for effective auditing
 Organisation’s action programmes
 The company’s code of ethics, (Mangalo, 2010; Wixley and Everingham, 2010)
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2.5.4 King II
In 2002, when the Earth Summit was held in Johannesburg, King pushed for a revision of the
report (King II), including new sections on sustainability, the role of the corporate board, and
risk management. This revised code of governance was applicable from March 2002.
In addition to those types of organisations listed in King I,

 it was applicable to departments of State or national
 provincial or local government administration falling under the Local Government
(Municipal Finance Management Act)
 public institution or functionary exercising a power or performing a function in terms of
the constitution, or exercising a public power or performing a public function in terms of
any legislation, excluding courts or judicial officers
As before, it encourages all companies to adopt the applicable principles from the code
(Mangalo, 2010; Wixley and Everingham, 2010).
The key principles from the second King report covered the following areas:
 Directors and their responsibility
 Risk management
 Internal audit
 Integrated sustainability reporting
 Accounting and auditing (Mangalo, 2010).
2.6 Legislative Enforcement

As before, the code is not enforced through legislation. However, it co-exists with a number of
laws that apply to companies and directors including the Companies Act. In addition, further
enforcement takes place by regulations such as the JSE Securities Exchange Listings
Requirements.
It was also during the 1990s that commencement of negotiations for the dismantling of
Apartheid was seen. These negotiations birthed the Government of National Unity in terms of
the interim constitution. During the Apartheid era when all aspects of socioeconomic and
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political wellbeing were governed by racially discriminatory laws and policies, meaningful
efforts had to be undertaken to redress them. At this stage globally, the development of
corporate governance was at its nascent stage and one could not turn a blind eye on the
political developments in forging a good corporate governance system in South Africa.
Therefore, it came as no surprise when King I considered the implementation of
organisational action measures within companies as good corporate governance practises.
The Draft Report of the King Committee refers to the recognition of Black Economic
Empowerment by companies as a good Corporate Governance Practise. The Final Report
states that, ‘In South Africa where social imbalances have existed for many decades, the
need for reform, the need for ploughing back, and the need for a greater social and ethical
conscience of companies are crucial to their long term survival. Such actions would also
promote the greater wellbeing of society generally. Increasingly, South African companies are
seen as agents of change not only for their own benefit but also for the benefit of their
stakeholders. (Mangalo, 2010).
The Final Constitution of the Republic of South Africa, 1996 echoes the provisions of the
interim constitution in so far as organisation action (equality right) is concerned. In addition to
these two most important legislative enactments, the legislature is passing an array of
legislation aimed at giving all citizens of South Africa equal access to opportunities. King II, for
example, followed major legislative and other initiatives such as ‘The Employment Equity Act,
No 55 of 1998, The Skills Development Act 97 of 1998 and Black Economic Empowerment
Commission Report. That is the main reason why King II specifically makes recommendations
regarding Black Economic Empowerment. (Mangalo, 2010).
2.7 King III

In an interview with Mervyn King, he considered the King II report was wrong to include:
 sustainability as a separate chapter and
 leading companies to report on it separately from other factors.
In the next version, the 2009 King III report, governance, strategy and sustainability were
integrated. The report recommends that organisations produce an integrated report in place
of an annual financial report and a separate sustainability report; and those companies create
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sustainability reports according to the Global Reporting Initiative's Sustainability Reporting

Guidelines (Mangalo, 2010).
In contrast to the earlier versions, King III is applicable to all entities, public, private and non-
profit. King encourages all entities to adopt the King III principles and explain how these have
been applied or are not applicable. The code of governance was applicable from March 2010.
The report incorporated a number of global emerging governance trends:

 Alternative dispute resolution
 Risk-based internal audit
 Shareholder approval of non-executive directors’ remuneration
 Evaluation of board and directors’ performance.
It also incorporated a number of new principles to address elements not previously included in
the King reports:
 IT governance
 Business Rescue
Fundamental and affected transactions in terms of director’s responsibilities during mergers,

acquisitions and amalgamations.
Again, the code of corporate governance is not enforced through legislation. However, due to
evolutions in South African law, many of the principles put forward in King II are now
embodied as law in the Companies Act of South Africa of 2008. In addition to the Companies
Act, there are additional applicable statutes that encapsulate some of the principles of King III
such as the Public Finance Management Act 1 of 1999 and the Promotion of Access to
Information Act 2 of 2002, (Mangalo, 2010).
2.8 Corporate Sustainability

The definition of sustainable development is development which meets the needs of the
present without compromising the ability of future generations to meet their needs. The
corporate sustainability is understood as the ability of companies, through their governance
practises and market presence to positively influence ecosystems, improving natural
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resources, reduce pollution levels, support local population and create employment and
economic development (distributing wealth through dividends, paying fair salaries, respecting
supplier payment obligations). Companies with sustainability practises will be more likely to
operate in harmony with the societies in which they operate, maintain their market presence
and help and maintain and increase profitability levels.
The concept of corporate sustainability therefore implicitly includes the following:

 Efficient management of the social, environmental and economic factors, that affect the
company, its business activities, products and services, and their impact through the
value chain.
 The management of stakeholder expectations, balancing and managing the social,

environmental and economic risks that have the potential to adversely affect
relationships with stakeholders of the company.
2.9 Adoption of Practises and Behaviour, which are Compatible with the
Values of Society
The ability to offer products and services that attach environmental, social and financial value
to their levels of quality, perceived as such by customers and providing a clear license to
operate (from all relevant stakeholders).
The need to change the Governance paradigm

by adopting the concept of sustainability, starting from the core of the business – in other
words the products and services that the company sells – and implementing it throughout the
entire organisation the company can develop strategies and management models that create
social, environmental and economic value, generating higher levels of profitability in the short
and long term. It is precisely in this respect that the concepts of corporate sustainability and
corporate governance interlink and provide a new governance paradigm.
To maximise company value, it is essential to develop a system made up of people, policies

and processes (corporate governance), which incorporates a positive response to the
company’s social, economic and environmental risks and opportunities that have the potential
to influence the performance of the organisation.
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The Governance for Sustainability can be defined and the Governance Model which ensures
the appropriate management of social, environmental and economic factors, taking into
consideration and giving due weight to the expectations of society.
2.10 The Need for Governance Models

The reason that governance models are important for companies is because of the
asymmetrical information that may exist between mangers/directors and shareholders. This
is known as the Agent/ Principle Theory. This theory focuses on the fact that managers and
shareholders can have different interests, due to asymmetrical information which exist
between the principal who is the shareholder and the agent or the manager who is hired to
manage the company to maximise the profits of the principal. The managers who are
responsible for the day to day management of the company may have access to specific
information. These managers may, if appropriate ethical standards are not in place, use it
opportunistically in their own personal interest, instead of using it in the interests of the
shareholders.
The Principal/Agent Theory has become relevant in relation to governance issues in the 21st
century. This is especially so since there were several financial scandals, like Enron and the
Parmelat case, connected to issues of transparency, responsibility and governance. These
scandals demonstrate that not only the theory but also practical examples lead to the
recognition of the following:
 The management and Board of Directors have an advantage in relation to

shareholders and other stakeholders concerning the information to which they have
access
 Management and sometimes the Board of Directors have a natural tendency to give
themselves preferential treatment
 Stakeholders, especially the shareholders, very often lack information and analytical
knowledge about the situation of the company in order to effectively defend their
interests through mechanisms existing specifically for this purpose
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 Managers/ Board members, who should represent the interests of shareholders, are
often confronted with conflicts of interests related to their mutual interdependence
The statements above are the main issues which justify the importance of the existence of
governance model and the manner in which it operates.
The relationship between Managers/Directors, shareholders and the remaining stakeholders
can have different forms of theoretical expression, which can later be transformed into
functional systems of company governance.
Governance models are a reflection of the economic, historical and legal background of a
country, as well as determined by the power structure that exists in the economy and by the
available financial options for developing the business:
 The role that the financial markets, banks and insurance companies have in the
economy
 The role played by the Government as shareholder and investor
 The percentage of free float shares on the market
 The level of share capital concentrated in one or more shareholders
The differences in consensus of what constitutes good governance practises, varies. In

different countries, the success of similar models can vary. Different countries have different
cultures, and society can have different expectations which can lead to different ways in
which management practises develop. In spite of the knowledge of different societies about
sustainability issues and the fact that the role of companies varies between companies in
relation to this process, it is possible to highlight a number of studies which give credence to
the empirical belief that society is becoming more demanding in relation to companies and the
manner in which they protect the environment and as a result promote sustainability. For
example in February 2009, a market study in the USA by the Opinion Research Corporation,
concluded that even in a recessionary period, the interest of Americans concerning
environmental issues had not diminished and that consumers were paying more attention to
what companies were doing in relation to environmental matters. The increased pressure
coming from society and regulators for companies to divulge how they are dealing with these
emerging issues led to the idea that a good governance model should also be able to explain
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how sustainability issues are managed by the Board of Directors. In reality, since
sustainability embraces economic, governance, ethical, social and environmental issues,
some experts believe that Governance should be considered as an integral part of
Sustainability, and not the other way around.
2.11 Integrated reporting

Integrated reporting is a new standard for corporate communication, and helps to complete
financial and sustainability reports. A clear framework has been published, but some
questions remain in order to know how to apply it. Do we need a new report? Do we need one
report? Will this report be useful for investors, and for other stakeholders? Other questions
could have been raised, such as who is really working for an integrated reporting, and who
has interests in it.
Integrated reporting is a "process that results in communication, most visibly a periodic

“integrated report”, about value creation over time. An integrated report is concise
communication about how an organisation’s strategy, governance, performance and
prospects lead to the creation of value over the short, medium and long term."
Integrated reporting is the integrated representation of a company’s performance in terms of

both financial and other value relevant information. Integrated Reporting provides greater
context for performance data, clarifies how value relevant information fits into operations or a
business, and may help embed long-term thinking into company decision making. While the
communications that result from IR will be of benefit to a range of stakeholders, they are
principally aimed at providers of financial capital allocation decisions.
2.12 The Benefits of Corporate Governance

2.12.1 Increases Transparency
Companies now recognise that having auditors vouch for the financial results is not enough.
Therefore, companies enact measures increasing transparency to keep regulators from
stepping in and mandating a costly regulatory framework. When regulators enact
transparency-increasing measures instead of companies doing so voluntarily, organisation
profits fall, executive compensation rises and the rate of CEO turnover increases. The
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enactment of Sarbanes-Oxley has demonstrated this, punishing both publicly-traded and

closely-held companies, as internal audit controls of larger companies often require testing
the integrity of suppliers and other companies with whom they do business (Mangalo, 2010).
2.12.2 Prevents Market Shocks

Companies using aggressive accounting tactics or engaging in outright fraud undermine the
entire economic system. The bankruptcies of Enron, Tyco and other companies led to
uncertainty in the stock market, causing broader stock market indices to fall in value. In the
case of Enron, uncertainty spread throughout the energy trading sector, eventually resulting in
more large bankruptcies. More important was when auditor Arthur Andersen collapsed, which
resulted in massive structural changes to the audit and consulting industry and undermined
the entire economy in the USA (Mangalo, 2010).
2.12.3 Shareholder Activism

Going green is now a mainstream global initiative. Environmental and other social concerns
are now deeply entrenched within corporate governance. Socially-conscientious hedge funds,
mutual funds and exchange-traded funds have proliferated. Companies are increasingly
focused on managing and disclosing environmental risks, including energy companies. The
benefits of being socially responsible may be more difficult to quantify than other areas that
benefit from increased transparency. However, 95 percent of the 250 largest global
companies now report metrics designed to track corporate responsibility (Mangalo, 2010).
2.12.4 Decreases Conflicts of Interest

Part of the reason management engages in risky behaviour is the conflict of interest inherent
in positions responsible for maximising profitability while promoting self-accountability.
Corporate governance is meant to relieve management of these conflicts of interest.
Shareholder activists are very active in affecting management compensation structures,
which has resulted in less arbitrarily-high salaries and an increase in incentivized
compensation. Dividend policy affects both large and small company investors, and minority
investors in small companies, in particular, are vulnerable to founding shareholders
withholding dividends while paying themselves exorbitantly.
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2.13 The Underlying Mechanisms on Corporate Governance

Effective corporate governance is essential if a business wants to set and meet its strategic
goals. A corporate governance structure combines controls, policies and guidelines that drive
the organisation toward its objectives while also satisfying stakeholders' needs. A corporate
governance structure is often a combination of various mechanisms (Davoren, 2009).
According to Hitt, Ireland and Hoskisson, (2004) corporate governance is a relationship

among stakeholders used to determine and control the strategic direction and performance of
organisations. It is concerned with making strategic decisions more effectively and it is also
used to establish order between an organisation’s owners and its top-level managers whose
interests may be in conflict.
2.13.1 Internal Mechanisms

The internal mechanisms are:
2.13.1.1 Concentration of Stock

In most corporates, relative amounts of stock are owned by individual shareholders and
institutional investors, (Davoren, 2009).
2.13.1.2 Board of Directors

With regard to the Board of Directors, they are the individuals responsible for representing the
organisation’s owners by monitoring top-level managers’ strategic decisions (Davoren, 2009).
2.13.1.3 Executive Compensation

This is concerned with the use of salary, bonuses, and long-term incentives to align
managers’ interests with shareholders’ interests (Hitt et al., 2004).
The foremost set of controls for a corporation comes from its internal mechanisms in the form
of ownership concentration. These controls monitor the progress and activities of the
organisation and take corrective actions when the business goes off track. Maintaining the
corporation's larger internal control fabric, they serve the internal objectives of the corporation
and its internal stakeholders, including employees, managers and owners. These objectives
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include smooth operations, clearly defined reporting lines and performance measurement
systems. Internal mechanisms include oversight of management, independent internal audits,
structure of the board of directors into levels of responsibility, segregation of control and
policy development.
2.13.2 External Mechanisms

External control mechanisms are controlled by those outside an organisation and serve the
objectives of entities such as regulators, governments, trade unions and financial institutions.
These objectives include adequate debt management and legal compliance. External
mechanisms are often imposed on organisations by external stakeholders in the forms of
union contracts or regulatory guidelines. External organisations, such as industry
associations, may suggest guidelines for best practises, and businesses can choose to follow
these guidelines or ignore them. Typically, companies report the status and compliance of
external corporate governance mechanisms to external stakeholders (Davoren, 2009).
An external mechanism can be a market force for corporate control that results from the
purchase of an organisation that is underperforming relative to industry rivals in order to
improve its strategic competitiveness (Hitt et al., 2004).
2.14 Independent Audit

An independent external audit of a corporation’s financial statements is part of the overall
corporate governance structure. An audit of the company's financial statements serves
internal and external stakeholders at the same time. An audited financial statement and the
accompanying auditor’s report helps investors, employees, shareholders and regulators
determine the financial performance of the corporation. This exercise gives a broad, but
limited, view of the organisation’s internal working mechanisms and future outlook (Davoren,
2009).
2.15 Small Business Relevance

Corporate governance has relevance in the small business world as well. Internal
mechanisms of corporate governance may not be implemented on a noticeable scale by a
small business, but the functions can be applied to many small businesses nevertheless.
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Business owners make strategic decisions about how workers will do their duties, and they
monitor their performance; this is an internal control mechanism - part of business
governance. Likewise, if a business requests a loan from a bank, it must respond to that
bank’s demands to comply with loan and agreement terms - an external control mechanism. If
the business is a partnership, a partner might demand an audit to place reliance on the profit
figures provided - another form of external control, (Davoren, 2009).
2.16 Private or Public Enforcement to Entrench Good Governance

In light of what has been discussed, Hendricks (2010) investigates whether South Africa
should opt for private enforcement as opposed to public enforcement to entrench good
corporate governance. In so doing, a framework for determining the suitability of an
enforcement strategy was developed.
A sound enforcement strategy requires three-pronged analysis:

1. Determine whether a country has good laws, principles and rules as it relates to
corporate governance
2. Evaluate the suitability of the enforcement framework of the country; and
3. Identify prevailing corporate governance challenge(s) (Hendricks, 2010)
The application of this analysis in the South African context reveals that South Africa has
good laws, principles and rules as it relates to corporate governance. It also reveals that the
enforcement framework is capable of assuring investors that their investments will be
protected and hence suitable. As far as corporate governance challenges are concerned, it is
reasoned that South Africa, as a leading emerging country, experiences corporate
governance problems common to both developed and developing countries. South Africa
would therefore be better equipped, if it had a balanced enforcement framework; recognizing
no prior winner between the two categories of enforcement. This is aligned with the latest
empirical evidence, which holds that the ‘multiple mechanisms’ approach is evident in
developed countries with strong financial markets (Hendricks 2010).
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Furthermore, it is also submitted that the establishment of good corporate governance is too
important for emerging and developing countries to gamble with favouring one enforcement
category over the other.
Berglöf and Claessens (2003) as cited in Hendricks (2010) aver that enforcement more than
regulations, laws-on-the-books or voluntary codes is key to effective corporate governance, at
least in transition and developing countries. Corporate governance and enforcement
mechanisms are intimately linked as they affect an organisation’s ability to commit towards
their stakeholders, in particular towards external investors. From this perspective, corporate
law Reform emanated (Hendricks, 2010).
A great deal of attention has been devoted to the reform of South African company law. The
reform process commenced in September 2003, when the Department of Trade and Industry
(DTI) initiated a reform programme that included a review of existing securities regulation and,
of corporate structures and practises in the area of corporate governance. Subsequently, in
March 2004 (and updated in June 2004), the DTI published a policy document on corporate
law reform entitled ‘South African Company Law for the 21st Century: Guidelines for
Corporate Law Reform’. This policy paper explained that company law in South Africa would
be reviewed and modernized. The objectives of the reform process were to align it with
international trends and to accommodate the economic and legislative changes that have
taken place in South Africa since the advent of democracy in 1994. The policy paper also
explained that this reform process would occur in two stages. Firstly, urgent interim changes
would be brought by the Corporate Law Amendment Act, No 24 of 2006. The Act provided
for, amongst others, assistance to acquire shares and greater protection of minority
shareholders in respect of takeovers. The Act came into effect on 14 December 2007.
Secondly, the new Companies Act will repeal and replace the entire Companies Act No 61 of
1973, when it becomes operational.
The promulgation of the Companies Act, No 71 of 2008, signalled the completion of a

comprehensive overhaul of company law in South Africa. This Act is less bulky and
complicated than its predecessor and it incorporates certain common law principles relating to
companies.
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Hendricks (2010) states that ‘statutory regulations, laws-on-books or voluntary codes’ are not
by themselves adequate to address the issue of good corporate governance. There is a need
for enforcement to be looked at critically.
It is important to analyse whether South Africa should favour private enforcement as opposed
to public enforcement to entrench good corporate governance. This analysis involves a two-
pronged approach. Firstly, it aims to ascertain whether South Africa has in place the
enforcement framework that assures public investors that their assets will be protected. This
discussion will focus on the Companies Act No. 71 of 2008 and King III, specifically
highlighting the corporate governance developments. The second aspect will proceed to
consider whether South Africa should favour private enforcement as opposed to public
enforcement. In executing this objective, empirical work undertaken in securities law will be
relied upon (Hendricks, 2010).
The Companies Act No. 71 of 2008 (hereafter referred to as the new Companies Act) was
promulgated in April 2009 and is now in operation. Similarly, King III was finalised on 1
September 2009 and came into operation on 1 March 2010 (Hendricks, 2010).
Despite its long history, new corporate governance principles are still being incorporated into
the system. This is primarily as a consequence of reforms. To highlight the distinction
between the new corporate governance principles and the established corporate governance
principles, Mongalo (2003) categorizes these principles as belonging to either the self-
regulatory regime or the traditional corporate governance regime. This traditional corporate
governance regime (also referred to as the conventional regime) generally refers to
established principles that have long been provided for in common law or company
legislation. As a result, these principles of corporate governance are generally backed by
legal enforcement. These include: fiduciary duties of directors, requirements for special
resolutions, the role of shareholders and company meetings. It is important to highlight that
even though the traditional corporate governance regime is backed by legal enforcement it
does not necessarily mean that the enforcement is effective. On the other hand, self-
regulatory regime refers to the new corporate governance principles that are concerned with,
amongst others, the improvement of the rules and principles of company direction and
development of stricter checks and balances to alleviate wrongdoings of those engaged in
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corporate decision making. The objective of these principles is to equip companies to operate
in the modern environment. This corporate governance regime is backed by codes of good
practise (Mongalo, 2004).
? THINK POINT
Discuss the effect of Companies Act, 71 of 2008 on corporate governance?
2.17 Corporate Governance Framework in South Africa

To assess whether South Africa has the enforcement framework that assures public investors
that their assets will be protected, the discussion will now primarily focus on the developments
of the four main elements upon which the foundation of good corporate governance rests,
namely:
 The Companies Act, No 71 of 2008 (the new Companies Act)
 Common Law
 King III and
 Other statutes
2.17 Other Key Legislation

In addition to the provisions of the Companies Act, common law and King III there are several
pieces of legislation that have been enacted, which impacts on corporate governance in
South Africa. In a survey conducted by KPMG in 2004 entitled ‘Survey of Integrated
Sustainability Reporting in South Africa’ it was noted that from 1994 to 2004 approximately 60
Acts were passed or substantially revised that had a direct impact on corporate governance.
These include:
 Closed Corporations Act, No 69 of 1984
 Competition Act No, 89 of 1998
 Copyright Act, No 98 of 1978
 Trade Marks Act, No 194 of 1993
 Patents Act, No 57 of 1978
 Banks Act. No 94 of 1990
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 Securities Services Act, No 36 of 2004

 Financial Advisory and Intermediary Services Act, No 37 of 2002
 Collective Investment Schemes Control Act, No 45 of 2002
 Financial Intelligence Centre Act, No 38 of 2001
 Financial Institutions (Protection of Funds) Act, No 28 of 2001
 Income Tax Act, No 58 of 1962
 Value-added Tax Act, No 89 of 1991
 Insider Trading Act, No 135 of 1998
 Financial Intelligence Centre Act, No 38 of 2001, which complies with international
standards for the prevention of money laundering
2.18 The Companies Act, No 71 of 2008

This discussion will focus on the developments in respect of South Africa’s regulatory
framework with the view of highlighting its improvements.
The Companies Act, No 61 of 1973, is still in operation and is to be replaced by the new
Companies Act in its entirety. As mentioned earlier, the new Companies Act was promulgated
in April 2009. The promulgation of the new Act was preceded by a reform process that
involved a complete overhaul of South African Company Law. Despite the comprehensive
corporate law reform process, it does not infer a complete abolishment of company law
jurisprudence. As part of the reform process it was decided to retain many provisions of the
current law which were found to be ‘appropriate for the legal, economic and social context of
South Africa as a constitutional democracy and open economy (Hendricks, 2010).
Important features of the new Act include:

 Modernisation of company law and aligning it with international best practise,
especially in relation to corporate governance, communications and public companies
 Simplifying company law by - introducing simpler administrative and other procedures
 Reducing the number of provisions from 450 to 225
 Using simpler language
 Introducing simpler administrative and other procedures;
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 Promotes transparency, high standards of corporate governance and accountability,

particularly by directors and other officers, including minimum standards for annual
reports
 Gives greater protection to minority shareholders
 Codifies the fiduciary duties of directors and liabilities of directors
 Includes a complete overhaul of provisions relating to takeovers
 Introduces a new business rescue regime which replaces the judicial management
system (Hendricks, 2010)
2.19 Common Law

Common law refers to law which is not contained in the statute books of a country but which
nevertheless over time and through wide acceptance has gained the force of law. The
common law which pertains to companies arose primarily as a result of judicial interpretation
of the Act and the general body of company law. This body of law draws extensively on
English legal precedent.
In addition to the statutory duties prescribed by the Act, there are certain common law duties,
also known as fiduciary duties, incumbent on the directors and officers of a company. A
fiduciary duty simply means that a director of a company must exercise the powers and
perform the functions of director in good faith and in the best interests of the company. Also
the directors owe the duty to the company itself and not to the shareholders or stakeholders.
In the event that a director breaches his fiduciary duty, a company has three primary
remedies, namely:
 a right to claim any profit or business opportunity that was obtained or kept
 a right, in certain circumstance to set aside transactions entered into
 a right to claim monetary compensation for any loss or damage (Hendricks, 2010)
2.20 The King Report on Corporate Governance (King III)

King III report was published in February 2009 and stakeholders were invited to comment on
the draft. This report was the result of the recent corporate law reforms in South Africa which
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included the promulgation of the new Companies Act and the developments in international
corporate governance.
As was the case with King I and King II, the Committee aimed to be at the forefront of
corporate governance. This objective has arguably been realized by its proposal to report
annually on how a company has affected the economic life of the community in which it
operates. In addition, King III also recommends that a company’s reporting should be
extended to include a reference on its efforts to improve the positive aspects and eradicate
any possible negative aspects that impacts on the economic life of the community in which it
operates (Hendricks, 2010).
Another distinguishing feature of King III is that it broadens the scope of corporate
governance in South Africa by emphasizing leadership, sustainability and being a good
corporate citizen. Moreover, King III places emphasis on the following emerging governance
trends, namely:
 Alternative Dispute Resolution (ADR)
 Risk based internal audit
 IT governance
 Shareholders and remuneration
 Evaluation of the board of directors and the board committees
In respect of ADR, the report supports controlled mediation to resolve disputes. In the event
that the ADR is unsuccessful, the report recommends expedient arbitration. It is also worth
noting that an enforceable alternative dispute resolution clause has been developed for
inclusion in agreements (Hendricks, 2010).
King III states that the Code applies to all companies ‘regardless of the manner or form of
incorporation or establishment’, and has opted for an ‘apply or explain’ governance
framework. This means that a company is not compelled to follow King III strictly, the
company can deviate from the principles contained in King where the company believes it is
in the best interest of the company but it must explain. Hence, even if a company fails to
mechanically implement the principles in King III, explaining the basis for its decision will still
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render it consistent with the spirit of King III. This arrangement empowers stakeholders to be
in a position to challenge the board on the level of governance in an organisation. There is a
view which holds that this approach is more burdensome. It is explained that this approach
goes beyond the ‘tick box compliance’ approach to an approach that involves more
consideration of what is actually done to implement the code, (Hendricks, 2010).
Another view sees this approach as deliberately equating the principles and
recommendations to that of law. The corporate governance framework recommended by King
III is principles-based. As such there is no ‘one size fits all’ approach even though entities are
strongly encouraged to adopt the principles contained in King III as far as practically possible.
This principles-based approach takes into consideration the different size, nature and
complexity of various organisations. It has been argued that this approach avoids some of the
shortcomings evident in the United States where a ‘one- size-fits-all’ approach was initially
adopted.
The main criticism levelled against this Report is based on the fact that the report is simply a
set of principles as opposed to laws and therefore could easily be circumvented. In response
to this view, it has been argued that the market place should be the primary compliance
enforcer and therefore there is no need to give these principles legislative backing. The latter
view encapsulates the approach taken by King III. These sentiments capture an on ongoing
debate which centers on the enforceability of the Code.
The Codes of good corporate principles, in particular King II, have indicated that new
principles of good corporate governance do not require further legislation. The reasoning
behind this preference is based on the idea that the Code should be self-regulatory for
principles that do not enjoy legal remedies. The main reason afforded for making the Code
non-prescriptive is that significant differences exist between companies. In other words, the
Codes recognise that some companies are better positioned to implement the
recommendations contained in the Code whilst other companies are not capable of
implementing them. The system of self-regulation is thus favoured for its flexibility (Hendricks,
2010).
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It is also worth noting that companies listed on the Johannesburg Stock Exchange (JSE) are
required to divulge the extent to which they are complying with King II and where companies
deviate from the Code, they are required to explain their deviance. Also the JSE has revised
its listing requirements in 2000 to improve corporate governance. The new listing
requirements include the following
 directors of companies are required to complete a “fit and proper” declaration prior to
the listing of the company
 directors are required to disclose their dealings in shares of the company
 pyramid companies or companies with low-voting shares will no longer be
accommodated on the JSE
 the results of South African Companies must be reported in compliance with the South
African generally accepted accounting practises (GAAP) whilst the results of non-
South African companies must be reported in compliance with the relevant
international accounting standards (Hendricks, 2010)
2.21 Legislated Basis for Governance Compliance

The governance of corporations can be on a statutory basis, or as a code of principles and
practises, or a combination of the two. The United States of America has chosen to codify a
significant part of its governance in an act of Congress known as the Sarbanes-Oxley Act.
This statutory regime is known as ‘comply or else’. In other words, there are legal sanctions
for non-compliance.
There is an important argument against the ‘comply or else’ regime: a ‘one size fits all’
approach cannot logically be suitable because the types of business carried out by
companies vary to such a large degree. The cost of compliance is burdensome, measured
both in terms of time and direct cost. Further, the danger is that the board and management
may become focused on compliance at the expense of enterprise. It is the duty of the board
of a trading enterprise to undertake a measure of risk for reward and to try to improve the
economic value of a company. If the board has a focus on compliance, the attention on its
ultimate responsibility, namely performance, may be dilute, (Mangalo, 2010).
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The total cost to the American economy of complying with SOX is considered to amount to
more than the total write-off of Enron, World Com and Tyco combined. Some argue that
companies compliant with SOX are more highly valued and that perhaps another Enron
debacle has been avoided. Prof Romano of Yale Law School said, “SOX’s corporate
governance provisions were ill-conceived. Other nations, such as the members of the
European Union who have been revising their corporation codes, would be well advised to
avoid Congress’ policy blunder.” Prof Ribstein of Illinois Law School said, “It is unlikely that
hasty, crash-induced regulation like SOX can be far sighted enough to protect against future
problems, particularly in light of the debatable efficiency of SOX’s response to current market
problems. Even the best regulators might err and enact regulation that is so strong that it
stifles innovation and entrepreneurial activity. And once set in motion, regulation is almost
impossible to eliminate. In short, the first three years of SOX was, at best, an overreaction to
Enron and related problems and, at worst, ineffective and unnecessary”(Mangalo, 2010).
2.22 Voluntary Basis for Governance Compliance

The 56 countries in the Commonwealth, including South Africa and the 27 states in the EU
including the United Kingdom, have opted for a code of principles and practises on a ‘comply
or explain’ basis, in addition to certain governance issues that are legislated.
At the United Nations, the question whether the United Nations Governance Code should be
‘comply or explain’ or ‘comply or else’, was hotly debated. The representatives of several of
the world bodies were opposed to the word ‘comply’, because it connoted that there had to be
adherence and there was no room for flexibility (Mangalo, 2010).
Following King II, the Johannesburg Stock Exchange Limited (JSE) required listed companies
to include in their annual report a narrative statement as to how they had complied with the
principles set out in King II, providing explanations that would enable stakeholders to evaluate
the extent of the company’s compliance and stating whether the reasons for non-compliance
were justified. There are indeed examples in South Africa of companies listed on the JSE that
have not followed practises recommended but have explained the practise adopted and have
prospered. In these examples, the board ensured that acting in the best interests of the
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company was the overriding factor, subject always to proper consideration of the legitimate
interests and expectations of all the company’s stakeholders (Mangalo, 2010).
South African listed companies are regarded by foreign institutional investors as being among
the best governed in the world’s emerging economies and we must strive to maintain that
high ranking. South Africa has benefited enormously from its listed companies following good
governance principles and practises, as was evidenced by the significant capital inflows into
South Africa before the global financial crisis of 2008.
For all these reasons, the King Committee continues to believe that there should be a code of
principles and practises on a non-legislated basis (Mangalo, 2010).
2.23 Various Approaches to Voluntary Basis for Governance Compliance

Internationally, the ‘comply or explain’ principle has also evolved into different approaches. At
the United Nations, for instance, it was ultimately agreed that the UN Code should be on an
‘adopt or explain’ basis.
In the Netherland Code the ‘apply or explain’ approach was adopted. It is believed that this
language more appropriately conveys the intent of the King Code from inception rather than
‘comply or explain’. The ‘comply or explain’ approach could denote a mindless response to
the King Code and its recommendations whereas the ‘apply or explain’ regime shows an
appreciation for the fact that it is often not a case of whether to comply or not, but rather to
consider how the principles and recommendations can be applied. King III, therefore, is on an
‘apply or explain’ basis and its practical execution should be addressed as follows:
It is the legal duty of directors to act in the best interests of the company. In following the
‘apply or explain’ approach, the Board Of Directors, in its collective decision-making, could
conclude that to follow a recommendation would not, in specific circumstances, be in the best
interests of the company. The Board could decide to apply the recommendation differently or
apply another practise and still achieve the objective of the overarching corporate governance
principles of fairness, accountability, responsibility and transparency. Explaining how the
principles and recommendations were applied, or if not applied, the reasons, results in
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compliance. In reality, the ultimate compliance officer is not the company’s compliance officer
or a bureaucrat ensuring compliance with statutory provisions, but the stakeholder (Mangalo,
2010).
2.24 The Link between Governance, Principles and Law

There is always a link between good governance and compliance with law. Good governance
is not something that exists separately from the law and it is entirely inappropriate to unhinge
governance from the law. The starting point of any analysis on this topic is the duty of
directors and officers to discharge their legal duties. These duties are grouped into two
categories, namely: the duty of care, skill and diligence, and the fiduciary duties (Institute of
Directors in Southern Africa, 2009).
As far as the body of legislation that applies to a company is concerned, corporate

governance mainly involves the establishment of structures and processes, with appropriate
checks and balances that enable directors to discharge their legal responsibilities, and
oversee compliance with legislation (Institute of Directors in Southern Africa, 2009).
In addition to compliance with legislation, the criteria of good governance, governance codes
and guidelines will be relevant to determine what is regarded as an appropriate standard of
conduct for directors. The more established certain governance practises become, the more
likely a court would regard conduct that conforms with these practises as meeting the
required standard of care. Corporate governance practises, codes and guidelines therefore lift
the bar of what are regarded as appropriate standards of conduct. Consequently, any failure
to meet a recognised standard of governance, albeit not legislated, may render a board or
individual director liable at law.
Around the world hybrid systems are developing. In other words, some of the principles of
good governance are being legislated in addition to a voluntary code of good governance
practise. In an ‘apply or explain’ approach, principles override specific recommended
practises. However, some principles and recommended practises have been legislated and
there must be compliance with the letter of the law. This does not leave room for
interpretation. Also, what was contained in the common law is being restated in statutes. In
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this regard, perhaps the most important change is incorporation of the common law duties of
directors in the Act. This is an international trend.
As a consequence, in King III, we point to those matters that were recommendations in King
II, but are now matters of law because they are contained in the Act.
Besides the Act, there are other statutory provisions which create duties on directors and we
draw some of these statutes to the attention of directors. The Act legislates in respect of
state-owned companies as defined in the Public Finance Management Act, No 1 of 1999,
(PFMA) which includes both national government business enterprises and national public
entities (Institute of Directors in Southern Africa, 2009).
These state-owned companies are described as ‘SOC Limited’. Private companies (which
have Pty Ltd at the end of the company name) are companies that have memoranda of
incorporation prohibiting the offer of shares to the public and restricting the transferability of
their shares. Personal liability companies (which have Inc. at the end of the company name)
provide that directors and past directors are jointly and severally liable for the contractual
debts of the company. A public company (which has Ltd at the end of the company name)
means a profit company that is not a state-owned company, private company or personal
liability company. A non-profit company carries the naming convention ‘NPC’. A person who
holds a beneficial interest in the shares issued by a company has certain rights to company
information under the Act and under the Promotion of Access to Information Act, No 2 of
2000.
All companies must prepare annual financial statements, but there are limited exceptions from
the statutory requirement for an external audit of these annual financial statements (Institute
of Directors in Southern Africa, 2009).
A company is generally permitted to provide financial assistance for the purchase or

subscription of its shares and to make loans to directors, subject to certain conditions such as
solvency and liquidity. The Act describes the standards of directors’ duties by reference to the
common law principles. A new statutory defense has been introduced for the benefit of
directors who have allegedly breached their duty of care. This defense will be availed of by a
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director who asserts that he had no financial conflict, was reasonably informed, and made a
rational business decision in the circumstances.
Provisions exist for relieving directors of liability in certain circumstances, either by the courts
or, if permitted, by the company’s memorandum of incorporation, but not in the case of gross
negligence, willful misconduct or breach of trust. Every public company and state-owned
company must have a company secretary, who has specific duties set out in the Act. The
company secretary is dealt with in Chapter 2 Principle 2.21 (Institute of Directors in Southern
Africa, 2009).
The designated auditor may not hold office as such for more than five consecutive years and,
in general terms, cannot perform any services that would be implicated in the conduct of the
external audit or determined by the audit committee. Every public company and state-owned
company must appoint an audit committee, the duties of which are described in the Act and
repeated in Chapter 3 Principles 3.4 to 3.10.
A distinction has been made between statutory provisions and voluntary principles, and
recommended practises. It is clear that it is the board’s duty, if it believes it to be in the best
interests of the company, to override a recommended practise. However, the board must then
explain why the chosen practise was applied and give the reasons for not applying the
recommended practise.
The ultimate compliance officer is the company’s stakeholders who will let the board know by
their continued support of the company if they accept the departure from a recommended
practise and the reasons furnished for doing so (Institute of Directors in Southern Africa,
2009).
Most individuals are raised with a sense of ethics that begin in their families - values that have
been driven home through their schools and religious institutions. “Honesty” and “decency”
have typically been applied in interpersonal communications. But such characteristics can get
lost during business dealings. Enron is the poster child for such distorted behaviour.
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But the company’s demise is not the end of self-indulgence. It’s simply a milestone. And while
lying and deceit will always exist, there is a heightened awareness on the part of boards and
investors. Without a doubt, corporate cultures must reward ethical conduct and penalize
wrongdoing at every turn. Values matter: Ignoring trouble spots or blaming underlings is
unacceptable.
The key to creating a just and ethical corporate culture is to breed fair and lasting business
principles. Indeed, companies will be measured by the traditions they build and the way in
which they manage their relationships with shareholders, communities and employees.
The Enron Saga

Enron’s heyday has long ended. But its lessons will long endure. The global business
community is now watching a painful new chapter is this saga - one where its former high-
riding chief executive officer, Jeff Skilling, is getting a decade shaved off of his prison term
that should end in 2017.
The company’s failure in 2001 represents the biggest business bankruptcy ever while also
spotlighting corporate America’s moral failings. It is stark reminder of the implications of being
seduced by charismatic leaders, or more specifically, those who sought excess at the
expense of their communities and their employees. In the end, those misplaced morals killed
the company while it injured all of those who had gone along for the ride.
“Just as character matters in people, it matters in organisations,” says Justin Schultz, a

corporate psychologist in Denver.
Surely, if there are profits to be made, some type of scheme that attempts to skirt the law or
even cross boundaries will occur. It’s been that way throughout history. But with each passing
scandal, new rules and codes emerge that surpass those of the past. And while Enron won’t
be the last case of corporate malfeasance, its tumultuous tale did initiate a new age in
business ethics.
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Enron, once a sleepy natural gas pipeline company, grew to become the nation’s seventh
largest publicly-held corporation. But its shoddy business practises, aided by bankers and
advisors feeding from the gravy train, brought down the company in December 2001.
Altogether, 16 former Enron execs including Skilling had been sentenced to prison. Its former
chairman, Ken Lay, was also convicted but because he passed away before his guilty verdict
could be appealed, that case was thrown out. An appeals court has reduced Skilling’s
sentencing because it said that the trial court had miscalculated the codified penalty.
A lot of people have suffered, not the least of whom are the shareholders and pensioners who
lost it all. It was a sad “ending” to what had appeared to be a promising beginning to the New
Economy in which the internet age would spread wealth and create jobs throughout the social
spectrum. While Enron may be the crown jewel of corporate prosecutions, it was preceded by
guilty verdicts for top execs at Adelphia Communications, Tyco International and WorldCom.
Punishment serves as a deterrent. But a clear-cut mission and a corporate code of ethics is
crucial. It is the foundation to which boards, managers and workers rely when they reach a
fork in the road. It is the principles they use when deciding whether to emphasize short-term
gain or long-term stability.
Economist Milton Friedman has argued that it is the social responsibility of corporations to
increase profits, thereby putting more people to work and paying more taxes to support
programmes that benefit the general public. But business ethicists caution against a myopic
pursuit toward earnings. The quarterly reporting syndrome that pressures companies to meet
earnings expectations promotes temptation that can push some to distort the truth.
But the desire to satisfy shareholders must be balanced with the need to service all corporate
constituents - all of whom contribute to a company’s worth. That structure must be reinforced
with values that build trust, as well as by more cognisant oversight and notable penalties for
shocking acts.
“So, even if you can’t really regulate ethics, the fact that more people are more closely
scrutinising board behaviour encourages directors to be more responsible,” says Mary
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Driscoll, an analyst with Standard & Poor’s. “But, there is no panacea, and I think we will
continue to see abuses and excesses - but hopefully fewer.”
Certainly, ethical dilemmas are not always black and white. And the situations that can lead to
hard choices can be as complex as the options themselves. Some companies therefore
struggle with how to manage and measure ethics and particularly in cases where they have
worldwide offices that operate in diverse cultures. Those decisions have a direct bearing on
their public identities and will affect their share prices.
Unethical companies will eventually get exposed: Witness Enron. Companies that live and
breathe their missions, by contrast, will get recognised by both the retail and capital markets.
Stock values, of course, are a function of multiple factors. But solid principles are good for
business, and ultimately good for corporation valuations.
Corporate codes are not charades. They are practical approaches to everyday situations.
Meaningful cultures will implore workers to do the right thing. That means individuals are
encouraged to come forward with their concerns and know they will be heard and acted upon.
Such a system allows management to address and handle issues in a holistic way to ensure
strong ethical health.
“Ethics and integrity are at the core of sustainable long term success,” says Richard Rudden,
managing partner at Target Rock Advisors in New York State. “Without them, no strategy can
work and, as Enron has demonstrated, enterprises will fail. That’s despite having some of the
‘smartest’ guys in the room.”
? THINK POINT
Despite the consequences of the Enron Saga, have businesses stopped behaving
unethically?
Make recommendations about the mechanisms that can be developed and
implemented to instil good corporate citizenship.
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SECTION 3
ARGUMENTS FOR AND AGAINST CORPORATE SOCIAL
RESPONSIBILITY
Chapter outcomes
 Evaluate the arguments for and against Corporate Social Responsibility (CSR)
 Analyse the impact of Corporate Social Responsibility in present day business
strategies and activities.
 Determine the role of political and social institutions in Corporate Social Responsibility.
 Understand the economic and legal responsibility of businesses in relation to
Corporate Social Responsibility
 Examine the pitfalls in implementing Strategic CSR
Reading
 Wixley, T and Everingham, G (2010) Corporate Governance Third edition. SiberInk.
 Stanwick, PA and Stanwick, SD (2009) Understanding Business Ethics First edition.
Pearson
 Griseri, P and Seppala, N (2010) Business Ethics and Corporate Social Responsibility
First edition. Cengage Learning
3.1 Introduction
The purpose of this section is to evaluate the arguments concerning corporate social
responsibility (CSR). Corporate Social Responsibility (CSR) has recently become a strongly
debated topic. What is the business of business? Should businesses attempt to solve societal
ills?
Or should businesses merely maximise shareholder wealth? Both sides of the CSR debate
have been forcefully attacked and vigorously defended. Have the warnings concerning CSR
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from the accomplished economists Theodore Levitt and Milton Friedman become irrelevant in
the modern era? Until recently, there was hardly any disagreement that the objective of a
business was to maximise long-term shareholder wealth.
3.2 CSR in Present Day Business Strategies and Activities

Corporate Social Responsibility (CSR) or Corporate Social Investment (CSI) has become the
buzz word in the business world. Businesses are increasingly implementing CSR policies. For
example, many organisations in the airline industry have incorporated CSR into their business
structures. In recent decades the airline industry has been pressured into reducing their
negative environmental effects. Consequently, airline organisations are focusing on reducing
emissions and aircraft noise (Cowper-Smith & de Grosbois, 2011).
From this example, it is evident that some of the reasons for organisations implementing CSR
include strategy, defense, and altruism.
According to Cheers, (2011), the two sides of the debate are stakeholder theory and
shareholder theory. Proponents of stakeholder theory support providing for the discretionary
expectations of society. On the other hand, advocates of shareholder theory maintain that
businesses should simply obey the law and maximise shareholder wealth. Although CSR is
enthusiastically espoused by many social progressives, it is not a panacea for society’s ills.
Cheers (2010) comes to the conclusion that corporations should focus on legally maximising
shareholder wealth based on ethical principles. CSR should only be pursued if doing so
accomplishes this function.
Many corporate executives believe that CSR creates a competitive advantage for
organisations, thus leading to greater market share. CSR can differentiate a company from its
competitors by engendering consumer and employee goodwill (McWilliams & Siegel, 2001).
CSR may also be used to pre-empt competitors from gaining an advantage. Once an
organisation in an industry has implemented CSR policies successfully, rival organisations
may be forced to engage in CSR as well. If they do not exercise CSR, these rival
organisations are in danger of losing consumer loyalty. On the other hand, some
organisations are involved in CSR simply because they believe it is the right thing to do.
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Regardless of the underlying reasons, CSR has become a commonly used term in the
business arena (Lindgreen,Swaen, & Maon, 2009).
Smith (2003b), a former professor at Harvard Business School, argued that “The impression
created overall is that the debate about CSR has shifted: it is no longer about whether to
make substantial commitments to CSR, but how to make these commitments”.
3.3 Defining CSR for Business Case Purposes

There are many different ways to think about what CSR includes and what it embraces. A
recent study found that definitions tended to identify various dimensions that characterized
their meaning. Using content analysis, this study identified five dimensions of CSR and used
frequency counts via a Google search to calculate the relative usage of each dimension. The
study found the following to be the most frequent dimensions of CSR: stakeholder dimension,
social dimension, economic dimension, voluntariness dimension and environmental
dimension (Dahlsrud 2006). Although these dimensions were identified via Google citations,
no research attesting to their validity has been done.
Another way to think about CSR is to identify the different categories of CSR and sort out
companies’ activities in terms of these different types, classes or kinds of CSR. Using this
approach, Carroll’s four different categories of CSR, can be employed: businesses’ fulfilment
of economic, legal, ethical and discretionary or philanthropic responsibilities.
This four-part definition of CSR has been stated as follows: ‘The social responsibility of
business encompasses the economic, legal, ethical, and discretionary (later referred to as
philanthropic) expectations that society has of organisations at a given point in time’ (Carroll,
1979). The reason for using this definition is because it has been used successfully for
research purposes for over 25 years.
Another reason why this definition is useful is that it specifies the organisation’s economic
responsibility as a factor to be considered in CSR, and this becomes very important in
thinking about the ‘business case’.
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Business people, in particular, like to think of their economic/ financial/ profitability

performance as something that they are doing not only for themselves, but also for society, as
they fulfill their institutions’ mission to provide goods and services for society. Further, the
definition separates out legal, ethical and philanthropic categories of
responsibility/performance, and this provides for a sharper examination of different corporate
actions.
The four categories of responsibility/ performance embrace the five dimensions of CSR,
which are:
 Stakeholder dimension
 Social dimension
 Economic dimension
 Voluntariness dimension
 Environmental dimension
Whether in the definition’s structure or its application, business performance with respect to
the environment, stakeholders and society (social) are captured along with the categories of
economics and voluntariness discretionary/ philanthropic). The four categories of CSR,
economic, legal, ethical and philanthropic, address the motivations for initiatives in the
category and are also useful in identifying specific kinds of benefits that flow back to
companies, as well as society, in their fulfilment. Of course, these concepts can be
overlapping and interrelated in their interpretation and application, but they are helpful for
sorting out the specific types of benefits that businesses receive, and this is critical in building
the ‘business case’.
3.4 The Essence of CSR: Ethical and Philanthropic Responsibilities

Carroll’s (1979, 1991) four-part definition of CSR identifies four categories of responsibilities:
economic, legal, ethical and discretionary/ philanthropic. These ‘responsibilities’ are the
expectations placed on the corporation by corporate stakeholders and society as a whole.
One of the major advantages of Carroll’s definition is its expansion of the categories of CSR
that McGuire referred to in 1963. McGuire (1963) argued that: ‘The idea of social
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responsibilities supposes that the corporation has not only economic and legal obligations,
but also certain responsibilities to society which extend beyond these obligations.’
By identifying and distinguishing the ethical and discretionary/ philanthropic categories,

Carroll (1991) explicitly spelled out what McGuire referred to as the responsibilities that
extend beyond the economic and legal responsibilities. Carroll (1991) then made the notion of
CSR more explicit when he contended that the economic and legal responsibilities are
‘required’, the ethical responsibilities are ‘expected’, and the discretionary/ philanthropic
responsibilities are ‘desired’. By doing so, he made a distinction between the traditional and
the new responsibilities of the corporation. The classical responsibilities of the corporation
which are embodied in its economic and legal responsibilities reflect the old social contract
between business and society. Alternatively, the new responsibilities of the corporation which
are embodied in the ethical and discretionary/ philanthropic responsibilities reflect the new,
broader, social contract between business and society.
Since what is debated in the subject of CSR are the nature and extent of corporate
obligations that extend beyond the economic and legal responsibilities of the organisation, it
may be understood that CSR really refers to the ethical and philanthropic obligations of the
corporation towards society. Kotler and Lee (2005) essentially see CSR in the same way.
They define CSR as ‘a commitment to improve community well-being through discretionary
business practises and contributions of corporate resources’.
? THINK POINT
Taking into account the organisational responsibilities, formulate a definition of Corporate

Social Responsibility.
3.5 The Economic and Legal Responsibilities of Business Economic

Responsibilities
The economic responsibility of business is ‘to produce goods and services that society
desires and to sell them at a profit’ (Carroll, 1979). By doing so, businesses fulfil their primary
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responsibility as economic units in society. The critical question is: To what extent should a
business pursue profits? Carroll (1991) observes that the profit principle was originally set in
terms of ‘acceptable profits’; however, the principle transformed to ‘profit maximisation’. The
doctrine of profit maximisation is endorsed by the classical economic view led by the late
Milton Friedman (1962) where ‘there is one and only one social responsibility of business - to
use its resources and engage in activities designed to increase its profits so long as it stays
within the rules of the game, which is to say, engages in open and free competition without
deception or fraud’. Drucker (1954; 2006) presents an alternative perspective to the classical
economic view. He argues that profit performs three main functions.
First, it measures the effectiveness of business activities; second, it provides a ‘risk premium’
necessary for the corporation to stay in business; and third, it insures the future supply of
capital. ‘A profitability objective therefore does not measure not the maximum profits the
business can produce, but the minimum it must produce’ (Drucker, 1954; 2006).
It is worth noting that Barnett (2007) provides an argument which seems to indicate that the
principle of maximising shareholder wealth is, in itself, not in the interest of shareholders.
Barnett (2007) contends that excessive financial performance leads to decreasing the ability
of the company to influence its stakeholders. Barnett (2007) explains that doing too well can
lead stakeholders to perceive that an organisation is not doing enough good. Excessive
Corporate Financial Performance indicates that an organisation is extracting more from
society than it is returning and can suggest that profits have risen because the organisation
has exploited some of its stakeholders in order to favour shareholders and upper
management. This can indicate untrustworthiness to stakeholders looking to establish or
maintain relations with the organisation.
While tension remains between these two views of profit, the notion of an economic
responsibility in terms of financial profit to stockholders is accepted and required by both
views. One may even argue that maximising shareholder wealth in the long run is an
underlying principle of both views. The real difference may be that the classical economic
view fails to appreciate the long-term negative effects of the application of the maximisation
principle in the short term. In contrast, the opposite view applies the maximisation principle for
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long-term benefits, which entails that such principle may be suppressed in certain short-term
considerations.
? THINK POINT
Posit a critical opinion of whether organisations who are optimising profitability are in fact
exploiting society.
Legal responsibilities. The legal responsibilities of businesses refer to the positive and
negative obligations put on businesses by the laws and regulations of the society where it
operates. Little disagreement exists between the various views on CSR regarding what
constitutes the legal responsibilities of business. All views accept the requirement of
adherence to the laws and regulations of society. The difference really exists regarding the
nature and scope of such an obligation. With respect to the nature of the legal obligations,
some views contend that the legal responsibility of business constitutes the totality of the
responsibility of business towards society. On the other hand, some argue that laws and
regulations constitute but one category of the responsibility of business towards society. For
example, Carroll (1991) considers the laws and regulations as the ‘codified ethics’ of society.
They represent ‘partial fulfilment of the social contract between business and society’.
With respect to the scope of the legal responsibilities, some advocate its expansion to
encompass more regulation. They claim that regulation is necessary for the fulfilment of CSR.
For example, De Schutter (2008) argues that the business case for CSR ‘rests on certain
presuppositions about markets and the business environment, which cannot be simply
assumed, but should be created by a regulatory framework for CSR’. Others oppose such
claims and assert that engagement in CSR activities and management of stakeholder
relations should continue to remain voluntary. For example, Phillips et al. (2003) reject the
claim that stakeholder theory, which contends that organisation performance is influenced by
the organisation’s management of its relationships with its stakeholders, promotes expanding
or changing laws and regulations. The authors assert that stakeholder theory ‘does not
require a change in the law to remain viable’ (Phillips et al. 2003).
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? THINK POINT
Suggest if business case for CSR should be regulated or must organisations voluntarily
participate in these ventures?
The two opposing camps continue to present their arguments to justify the need for the
expansion or contraction of the legal requirements imposed on business. Advocates of
regulation question the ability of the free market mechanism to support CSR activities (Valor
2008; Williamson et al. 2006). They contend that market failure and the business environment
are not rewarding organisations engaging in CSR activities. In contrast, opponents of
regulation argue that the free market mechanism promotes the interest of individuals, and in
turn society, by rewarding CSR activities that are actually favoured by individuals.
Corporate social responsibility activities that are not rewarded by the market are those
activities that individuals do not value and are therefore unwilling to support. The merit of CSR
activities, thus, should be determined by the free market mechanism.
3.6 The Business Case for CSR: What Does CSR Really Mean?
Before presenting a review and summary of the ‘business case’ for social responsibility, it is
important to discuss what this really means. When one examines the history and evolution of
CSR, the idea of a business case for CSR has been developing almost since the 1970s. Even
with early CSR initiatives, there was always the built-in premise that, by engaging in CSR
activities, businesses would be enhancing the societal environment in which they existed and
that such efforts would be in their long term enlightened self-interest. Though CSR came
about because of concerns about businesses’ detrimental impacts on society (avoiding
‘negatives’), the theme of improving society (creating ‘positives’) was certainly in the minds of
early theorists and practitioners. With the passage of time and the growth of resources being
dedicated to social responsibility, it was only natural that questions would begin to be raised
about whether CSR was paying its own way, so to speak. Another incentive for the
development of the business case was probably a response to Milton Friedman’s continuing
arguments against the concept, claiming that businesses must focus only on long-term profits.
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If it could be demonstrated that businesses actually benefited financially from CSR, then
possibly Friedman’s arguments would somewhat be neutralized.
In essence, then, the quest for the business case for CSR has been developing for several
decades. In recent times, the search for the ‘business case’ for CSR has accelerated and has
come to mean the establishment of the ‘business’ justification and rationale, that is, the
specific benefits to businesses in an economic and financial sense that would flow from CSR
activities and initiatives. Questions such as the following have framed this search:
 Can an organisation really do well by being good?
 Is there a return on investment on CSR?
 What are the bottom-line benefits of socially responsible corporate performance?
 Is CSP positively related to CFP?
It has been argued that, in business practitioner terms, a ‘business case’ is ‘a pitch for
investment in a project or initiative that promises to yield a suitably significant return to justify
the expenditure’. That is, can companies perform better financially by addressing both their
core business operations and their responsibilities to the broader society (Kurucz et al.
2008)?
Who really cares whether CSR improves the bottom line? Obviously, corporate boards,
CEOs, CFOs and upper echelon business executives care.
They are the guardians of their companies’ financial welfare and ultimately must bear
responsibility for the impact of CSR on the bottom line. At various levels, they need to justify
that CSR is consistent with the organisation’s strategies and that it is financially sustainable
(O’Sullivan 2006). But, other groups care as well. Shareholders are increasingly concerned
with financial performance and are concerned about possible threats to management’s
priorities. Social activists care because it is in their long-term best interests if companies can
sustain the types of social initiatives which they are advocating. Governmental bodies care
because they desire to see whether companies can deliver social and environmental benefits
more cost effectively than they can through regulatory approaches (Zadek 2000). It may also
be argued that average consumers care as well, as they want to pass on a better world to
their children, and many want their purchasing to reflect their values. It should also be
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emphasized that a multitude of different business cases for social responsibility have been
developing over the years. There is no single business case for CSR - no single
rationalization for how CSR improves the bottom line. Many different arguments have been
assembled to justify the composite business case. The business case for CSR has been
broken down into four different categories by Simon Zadek. Zadek (2000) has argued that
companies pursue CSR strategies to:
(1) Defend their reputations (pain alleviation)
(2) Justify benefits over costs (the ‘traditional’ business case)
(3) Integrate with their broader strategies (the ‘strategic’ business case)
(4) Learn, innovate and manage risk (New Economy Business case)
Kurucz et al. (2008) also have set out four general types of business case for CSR which
support that of Zadek’s. They maintain that there are four different groupings of the business
case based on the focus of the approach, the topics addressed, and the underlying
assumptions about how value is created and defined.
Their four approaches include
(1) Cost and risk reduction
(2) Gaining competitive advantage
(3) Developing reputation and legitimacy
(4) Seeking win-win outcomes through synergistic value creation.
Other widely accepted approaches to the business case include focusing on the empirical
research linking CSR with CSP and identifying benefits to different stakeholder groups that
directly or indirectly benefit companies’ bottom lines. In addition, the socially conscious
investment movement, sometimes called ‘ethical investing’ is often built on the belief that
there exists a strong correlation between social performance and financial performance.
Others, by contrast, believe socially conscious investing is simply the right thing to do.
3.7 Documenting the Business Case for CSR

Attention to the business case for CSR has gained noticeable consideration. Lee (2008)
observes a trend in the evolution of CSR theories that reveal ‘a tighter coupling [between
CSR and the] organisations’ financial goals’. The focus of CSR theories has shifted away
from an ethics orientation to performance orientation. In addition, the level of analysis has
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moved away from a macro-social level to an organisational level, where the effects of CSR on
organisation financial performance are closely examined.
Vogel (2005) maintains that the close examination of the relationship between CSR initiatives
and organisation financial performance is a characteristic of the ‘new world of CSR’. He
argues that ‘old style’ CSR of the 1960s and 1970s was motivated by social considerations.
Economic considerations were not among the motives for CSR: while there was substantial
peer pressure among corporations to become more philanthropic, no one claimed that such
organisations were likely to be more profitable than their less generous competitors’; in
contrast, the essence of the ‘new world of CSR’ is ‘doing good to do well’ (Vogel, 2005).
Vogel also (2005) observes some features of the ‘new world of CSR’. He notes that the new
world of CSR emphasizes the link between CSR and corporate financial success. Evidence
for such emphasis, Vogel (2005) states, are the many works (e.g. Jackson 2004; Laszlo
2003; Scott and Rothman 1992; Waddock 2002) that promote the ‘responsibility–profitability
connection’ and assert that CSR leads to long-term shareholder value. He also reports that
according to a 2002 survey by PricewaterhouseCoopers “70 percent of global chief
executives believe that CSR is vital to their companies’ profitability”. This evidence suggests
that CSR is evolving into a core business function which is central to the organisation’s overall
strategy and vital to its success.
3.8 The Argument for and Against Corporate Social Responsibility

The idea of corporate social responsibility seems like something every company should strive
for. Giving back to the community, or even the world, seems like a reasonable expectation for
companies that want to “do the right thing” Associate Professor Blaine McCormick contends
the concept is not always so black and white, “As people, we have the urge to do good,” he
said. “We are beings who want to help. We seek the good; we are attracted to the good. But
sometimes our desire to do good, harms other people.” In the case of corporate social
responsibility (CSR), the harm may be to shareholders.
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3.8.1 Stakeholder Theory

On one side of the argument are those who believe in providing for society’s discretionary
expectations. In addition to making a profit and obeying the law, a company should attempt to
alleviate or solve social problems. This view is commonly advocated through stakeholder
theory. This theory maintains that corporations should consider the effects of their actions
upon the customers, suppliers, general public, employees, and others who have a stake or
interest in the corporation (Jensen, 2002; Smith, 2003a; Freeman, Wicks and Parmar, 2004;
Lee, 2008; Schaefer, 2008). Supporters reason that by providing for the needs of
stakeholders, corporations ensure their continued success. A renowned company that
exhibits the stakeholder view is Johnson and Johnson. Their credo lists the corporation’s
responsibilities in the following order:
 Customers
 Employees
 Management
 Communities
 Stockholders (Seglin, 2000/2002)
Proponents of stakeholder theory maintain that increasing shareholder wealth is too myopic a
view. According to stakeholder theory, increased CSR makes organisations more attractive to
consumers. Therefore, CSR should be undertaken by all organisations.
3.8.2 Legitimacy Theory

In a more extreme version of stakeholder theory, legitimacy theory claims that corporations
have implicit contracts with stakeholders to provide for their long-term needs and wants. By
providing for the desires of stakeholders, the corporation legitimizes its existence (Guthrie &
Parker, 1989). Because society provides important benefits to the corporation, the corporation
is obligated to promote society’s interests in return. The theory in effect claims that because
corporations have the resources, they should engage in social ventures. In addition,
legitimacy theory maintains that larger organisations have a greater responsibility than
smaller organisations.
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3.8.3 Let Business Try

An argument voiced for stakeholder theory is that society should let business attempt to solve
society’s problems because other institutions have clearly failed to do so (Davis, 2001). In
order for business as an institution to retain its social authority, business must meet the needs
of society. Proponents of the argument, which is also known as the Iron Law of Responsibility,
contend that, “society ultimately acts to reduce the power of those who have not used it
responsibly” (Davis, 2001). However, opponents of stakeholder theory disagree. How can
businesses that are not specialised or elected to serve in social areas do a better job than
political institutions?
3.9 Problems with Stakeholder Theory

The stakeholder theory has been criticised by the advocates of the shareholder model
because they consider it to be impossible for a company to follow several goals
simultaneously, which can very often be contradictory. Those who believe in the stakeholder
model reply that value creation for stakeholders creates value for shareholders (who are one
group of stakeholders), In short, profitability depends directly on satisfying the needs of the
company’s stakeholders,
3.9.1 Denies Fiduciary Responsibility

Stakeholder theory has some significant disadvantages. For instance, stakeholder theory runs
directly counter to corporate governance. Since shareholders are owners of the organisation,
the organisation should be operated to maximise their returns. Stakeholder theory transfers
the corporation’s focus from shareholders to the needs of stakeholders. By implementing
unprofitable CSR programmes, organisations are denying their fiduciary responsibility to
shareholders.
3.9.2 Oversimplification
Society has numerous problems that have existed for many years such as poverty and
pollution. If these problems were as simple to solve as stakeholder theory advocates
maintain, they would have been remedied long ago by profit-seeking organisations focused
on benefiting society (Karnani, 2010). Many businesses have discovered, however, that the
pursuit of society’s welfare often leads to a reduction in profits. If managers pursued CSR
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activities that hampered profits they would likely be out of a job. The owners of an
organisation desire a return on their investment, and would likely fire a manager that
purposely opposed this objective. Social problems are more complex than stakeholder
theorists claim.
3.9.3 Overregulation
Another critical argument voiced against stakeholder theory is the overregulation argument.
This argument maintains that the pursuit of CSR would lead to more rigorous environmental
and social regulations for businesses across the world. These regulations would then make it
more difficult for undeveloped nations to keep pace with developed nations. David Henderson
(2009), “When conditions differ widely between countries, as they do, prescribing and
enforcing such common standards . . . restricts the scope for mutually beneficial trade and
investment flows. It holds back the development of poor countries by suppressing
employment opportunities within them”. The potential for overregulation strikes a formidable
blow to stakeholder theory.
3.9.4 Competing Interests

One of the core problems of stakeholder theory is the presence of competing interests within
and outside an organisation. Supporters of stakeholder theory argue for a multi-fiduciary
relationship between managers of a corporation and all of an organisation’s stakeholders.
By definition a fiduciary relationship involves promoting the interests of one group above
others; however, “as almost everyone recognises, the interests of shareholders, customers,
suppliers, employees, and communities in the management of an organisation's assets are
conflicting” (Marcoux, 2003). Shareholders want the highest return possible through capital
gains and/or dividends at the lowest possible risk. Customers desire quality products, low
prices, and excellent service. Employees crave high wages, excellent working conditions, and
a handsome benefits package. These competing demands from stakeholders make
stakeholder theory untenable. It would be difficult to balance these desires in practise. Some
stakeholders would be satisfied while others would be disgruntled (Jensen, 2002).
The implementation of CSR would likely cause significant disagreement among shareholders
as well. Some of the shareholders would promote CSR. On the other hand, some
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shareholders would support the sole pursuit of profit. Even if shareholders agreed that CSR
was beneficial, they may differ as to where it should be directed. Furthermore, the
stakeholders would be competing for the implementation of various CSR programmes.
How could a business manager discern which programme(s) would be the best to pursue?
Shareholder theory (as discussed later) overcomes this weakness of stakeholder theory by
focusing corporate efforts on a single objective, maximising shareholder wealth. For example,
an organisation with a store operating in one region becomes unprofitable.
The organisation considers closing the store to avoid harming shareholders. Stakeholder
theory may suggest that the company leave the store open to continue to provide for the
store’s employees and community. Shareholder theory proponents would propose that unless
leaving the store open would maximise long-term shareholder wealth, it should be closed.
Although stakeholder theory sounds reasonable, it may introduce more problems than it
solves. It is practically impossible to serve the interests of each of the stakeholder groups
simultaneously.
3.9.3 Competitive Disadvantage

Another argument against stakeholder theory is the competitive disadvantage argument. This
argument is that “because social action will have a price for the organisation it also entails a
competitive disadvantage” (Smith, 2002). Therefore, advocates of this argument deem that
social actions should not be initiated by businesses. The problem with this argument is that
social actions may actually foster public support of a corporation. The ethical action of
Johnson and Johnson executive David Collins serves as a prominent example. In 1982,
Collins recalled the entire Tylenol product line after cyanide-laced capsules of the brand had
caused several deaths in Chicago. As an article in Workforce, a popular human resource
magazine, proclaimed, “To this day, Collins’ response is cited as the textbook example of how
decisive action, grounded in sound ethical values, can avert a crisis, and even bolster a
company’s support over the long run” (Fandray, 2000).
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Contrary to the argument, social responsibility may actually provide a competitive advantage.
Even if social responsibility results in short-term losses; it can engender loyal employees and
communities and consequently reap long-term dividends: “CSR is also proving to benefit
companies. The most commonly identified corporate advantages include maintaining and
improving reputation or brand image, government relations, brand differentiation, customer
loyalty and employee recruitment and retention” (Walton, 2010). However, proponents of
stakeholder theory go too far in their support of discretionary social expenditures. The
benefits of profitable CSR initiatives must be balanced with the fact that unprofitable CSR
initiatives may put an organisation at a competitive disadvantage.
3.9.4 Greenwashing
Another problem with stakeholder theory is that it is reactive instead of proactive.
Some corporations engage in CSR solely in response to crises. In other cases, the primary
CSR action for organisations is merely reporting. This reporting is usually in the form of feel-
good stories with a lack of concrete social action: “The content of CSR very often is
misleadingly substantial: the reports are thick and seemingly contain much information, but
the actual extent of what is done beyond legal requirements remains limited (Fougere &
Solitander, 2009).
Although many companies advocate CSR in theory, they would not in practise increase
stakeholder welfare at the expense of shareholder wealth (Karnani, 2010). These
organisations may promote their reputation in the community through rhetoric and
advertisements related to their CSR efforts. However, they do this to shift the focus from their
flaws or to increase business. This is a practise known as “greenwashing.” These
organisations are not pursuing CSR to benefit society. They are pursuing CSR to take
advantage of consumers who are sold on the concept of CSR.
3.9.5 Destroys Pluralism

Friedman and Levitt (1979) feared the usurping of the authority of political institutions by
businesses as a result of CSR. Such a combination of governmental and corporate authority
would result in a fusing of the two institutions into a powerful, unified entity.
Friedman and Levitt were concerned about the potential socialistic consequences of this
fusing. They believed in the concept of pluralism. Pluralism requires the separation of power
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between the various institutions of society. Friedman and Levitt did not desire to see an
oppressive centralized government. As Levitt (1958/ 1979) stated “Government’s job is not
business, and business’s job is not government. And unless these functions are absolutely
separated in all respects, they are eventually combined in every respect”.
3.10 Shareholder Theory

On the other side of the debate, shareholder theory proposes that the corporation should
legally maximise long-term shareholder wealth (Jensen, 2002; Smith, 2003a; Schaefer,
2008). By providing a necessary product or service at a reasonable price, a business is
benefiting society. In financial language, shareholder theory advocates that an organisation
should maximise the present value of all future cash flows (Danielson, Heck, & Shaffer,
2008). It is unnecessary and unwise to spend shareholder money for unprofitable social
causes. The shareholders have made an investment and are dependent on the organisation
to provide them with a return. Steve Milloy, a mutual fund manager and critic of CSR,
proclaimed the following: “Shareholders do not hire CEOs to be the U.N., to act like a
government or to be a charity. They were hired to make money for shareholders. Business is
society's wealth-creation machine” (as quoted in Weiss, Kirdahy, & Kneale, 2008). Milloy’s
argument is similar to the reasoning of Adam Smith and Milton Friedman. The business of
business is to make money. By serving the needs of shareholders, businesses generate
wealth that benefits society. If CSR initiatives increase the bottom line, then shareholder
theory advocates recommend implementing such initiatives. However, using shareholder
money in an unprofitable manner is wrong. No matter how noble the cause, it is inappropriate
to be generous with another’s money.
3.11 Abandon CSR

On the extreme end of shareholder theory are some scholars who believe that CSR should be
abandoned altogether. Although they concede that CSR has increased global awareness of
business ethics, the concept is no longer practical. For example, Freeman and Liedtka,
(1991) professors at the University of Virginia’s Darden School of Business, argued that CSR
has failed and should be forsaken. They claimed that CSR has not delivered on its promise to
create the good society. Furthermore, they asserted that the concept of CSR promotes
incompetence by prodding business managers to improve society’s shortcomings. According
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to Freeman and Liedtka, businessmen do not have sufficient expertise regarding individuals
and communities to alleviate social problems (Freeman & Liedtka, 1991).
3.12 The Role of Political and Social Institutions

A common argument voiced in support of shareholder theory is that social actions are the role
of political and social institutions, not businesses. Shaw (1988), asserted, “Friedman will not
be dislodged until it can be shown that the social and political institutions of this nation . . . are
inadequate to promote the common good and social justice”.
Shaw (1988) insisted that the government through its regulations determines the moral
responsibilities of a corporation. This argument has been challenged on several levels.
First of all, the government would be hard pressed to have a law regulating every possible
decision that a corporate executive may face. As a result, there would inevitably be loopholes
that would allow immoral corporate actions. Additionally, the government would likely be
influenced by lobbying and financial support from political action committees. If the
government were to approve a lower standard of morality than a corporation formerly held,
should that company reform to conform to that lower standard? Likewise, the government
could pass laws that blatantly contradict the corporation’s ethical standards. Ethical imposition
by the government would most likely result in subjective morality, dependent on the views of
those holding political authority and the cultural norms of society.
Business should make decisions based on an objective ethical code in addition to the laws of
society. Mulligan (1990), assistant professor of management at Brock University,
emphasized, “Ethics is more fundamental than law. It is more appropriate to use moral
principles to test the validity of laws than to invoke laws to test the validity of moral principles”
Although the government is an imperfect mediator of moral responsibilities, it does provide a

baseline for morality. Nonetheless, corporations should aspire to go beyond the legal
minimum in their actions by following an objective ethical code of conduct.
3.13 Adam Smith and Self-Interest

A historical figure who supported the concept of shareholder wealth maximisation was the
Scottish philosopher, Adam Smith. Smith argued that the pursuit of profit ultimately promotes
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social welfare through the “invisible hand.” Smith posited that human nature made it far more
likely for individuals to act out of self-interest than out of pure benevolence, and that self-
interested actions ultimately benefit society. For example, one would not expect to receive
food from the butcher or baker on the basis of their benevolence, but due to their own self-
interest. Smith (1776/ 1981) stated in his book, An Inquiry into the Nature and Causes of the
Wealth of Nations: As every individual, therefore, endeavours as much as he can to employ
his capital in the support of domestic industry, and so to direct that industry that its produce
may be of the greatest value; every individual necessarily labours to render the annual
revenue of the society as great as he can. He generally, indeed, neither intends to promote
the public interest, nor knows how much he is promoting it. By preferring the support of
domestic to that of foreign industry, he intends only his own security; and by directing that
industry in such a manner as its produce may be of the greatest value, he intends only his
own gain, and he is in this, as in many other cases, led by an invisible hand to promote an
end which was no part of his intention.
By pursuing his own interest he frequently promotes that of the society more effectually than
when he really intends to promote it. Thus, Smith reasoned that the organisation helps society
more when they further their own interest (profit) than when they deliberately seek society’s
benefit.
3.14 Milton Friedman and CSR

In addition, Nobel Prize-winning economist Milton Friedman was a more modern proponent of
shareholder theory. In an article entitled, “The Social Responsibility of Business Is to Increase
Its Profits,” Friedman outlined the concept of shareholder wealth maximisation. Friedman
believed that a focus on discretionary social investments was improper for corporations. The
goal of the corporation is to provide a return to shareholders. By focusing on external social
responsibilities, the corporation is distracted from its sole purpose. Friedman asserted that
corporations do not know how to properly invest in social causes (This argument is commonly
cited as the inept custodian argument) (Friedman, 1970/ 2002). Therefore, such decisions
should be in the hands of individuals, not corporations. Brian Schaefer (2008), in the Journal
of Business Ethics, countered Friedman by stating that organisations could solve the inept
custodian argument by seeking to hire executives who are experts in social responsibility:
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“The ability to distribute funds effectively for social purposes, and perhaps also some
experience in doing so, could become highly desired traits on a corporate executive’s
resume”
Yet, hiring more employees would increase costs which may not be justified if profitable CSR
activities are not available. Throughout his article, Friedman is clear with regard to his
emphasis on shareholder wealth maximisation as an imperative of the corporation. Friedman
did not support the funding discretionary social activities: “Friedman is adamant that unless a
clear mandate from the company's owners is provided, 'philanthropic' activities which do not
serve to improve an organisation's profitability . . . should not be funded by organisations”
(Stratling, 2007). When an individual businessman asserts social responsibility through the
use of corporate cash, he is spending stockholder money. Friedman deemed this as a tax
upon stockholders of which they have no decision regarding how it is spent.
Consequently, he believed that the individual is free to pursue social responsibility, while the
corporate executive lacks the ability to properly perform such actions (Friedman, 1970/ 2002).
To this day, Milton Friedman’s ideas remain a crucial part of the CSR debate.
3.15 Problems with Shareholder Theory

3.15.1 Externalities
Shareholder theory is not without its shortcomings. In normal business transactions,
externalities may occur. These externalities are costs or benefits to third parties in a business
transaction. For example, an industrial organisation is considering opening a plant in the
United States. The proposed plant is known to emit a vast amount of pollutants that would
seriously harm the environment and the health of citizens in close proximity. Although building
the plant would provide benefits in the form of greater profitability, the construction would also
result in negative externalities to the community. Therefore, increasing shareholder wealth
does not always increase stakeholder welfare.
3.15.2 Focus on Short-Term Profit Maximisation

Another argument voiced against shareholder theorists is that a focus on shareholder wealth
encourages businesses to focus on short-term profit maximisation (Smith, 2003a). This is a
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misguided assumption. As mentioned earlier, the shareholder model is focused on long-term

profit maximisation (Danielson, Heck, & Shaffer, 2008).
3.15.3 Just Treatment of Stakeholders

Likewise, some claim that shareholder theory does not encourage businesses to treat their
employees and other stakeholders justly. This argument has a simple counterargument. Just
treatment of a company’s stakeholders is prerequisite for a successful business. The
company that treats its employees poorly is probably going to have an uncommitted, weak
workforce. As a result, such a company’s profits would suffer. Shareholder theory would not
prevent organisations from investing in financially beneficial activities (Smith, 2003a).
3.16 Recent Corporate Scandals

Opponents of shareholder theory assert that recent corporate scandals including Enron, Tyco,
and Worldcom expose the inefficiencies of shareholder theory (Freeman, Wicks, & Parmar,
2004). However, these companies were focused on maximising short term, not long-term,
shareholder value. Additionally, the managers of these organisations were engaging in clearly
fraudulent activities by promoting their personal welfare above the shareholder’s welfare
(Smith, 2003a). Advocates of shareholder theory proclaim:
“The shareholder model - when viewed from a long term perspective - still provides the best
framework in which to balance the competing interests of various stakeholders (including both
current and future stakeholders) when making business decisions” (Danielson, Heck, &
Shaffer, 2008).
3.17 The Normative Case for CSR

Two common justifications for CSR activities are the normative case and the business case.
The normative case follows the reasoning of stakeholder theory, while the business case is in
line with shareholder theory.
The normative case for CSR proposes that corporations should engage in CSR because it is
valiant and good to do so. The failure of government to address society’s needs has led to a
plea for the corporate sector to address these needs (Smith, 2003b). A prominent example of
the normative case for CSR is Merck’s treatment of river blindness. Even though there was no
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market for the drug except in the world’s poorest regions, Merck spent tens of millions of
dollars developing a drug that cured the disease (Smith, 2003b).
There are dissenters to the normative case for CSR. They proclaim that if these extraneous
projects do not contribute to shareholder value, the organisation is failing in their obligations
to investors. Solely having the means to engage in socially responsible actions does not
justify them. If social actions provide a profitable return and competitive advantage to the
organisation in the long term, the corporation should pursue such actions. Nevertheless,
investing in causes contrary to some of the shareholder’s values is wrong. Using another’s
money, even for charity, is misappropriation. Although an organisation may desire to do well,
only if CSR benefits the business should it be undertaken.
3.18 The Business (Strategic) Case for CSR

The business or strategic case for CSR (doing good in order to make a profit) has recently
become more pronounced. Proponents of the business case for an organisation say that
engaging in CSR can set a company apart from its competitors. As the preferences of
employees, consumers, and shareholders are changing, the economic value of CSR has
increased: “Consumers are demanding more than ‘product’ from their favourite brands.
Employees are choosing to work for companies with strong values. Shareholders are more
inclined to invest in businesses with outstanding corporate reputations” (Starbucks, 2001: p.
3). As a result of the increasing importance of CSR, many companies including Starbuck’s
have set up reporting systems to measure their CSR. There are now many stock market
indices measured according to CSR standards. This focus on CSR has pressured many
organisations to more closely scrutinize their social responsibility efforts.
A sound description of the business case for CSR is posited by business professors John
Martin, William Petty, and James Wallace. They claimed that CSR investments are critical in
helping companies maintain positive stakeholder reputations.
Without positive stakeholder reputations, organisations would most likely suffer from lost
sales, negative publicity, and a discontented workforce. Therefore, the trio reasoned that CSR
programs are a valuable means of increasing shareholder wealth. Yet, Martin, Petty, and
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Wallace (2009) emphasized that the returns of the proposed CSR investments must be
evaluated: “As with any corporate investment, each dollar of investment in a corporate
stakeholder group should be justified by at least a dollar of expected return over a finite time
horizon”.
3.19 Examples of Strategic CSR

Examples of the business case for CSR abound. In recent years, there have been numerous
business breakthroughs that have resulted in profits and the enhancement of society. One of
these breakthroughs is the production of fuel-efficient vehicles. For example, Toyota released
the hybrid Prius. This resulted in significant profits for the company. However, German and
American automakers that did not react to the hybrid trend were left at a competitive
disadvantage. Likewise, many companies have committed to buying fair-trade goods, such as
Starbuck’s. This initiative involves paying small suppliers more for goods that are sold at
premium prices, such as chocolate and coffee. Consumers are becoming more conscious of
fair trade practises: “Like consumer awareness of organic products a decade ago, fair trade
awareness is growing” (Downie, 2007). Additionally, many fast-food chains have expanded
their menus to include healthier items. These items have also resulted in increased profits.
Some may argue that the adoption of these changes is the result of an increased emphasis
on social welfare. Aneel Karnani (2010), Professor of Strategy at the University of Michigan’s
School of Business, begs to differ: “Social welfare isn’t the driving force behind these trends.
Healthier foods and more fuel-efficient vehicles didn’t become so common until they became
profitable for their makers”. Each of these programmes is ultimately founded on the
enhancement of shareholder wealth. If these projects were not potentially profitable, then
businesses would not have pursued them.
The strategic or business case for CSR seems to be logical and consistent. CSR efforts are
strategic in nature when they lead to increased revenues. CSR may produce cost reductions
by attracting more qualified and loyal employees. CSR can increase the revenues of
organisations by differentiating their products from competitors. If consumers see CSR as a
valuable part of a company’s brand, they may be willing to pay a premium for the company’s
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products and services. By serving the needs of both stockholders and stakeholders, strategic
CSR is a win-win situation (Husted & Salazar, 2006).
3.20 Difficulty of Implementing Strategic CSR

Discovering and implementing CSR activities that satisfy both stakeholders and stockholders
is not easy. It takes much research to discern whether a product with a CSR attribute is
purchased because of its CSR association or due to other product features.
For example, many shampoo products have the CSR attribute “not tested on animals” on the
label. However, the reasons for the ultimate purchase of shampoo may have to do with its
price, quality, ingredients, scent, advertising, or any combination of these factors. As a result,
it is difficult to quantify the financial effects of CSR efforts.
3.21 Justifiable Social Responsibility

In addition to the strategic case for CSR, there are other justifiable avenues for undertaking
social responsibility. Individuals, mission-driven organisations, sole proprietors, and partners
are not tied by fiduciary duties to shareholders. As a result, these groups can engage in
unprofitable social responsibility activities, if desirable.
3.21.1 Individuals
Individuals are free to invest in social causes. Individuals can support charities, churches, or
other societal causes with their personal money. Similarly, shareholders can choose to invest
their returns in social causes if they so desire. For instance, individuals who favour social
responsibility efforts may choose to invest in the Portfolio 21 mutual fund. This mutual fund
invests solely in companies with proven track records of environmental business practises
(Portfolio 21 Investments, n.d.).
3.21.2 Mission-Driven Organisations

Organisations that are mission-driven and focused on CSR are also tenable. Mission-driven
organisations clearly spell out in their mission statements the intent to undertake certain CSR
initiatives. An example of a mission-driven organisation is Greyston Bakery, a producer of
gourmet desserts. A few of Greyston Bakery’s social agendas are to provide affordable
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housing for homeless and low-income families, and to provide affordable healthcare for
people with HIV (Greyston Bakery). Because shareholders know (or should know) that a
mission-driven organisation is supporting social causes, they can make a conscious decision
of whether to invest in the organisation or not.
Investors may choose to invest in a mission-driven organisation for two reasons. The mission-
driven corporation may be more efficient at social responsibility than charitable organisations.
Additionally, corporate giving is tax-advantaged in comparison to private giving because
individuals must pay a dividend tax. As a result of these benefits, shareholders would be
inclined to support corporate philanthropy over personal philanthropy. However, if corporate
giving goes to undesirable social causes, personal giving would be favoured (Baron, 2007).
3.21.3 Sole Proprietors/Partners

Sole proprietors or partners who choose to invest their company’s money in social causes are
free to do so. This is comparable to individuals donating to social causes.
Companies have several options regarding social responsibility. They can engage in strategic
CSR, mission-driven CSR, or not engage in CSR and thus allow shareholders to make private
charitable donations. When deciding which CSR strategy to pursue, organisations must
consider the benefits and costs to their shareholders: “When corporate social giving is an
imperfect substitute for personal giving, organisations that practise CSR have a lower market
value than profit-maximising organisations” (Baron, 2007).
3.22 CSR Implementation

Even if a company adopts the shareholder model, it will likely engage in strategic CSR.
Therefore, a discussion of the implementation of CSR is in order. Ultimately, CSR strategy will
be unique for different organisations. The pressures of the market along with the
characteristics and norms of the particular industry will determine the costs and benefits of
implementing CSR (Smith, 2003b). In some industries, CSR may not be necessary.
However, in other industries CSR may be the norm. Also, the region or country in which the
organisation is located has a significant impact on CSR implementation. A study from the
Journal of Business Ethics concluded that, “the region or country of a company can condition
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the level, components and motives of its social behaviour” (Sotorrío & Sánchez, 2008, pp.
388-389). For instance, European and North American organisations differ in their CSR
efforts. European organisations, on average, exhibit more CSR than North American
organisations. This disparity exists because European organisations must comply with
stronger consumer desires, media pressure, and governmental regulations concerning CSR.
Before undertaking any CSR, organisations must thoroughly consider the effects of such
actions. Seemingly profitable CSR initiatives may be attacked as self-serving by the public.
For CSR actions that are not beneficial to shareholders, the best option may be to invoke the
help of other corporations, individuals, governments, and NGOs. A study by Sen and
Bhattacharya (2001), in the Journal of Marketing Research, found that “all consumers react
negatively to negative CSR information, whereas only those most supportive of the CSR
issues react positively to positive CSR information”.
As a result, managers need to avoid consumer perceptions of social irresponsibility.

Managers should only pursue CSR actions that are widely and strongly supported by the
organisation’s consumers. Once CSR programs are initiated, organisations should assess
their success and utility.
Organisations should determine the CSR expectations of the communities in which they
operate. The company’s view of CSR and the community’s view of CSR may be misaligned.
Susan Walton, associate chair of the department of communications at Brigham Young
University, suggested invoking the support of PR professionals through the use of social
media. For example, by posting CSR reports online, organisations can broadcast their efforts.
Finally, it is important for organisations to encourage consumer feedback concerning CSR

practises to uncover areas needing improvement and areas in which they are doing well
(Walton, 2010).
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3.23 Results of CSR

With the emphasis on CSR in today’s society, one would expect CSR activities to provide a
positive return to an organisation. However, this conclusion has been contested by business
scholars including David Vogel, the chair of business ethics at the University of California-
Berkeley. Consider the socially responsible organisation Starbucks. Although they have
benevolent labour policies and have committed to providing coffee growers with fair profits,
the organisation has not encountered success in recent years. This failure is largely due to
overexpansion of the company and the reluctance of consumers to pay such a high price for a
cup of coffee. Yet, the case of Starbucks seems to indicate that CSR does not affect financial
performance in a meaningful way (Vogel, 2008).
3.24 Effect of CSR on the Purchases of Consumers

While CSR does not seem to significantly affect overall financial performance, research
indicates that CSR activities by companies could affect the purchasing decisions of
consumers. A commonly-cited study by marketing professors Tom Brown and Peter Dacin
(1997) revealed, “When consumers know about such activities, our research indicates that
CSR associations influence the overall evaluation of the company, which in turn can affect
how consumers evaluate products from the company”. According to Brown and Dacin (1997),
negative CSR associations can result in negative consumer product evaluations, while
positive CSR associations can result in positive consumer product evaluations. Overall, the
conclusions of the article are too vague; of course, CSR could affect consumer evaluations of
companies. Brown and Dacin (1997) leave much to be desired regarding the connection
between CSR activities and consumer reactions.
3.25 Lack of CSR Awareness

Although CSR activities could affect the purchasing decisions of consumers, few consumers
are aware of or concerned about the social responsibility of companies. A study by Alan
Pomering and Sara Dolnicar (2009), marketing professors at the University of Wollongong in
Australia, concluded that consumers in Australia had low awareness of the CSR practises of
banks in the nation. Vogel (2008) argued that consumers are still more concerned about
factors other than CSR in their buying decisions: “‘Ethical’ products are a niche market:
Virtually all goods and services continue to be purchased on the basis of price, convenience
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and quality”. The market for CSR is too small to have a major impact on the profit margins of
organisations.
Additionally, many organisations are not consistently responsible or irresponsible.
Therefore, consumers would not know which organisations to purchase from anyway. For
example, the same company (Merck) that developed a cure for river blindness with the drug
Mectizan also demonstrated irresponsibility. Merck withheld information concerning the
dangerous side effects of its popular drug Vioxx (Werther & Chandler, 2011). Organisations
that report numerous CSR programmes may simply be engaging in greenwashing. Even in
the niche market for ethical products, consumers may find it difficult to decide which
organisations to support.
In reaction to the results, stakeholder theory advocates would argue that CSR is the right
thing to do whether it generates a profit or not. In contrast, shareholder theory proponents
would argue that this lack of CSR awareness impairs the case for CSR. If organisations
cannot make profits from engaging in a CSR activity, then that activity is detrimental to
shareholder wealth and should not be implemented.
3.26 Conclusion
The entire CSR debate hinges on one’s view of the corporation. Is the corporation responsible
to shareholders to make a profit? Should an organisation engage in initiatives that are not
supported by shareholders and/or that do not result in the maximisation of shareholder
wealth? The findings of this study indicate that the stakeholder and shareholder theories are
both incomplete. Organisations should maximise long-term shareholder wealth, but not at the
expense of stakeholders and ethical guidelines. They should not deliberately harm
stakeholders to make a profit, and they should not go out of their way to promote
stakeholders’ interests if doing so does not increase shareholder wealth. Organisations
cannot be profitable in the long term if they have poor relations with their stakeholders. At the
same time, organisations cannot meet all the needs of their stakeholders and remain
profitable. Also, business decisions should be based on an objective ethical code of conduct.
Government officials should not determine ethics.
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Shareholders, as individuals may freely give of their money to benefit society.

Similarly, mission-driven organisations, sole proprietorships, and partnerships are free to
support social actions. However, using the money that shareholders have invested in a
corporation to support unprofitable causes is clearly wrong. Therefore, businesses should
make a profit, obey the law, act according to an ethical standard, and only pursue CSR
activities that improve long-term shareholder wealth.
? THINK POINT
Is CSR truly a responsibility towards the community or is it a marketing strategy? Use the
theories of CSR to provide a cogent discussion.
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SECTION 4
DIFFERENT THEORETICAL MODELS OF STAKEHOLDER
MANAGEMENT
Chapter outcomes
 Analyse the theoretical models of Stakeholder Management
 Design Stakeholder mapping
 Evaluate the guiding principles of Stakeholder Management
 Determine strategic prioritisation of stakeholders
 Appraise the approaches for balancing stakeholder interests
Readings
Wixley T and Everingham G (2010) Corporate Governance Third edition. SiberInk.
Stanwick PA and Stanwick SD (2009) Understanding Business Ethics First edition. Pearson
Griseri P and Seppala N (2010) Business Ethics and Corporate Social Responsibility First
edition. Cengage Learning
De George RT (2010) Business Ethics Seventh edition. Prentice Hall
Hough J, Thompson AA, Gamble JE and Strickland AJ (2011) Crafting and Executing
Strategy Creating Sustainable High Performance in South African Businesses Second South
African edition. McGraw-Hill
4.1 Stakeholder Management for Ethical Decision - Making

This section discusses the role of stakeholder management for improving ethical decision-
making processes within organisations. It presents the key concepts and approaches
developed within stakeholder theory and analyses their implications from a management
perspective. The concept of ‘stakeholder corporation’ is introduced, and the need for effective
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engagement with stakeholders discussed under two different perspectives of stakeholder

theory, namely the instrumental vs. the normative approach (de Colle, 2005).
In the conclusion, a ten-step model for stakeholder management is presented as a

‘management tool’ that could be applied to improve decision-making processes within any
organisation, by enabling managers to identify and respond to legitimate stakeholders’
interests.
Ethical decision- making can be defined in many ways – but a fundamental distinction can be
drawn between two different perspectives on ethical decision making:
 What makes a decision-making process ethical?
 How do organisations deal with ethical issues?
Clearly, these two perspectives imply two very different levels of analysis. The former deals
with the (general) characteristics that makes a decision-making process an ethical process;
the latter focuses on (specific) issues that have an ethical dimension, such as - just to name
a few examples - employee privacy, equity of compensation, whistle-blowing, sexual
harassment, and other human rights issues.
Only ethical decision - making in the first perspective will be discussed, considering how one
particular management approach – namely stakeholder management – can help an
organisation to improve the ethics of its decision-making processes, by taking into
consideration the legitimate interests and claims of its own stakeholders.
Stakeholder management is nowadays a common expression in the business world – yet this
concept and its practical implications on the way stakeholders’ relationships are and should
be managed is still at the centre of a fervent discussion, which crosses a number of
disciplines, notably business ethics, management theory, corporate law and organisation
theory (de Colle, 2006).
Stakeholders have been defined by Freeman (1984/2001) as follows:
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“In a narrow sense, the stakeholders are all those identifiable groups or individuals on whom
the organisation depends for its survival, sometimes referred to as primary stakeholders:
these are stockholders, employees, customers, suppliers and key government agencies.
On a broader level, however, a stakeholder is any identifiable groups or individual who can
affect or is affected by organisational performance in terms of its products, policies and work
processes. In this sense, public interests groups, protest groups, local communities,
government agencies, trade associations, competitors, unions and the press are
organisational stakeholders”(Freeman, 1984/2001).
4.2 A New Perspective on the Organisation: The Stakeholder Corporation

The above definition of stakeholders bears significant implications on the concept of the
organisation itself. With the identification of the wide set of complex and sometimes
intertwined relationships among the organisation and its stakeholders - and among the
stakeholders themselves – a new definition of the corporation is suggested: the ‘stakeholder
corporation’, where the management bears ‘fiduciary duties’, namely, is expected to act in the
interests not only of the organisation’s owners, but on behalf of all its stakeholders. The term
‘stakeholder’ itself has been explicitly created to juxtapose, “with an ironic twist”, as Freeman
(2001) notes, the stockholder perspective.
The reasoning behind this broader definition of the management’s fiduciary duties can be
summarised as follows: in the traditional economic view, it is acknowledged that A
stakeholder management model for ethical decision making shareholders have a legitimate
interest in the organisation because they invest their capitals, which implies that the
management – the agent requested to act on behalf of its principal, the shareholders – have
an obligation towards the shareholders to provide adequate levels of remuneration of the
capitals invested.
The right to maximise the profits is the legal acknowledgement of the legitimate interests by
the shareholders. However, stakeholders also have legitimate interests in the organisation,
not because of their financial investments, but because they have rights that are ‘at stake’ in
the management of the organisation and their well-being can be affected by the activities of
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the organisation. Moreover, stakeholders also contribute in many different forms – for
example, with their skills and labour (employees), goods and services delivered (suppliers),
purchasing decisions (customers) and influence (NGOs, local community) – to the realisation
of the ‘Mission’ of the organisation. In this perspective, each stakeholder can be seen as an
individual or a group, which chooses to act in a cooperative way towards the organisation,
investing its own resources in view of a mutual advantage.
The management of the corporation has therefore additional fiduciary duties towards all the
stakeholders: the obligation to treat all stakeholders with impartiality and balance stakeholder
interests in a fair way (Sacconi, 2000). In other words, the stakeholder approach implies a
shift in the definition of the fiduciary duties of the management: from a mono-stakeholder
perspective (where only the interest of the shareholders is to be taken into consideration) to a
multi-stakeholder perspective, where all the corporate stakeholders are relevant to identify the
management’s fiduciary duties.
This approach, which has been called “a stakeholder theory of the modern corporation”,
(Freeman, 2001) is based on the assumption that the organisation should be managed by
taking into consideration the various stakes that can be typically identified with reference to
the main stakeholder groups, beyond the stockholders:
Employees have their jobs and usually their livelihood at stake: in the relationship with the
organisation, they often develop specialised skills that cannot be used in other industries
(namely, these are specific investments that add value to the working relationship with the
organisation). Employees therefore have a legitimate interest in the security of their jobs, in
fair wages and a safe and meaningful working environment. They expect the corporation to
pay attention to their needs and involve them in decision-making processes that can affect
these issues at stake – for instance, in the case of industrial re-organisations (Freeman,
2001).
Suppliers provide goods and services to the organisation and in turn the organisation is a
client for them. Therefore, suppliers have quotes of their income at stake in the relationships
with the organisation, which can become a vital aspect particularly when talking of small
suppliers who deal with a large corporation as their main or unique client – in this case there
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are usually specific investments done by the suppliers to improve the quality of goods and
services delivered, which generate a stronger dependency on the relationship with their
particular client-organisation. Suppliers therefore expect the corporation to develop a
partnership approach with them, and not to be used simply as a source of raw materials or
services, (Freeman, 2001).
Customers who buy the corporate products originate revenues available for the organisation,
which in turn can be used by the management to improve the quality of the existing goods
and develop new products and services. Customers therefore have a legitimate stake in the
quality of the corporate products, in the information made available on their use and possible
negative impacts originated (for instance, cigarettes, alcohol); they expect the corporation to
deal with them in a service-oriented way, and management to take into account consumer
needs, for example, by adapting a product design, packaging or technical specifications
(Freeman, 2001).
The local community provides the organisation with a vital resource: the environment where
the organisation builds its own facilities, and where its own employees, customers and
suppliers engage with each other. The local community benefits from the contribution of
wealth creation generated by the presence of the corporation, and from the amount of taxes
paid to the local government. But there are also negative impacts to be considered, such as
increased pollution, environmental risks, toxic waste and increase of traffic - all these
represent stakes that the local community has towards the corporation (Freeman, 2001).
Key government agencies are those agencies, which provide the necessary institutional and
legal framework within which a corporation can operate, such as regulatory agencies, market
control institutions and international agencies. The organisation cannot operate without such
framework and the government agencies expect in return that the management acts in a
cooperative way with them, ensuring the organisation is in compliance with all relevant legal
requirements, such as tax payments, lobbying and other sensitive corporate activities
(Freeman, 2001).
The management in the ‘stakeholder corporation’ has a special role to play. On the one hand,
managers are also stakeholders, and their stakes are similar to those of the employees
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described above. On the other hand, managers are also the people who govern the
organisation, and therefore have a duty of safeguarding the welfare of an abstract entity such
as the corporation. Managers also govern the relationships with the different corporate
stakeholders, and this involves mainly an issue of balancing the multiple claims that –
legitimately – stakeholders raise towards the organisation (Freeman, 2001).
The natural implication of the concept of the organisation as a ‘stakeholder corporation’ is to

require that stakeholders’ legitimate interests and concerns are reflected in the way decision-
making processes of the organisation are carried out. However, this highlights a key problem
in stakeholder theory, which has been also been called the Stakeholder Paradox:
“It seems essential, yet in some ways illegitimate, to orient corporate decisions by ethical
values that go beyond strategic stockholders considerations to a concern for stakeholders
generally” (Goodpaster, 1991).
The paradox is that stakeholder theory seems both to require that managers respect their
fiduciary duties towards the stockholders and towards all the stakeholders at the same time,
which leads to the logical contradiction to ask managers to maximise the profit (stockholder
approach) and abandon the profit-oriented mindset (stakeholder approach) at the same time.
The heart of the problem can be illustrated as follows:
 stakeholder theory acknowledges that stakeholders have legitimate interests and
claims towards the corporation
 stakeholder interests can be conflicting with each other
 the management’s role is to govern the organisation, which means taking decisions
that represent a balance among conflicting stakeholder interests
 stakeholder theory does not provide any criterion that can be used in corporate
decision-making processes in order to balance conflicting stakeholder interests.
In other words, stakeholder theory has the great merit of having broadened the traditional
vision of the organisation, helping managers to understand the complex network of the
different stakeholders of the corporation. Yet stakeholder theory has not been able to provide
any criterion that managers can use in their decision-making processes in order to balance
the multiplicity of conflicting stakeholder interests.
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To discuss this problem and its implications on stakeholder management, it is useful to look at
three different approaches that have characterised the development of stakeholder theory.
4.3 Stakeholder Theory: Instrumental, Descriptive, and Normative

Approaches
As Donaldson and Preston (1995) have pointed out, the development of stakeholder theory
has proceeded along three often-confused lines:
Instrumental approach. It assumes that if managers wish to maximise the objective function of
the organisation, then they do a better job by taking into account stakeholder interests. It also
suggests that ignoring stakeholder interests can represent a significant risk for the
organisation. Therefore, its logical implication for the management is that a organisation will
be more successful - and profitable - by catering to the interests of its stakeholders. The
relationships with stakeholders are seen as instrumental to the financial performance of the
organisation.
Descriptive approach. It refers to a number of studies and empirical research aimed at

analysing how managers, organisations and stakeholders in fact interact. The purpose of this
approach is mainly to improve the understanding of the complex relationships among the
different stakeholder groups, identifying and describing the most typical issues at stake.
Normative approach. It assumes that managers should consider stakeholder interests,

regardless of the consequences to the organisation, because there is an ethical obligation to
be responsive to a number of legitimate stakeholder claims. This approach is not about
describing how stakeholder relationships are managed in the real world, but about prescribing
how these should be managed, from an ethical point of view.
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Figure 4.1 Three approaches of stakeholder theory
Source: Adapted from Donaldson and Preston (1995).

The implications on stakeholder management of the three different approaches are
significant, in particular with regard to the instrumental vs. the normative approach.
According to the instrumental approach, managers should be concerned with understanding
and responding to stakeholder interests as a way to improve the corporate performance. As
Donaldson and Preston (1995) suggest, an instrumental stakeholder management approach
could be developed following these logical steps:
First, managers should assess the ability of a particular stakeholder group to pose a
threat to the organisation or to be a supportive ally to help the organisation to achieve
its goals. The decision of the relocation of a corporate plant is given as an example. In
this case, government agencies can play a role in terms of providing fiscal incentives
and relaxing specific local legislation; trade unions could support the move by agreeing
to more flexible work rules and suppliers by promising more favourable terms.
Secondly, the organisation should assess the costs that stakeholders could impose to
the organisation, if they are against the decision taken by the management. In the
relocation case, unions could decide to start to strike, community groups might decide
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to develop forms of public protest, such as boycotts, and existing suppliers might sue
the corporation for contractual breaches.
The final step for the management following the instrumentalist approach would then
be to assess the expected costs and benefits generated by stakeholder (re)actions,
and compare these with the expected net benefits on the overall corporate
performance generated by the decision under examination.
In contrast, the normative approach to stakeholder management emphasises doing ‘the right
thing’, which cannot be based on a cost-benefit analysis. It would follow a different decision-
making process:
First, the managers should consider which legitimate stakeholder interests are involved
in a corporate activity, or by a management decision. As an example, considering the
safety requirements of corporate products, this approach would imply to consider more
than the likely product liability costs in deciding how safe to make consumer goods. It
would in fact require managers to consider that consumers/users as stakeholders have
a legitimate interest in their own health and safety.
Second, the organisation should consider whether its actions could represent a risk of
harming legitimate stakeholder interests. Again, in the case of product safety, if the
management has reasonable concerns that a dangerous or defective product could
represent a risk for consumer safety, they should act in an appropriate way - e.g. by
recalling the whole stock of products on the market potentially involved - even if the
corporate lawyers would not require such a decision, or directly advise against it
because it could increase the organisation’s liability exposure.
Therefore, the normative approach to stakeholder management is not based on a cost-benefit

analysis, but on the evaluation of the moral implications of different corporate strategies, and
suggests undertaking case by case those decisions that seem to represent a morally
justifiable way of balancing stakeholder interests.
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4.4 Identifying and Mapping Stakeholders

The identification and classification of the nature of the stakeholder relationships with the
organisation is the necessary first step in order to develop an effective stakeholder
management strategy. This is, of course, true whether management wishes to pursue the
instrumental or the normative approach above discussed.
Freeman (1997) suggests three levels of stakeholder analysis to identify and map stakeholder
relationships with the corporation:
The rational level. The first level of stakeholder analysis concerns how the corporation
as a whole fits into its larger environment. It requires the management to consider the
history and the nature of the business in which the organisation operates, to accurately
identify those groups who have a stake in corporate activities. As Freeman (1997)
points out, this is only the surface of stakeholder relationships: some stakeholder
groups are still aggregated (for example, under financial community there might be
investment and commercial banks, private investors, financial analysts and the national
bank). Moreover, stakeholder relationships evolve over time in a dynamic way, and
stakes change in relation to the strategic issues under consideration.
The process level. To develop a more meaningful stakeholder map, the second step
requires managers to consider the process level of their organisations. Every
organisation, particularly large and complex ones, bases the realisation of their
strategies on a number of core business processes, standard operating procedures
and management tools. To understand how corporations work and how they manage
stakeholder relationships, it is necessary to look at this dimension of the corporation,
by analysing the organisational processes that are used to implement corporate
strategy and govern the relationships with the external environment – including
stakeholders. The idea is that existing strategic processes that work reasonably well
could be enriched with a concern for multiple stakeholders
The transactional level. The third level of stakeholder analysis deals with the set of
transactions that managers in organisations have with stakeholders. This is the ‘bottom
line’ for stakeholder management, as it concerns how in practise the organisation
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interacts with its stakeholders. Crucial elements for this analysis are the nature of the
transactions involved (e.g. buying goods and services from stakeholders as suppliers
or selling items to stakeholders as customers), the level of the resources allocated by
the corporation to manage stakeholder relationships and the understanding that the
behaviour of organisational members have significant impacts on stakeholders’
perception on the quality of their relationships with the organisation.
Figure 4.2 Stakeholder analysis: the rational level
Source: Freeman (1997).
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4.5 Strategic Prioritisation of Stakeholders

Once all the key organisational stakeholders are identified, the significance of stakeholder
claims towards the corporation needs to be assessed. Different criteria and methodologies
have been developed to provide guidance for prioritisation of competing stakeholder interests.
Some have suggested to look at the relevance of stakeholder groups (assuming that primary
stakeholders’ interest should prevail in case of conflict with secondary stakeholders’
interests), others at their legal status or at the nature of the contractual relationships with the
organisations (implicit or explicit). For example, members of the top management are likely to
have high power and influence over employees’ work projects and high interest. Employees’
families may have high interest, but are unlikely to have power over it.
According to this view, mapping each stakeholder group and its stakes on the grid provides
some useful hints on the most effective stakeholder management strategy:
Figure 4.3 Power/interest grid for stakeholder prioritisation
Source: www.mindtools.com
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Low power, less interested stakeholders – these are stakeholders who neither have a high
interest in corporate plans nor the power to exert much impact. Organisations should keep
these groups informed to the necessary extent, but should not invest too much effort to
manage these relationships. It is advisable, however, to monitor these stakeholder groups as
their ability to influence and their interest could increase over time.
Low power, highly interested stakeholders. These stakeholders have a high interest in the
corporation and its actions. However, they have limited means to influence things. Despite
their low power, such stakeholders could be valuable allies in important decisions. Therefore,
it is advisable to keep them informed about the issues they are interested in. Managers
should keep these people adequately informed, and talk to them to ensure that no major
issues arise. These people can often be very helpful with the detail of specific corporate
projects.
High power, less interested stakeholders. This is a critical stakeholder group. In this group,
we might find, for example, institutional investors or legislative bodies. The relationships with
these stakeholders can be very complex to manage. They behave passively most of the time
and show a low interest in corporate affairs. Nevertheless, they can exert an enormous
impact on the organisation, e.g. when it comes to investments. It is therefore necessary to
analyse potential intentions and reactions of these groups in all major developments, and to
involve them according to their interests. Therefore, it is advisable to keep them informed
about the issues they are interested in, and managers should put enough work in with these
people to keep them satisfied (e.g. through effective corporate communication).
High power, interested stakeholder. These are the most important stakeholder groups that
managers should manage closely in order to consider their key interests in all relevant
strategic decisions, for they have both a high interest at stake in corporate activity and a great
ability to influence over the organisation. These are the groups that managers must fully
engage and make the greatest efforts to satisfy on a regular basis.
In order to develop a meaningful stakeholder management strategy, a normative basis is
needed, by which the various analytical tools and methodologies for stakeholder management
can be anchored.
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In the next paragraphs, attention is given to a number of principles for stakeholder

management that can offer such a normative basis.
4.6 Principles for Stakeholder Management

In this section, the key concepts of three different normative frameworks for stakeholder
management are presented.
4.6.1 The Clarkson principles of stakeholder management
The Clarkson principles of stakeholder management have been developed with the aim to
“make managers more aware of the diverse constituencies that they are obliged to serve and
increase the openness of management processes” (Clarkson Centre for Business Ethics,
1999). According to these perspectives, the management is responsible for negotiating
contracts with the organisation’s ‘voluntary constituents’, and for governing the relationships
with the organisation’s involuntary stakeholders, in order to develop cooperative relationships
with the organisation. The underlying assumption is that managers have a moral obligation to
deal openly and honestly with the organisation’s stakeholders and that managing the
organisation according to a common standard of fairness will contribute to the long-term
survival and success of the organisation. The Clarkson principles of stakeholder management
illustrated in Table 4.1 should therefore be applied by corporate managers as general
guidelines to better manage the performance and impacts of the corporation.
Table 4. 1 The Clarkson principles of stakeholder management

Principle 1 Managers should acknowledge and actively monitor the concerns of all
legitimate stakeholders, and should take their interests appropriately into
account in decision making and operations
Principle 2 Managers should listen to and openly communicate with stakeholders about
their respective concerns and contributions, and about the risks that they
assume because of their involvement with the corporation
Principle 3 Managers should adopt processes and modes of behaviour that are sensitive
to the concerns and capabilities of each stakeholder constituency
Principle 4 Managers should recognise the interdependence of efforts and rewards among
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stakeholders, and should attempt to achieve a fair distribution of the benefits

and burdens of corporate activity among them, taking into account their
respective risks and vulnerabilities.
Principle 5 Managers should work cooperatively with other entities, both public and
private, to ensure that risks and harms arising from corporate activities are
minimised and, where they cannot be avoided, appropriately compensated
Principle 6 Managers should avoid activities that might jeopardise inalienable human
rights (e.g. the right to life) or give rise to risks, which, if clearly understood,
would be patently unacceptable to relevant stakeholders.
Principle 7 Managers should acknowledge the potential conflicts between:
Their own role as corporate stakeholders and their legal and moral
responsibilities for the interests of stakeholders, and should address such
conflicts through open communication, appropriate reporting and incentive
systems and, where necessary, third party review.
Source: Clarkson Centre for Business Ethics, 1999
The Clarkson principles should be regarded as ‘meta-principles’, encouraging and requiring

management to develop more specific stakeholder principles and then to implement those in
accordance with the principles.
4.7 The AA1000 Principles for Stakeholder Engagement

AccountAbility1000 Framework (AA1000) is the standard launched in 1999 by the Institute of
Social and Ethical AccountAbility with the aim “to improve organisational accountability and
performance by learning through stakeholder engagement and increasing quality in social and
ethical accounting, auditing and reporting.” (AccountAbility, 1999).
AA1000 has been developed as a guidance document to help organisations to integrate their
stakeholder engagement processes into daily activities. The Framework helps users to
establish a systematic stakeholder engagement process that generates the indicators,
targets, and reporting systems needed to ensure its effectiveness in overall organisational
performance. AA1000 includes a number of principles for stakeholder engagement,
articulated in a hierarchical way, as shown in Figure 4.4.
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Figure 4.4 AA1000 principles
Source: AccountAbility (1999).
At the top of the AA1000 hierarchy, there is the Accountability principle, which encompasses
three dimensions:
 transparency: the duty to account to all stakeholders with a legitimate interest
 responsiveness: concerns the responsibility of the organisation to be accountable for
its acts and omissions, including the processes of decision making and results of these
decisions
 compliance: refers to the duty to comply with the law and agreed standards regarding
both the organisational policies and practises.
The next principle of inclusivity states that the organisation should “reflect in every stage of
the social and ethical accounting, auditing and reporting process the aspirations and needs of
all stakeholder groups … including ‘voiceless’ stakeholder such as future generations.”
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Stakeholder views are to be obtained through an engagement process that lies at the heart of
AA1000 framework. This perspective is not to be confused with a request for shifting
responsibilities from the management to the organisational stakeholders: “engagement is not
about an organisation abdicating responsibilities for its activities, but rather using leadership
to build relationship with stakeholders, and hence improving the organisation’s accountability
and performance.”
4.8 The Social Contract Approach for Balancing Stakeholder Interests

The social contract approach provides a normative criterion to balance conflicting stakeholder
claims based on the idea of a (ideal) fair agreement. Its basic assumption is that all
stakeholders who contribute to the fulfilment of the corporate mission (the ‘primary’
stakeholders, in Freeman’s terms) are entitled to a fair share of the benefits generated with
their contributions. But the social contract approach also cares for other stakeholders (the
‘secondary’ stakeholders): these are those individuals or groups whose interest is involved
because they undergo the ‘external effects’, positive or negative, of corporate activity, even if
they do not directly participate in any transaction with the organisation, so that they do not
contribute to, or directly receive value from the organisation. The social contract approach
states that managers have a moral obligation to take into consideration the legitimate
interests of all the organisation’s stakeholder groups, both those contributing to the
achievement of corporate objectives, and those who are affected by corporate activity.
The concept of fairness is at the heart of this approach: in the social contract perspective,
‘fair’ is defined as “what rational people would unanimously and consensually accept” (de
Colle, Sacconi and Baldin 2003). Translating this concept to the organisation and its relations
with stakeholders, the social contract represents the ideal fair agreement that can be reached
between the organisation and all its stakeholders, even in the presence of conflicting claims.
To reach such an agreement, some conditions must be satisfied (Rawls, 1971):
 The legitimate interests of all stakeholders involved in the decision should be taken into
consideration
 All must be informed and not deceived
 No one must be have suffered or suffer for abuses of power or constraint
 Agreement must be reached voluntarily through rationality
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The hypothetical reasoning that managers should follow in order to apply the social contract
approach to balance conflicting stakeholder claims can be described as follows:
 Identify all stakeholder groups involved in a particular decision
 Imagine inviting a representative of each stakeholder group to a roundtable discussion
 Imagine that, when entering in the room, everyone falls behind a ‘veil of ignorance’, in
which nobody knows his/her identity and which particular interests is represented
 Ask everyone to put him/herself in the position of all the others and write the
agreement that everyone would accept, knowing that when they will leave the room,
the veil of ignorance will disappear.
If the agreement proposed is found acceptable to some stakeholders but not to others, this
agreement must be discarded and the procedure repeated until there is an agreement that is
unanimously accepted.
Following this hypothetical reasoning ensures that the terms of the agreement reached are
those that each stakeholder will be willing to accept from its particular point of view.
In other words, the social contract is the agreement that would be reached by the
representatives of all the organisation’s stakeholders in a hypothetical situation of impartial
choice.
4.9 Conclusion
10-step Stakeholder Management Model for Ethical Decision Making
The discussion of key principles and approaches to stakeholder management has pointed out
a number of lessons on the ‘normative’ foundations and the ‘instrumental’ devices that can
help managers to improve the decision-making processes that govern the relationships with
its stakeholders.
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Figure 4.5: A 10-step model for stakeholder management for ethical decision making
In this final section we present a Stakeholder Management Model aimed at improving the
ethical decision making of organisations (see Figure 4.5) by enabling managers to identify
and take into consideration legitimate stakeholder interests.
Each step of the model describes key elements needed in order to design and implement an
effective stakeholder management approach within organisations:
1. Identify and map all stakeholders
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The starting point for the organisation is to identify all its stakeholders, including both
stakeholders in the strict sense (those who have an interest at stake because they have made
specific investments in the organisation in the form of human, financial capital or social
capital) and stakeholders in the broad sense (those individuals or groups whose interest is
involved because they undergo the ‘external effects’, positive or negative, of corporate
activity).
2. Assess issues at stake

The legitimate claims of each stakeholder group should be identified and assessed, by
understanding the nature of their relationship with the organisation (the analysis of the
rational, process and transactional level addresses this phase).
3. Identify corporate values and existing commitments

Stakeholder management is a way for the corporation to define its own stance with respect to
conflicting stakeholder claims. To reach this aim, it is important that the management
demonstrate that corporate values and existing commitments underpin the whole stakeholder
engagement process.
4. Prioritise issues
At this stage, the ‘strategic’ element of stakeholder management for ethical decision making
comes into place. The management has to decide on the basis of which criteria stakeholder
claims should be prioritised, in order to provide the best response to the most urgent issues at
stake (the Power/Interest Grid addresses this problem, by providing a methodology for
classifying and prioritising stakeholder claims by assessing their power and interests with
regards to the organisation).
5. Review/develop policies
These are decision-making processes dealing with the design of practical solutions to specific
issues. As Wheeler and Sillanpää (1994) have pointed out, potential policy areas may
include, with regard to the different stakeholder groups:
The shareholders/owners
 Remuneration policy
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 Dividends policy
 Mergers and acquisitions policy.
Employees and managers

 Human resources policy
 Occupational health and safety policy
 Corporate code of ethics for individual rights and responsibilities.
Customers
 Complaints policy
 Marketing and advertising policy.
The Community
 Volunteering policy
 Donations policy.
Business partners, suppliers and small businesses

 Purchasing policy
 Payment policy
 Code of ethics (regulating gifts).
Global economy
Ethical and human rights policy.
The planet and future generations

 Environmental policy.
 The animal kingdom
 Animal welfare policy.
6. Set objectives
As with any other management process, stakeholder engagement is more effective if specific
objectives are identified in relation to the stakeholder issues that are at stake in a particular
decision-making process of the organisation. When initiating the dialogue with a specific
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stakeholder group, the management should clarify from the beginning what the intended
objectives of the dialogue are.
7. Measure performance
The corporation should be able to tell how well its stakeholder management processes are
going – which of course depends on what objectives the organisation has set for a specific
stakeholder engagement process. In general, measures in this area relate on the one side to
the quality of information that the stakeholder consultation delivers to the management – i.e.,
how useful it is for the decision-making process involved – and on the other, on the increase
of stakeholder trust and confidence towards the organisation generated by the process.
8. Communicate and report

A crucial element for achieving the benefits of stakeholder management is communication
and reporting activities, both internally, to provide the management with useful information on
stakeholder views and interests, and externally, to demonstrate to stakeholders that the
organisation ‘walks the talk’.
9. Review commitments and policies

The initial position of the organisation on a specific issue that has been the focus of a
stakeholder consultation process should be reviewed as a result of the views expressed by
stakeholders during the consultation. Similarly, corporate policies should be reviewed to
develop the most appropriate company response to issues raised by the stakeholders during
the consultation process.
10. Continuous engagement

This final step of the model is an element concerning the whole process of stakeholder
management. It refers in fact to the need of engaging with stakeholders as an ongoing
approach, to allow managers to consider stakeholder views in every decision-making
process.
This stakeholder management model can be seen as a management tool, that is, as a
resource that managers can apply to improve the quality of decision-making processes of
their organisation by identifying - and systematically taking into consideration - the legitimate
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interests and concerns of their organisation’s stakeholders. Better understanding of

stakeholder views and effectively responding to their legitimate interests can help managers
in many strategic decision-making processes, such as planning the construction of a new
factory in a foreign country, finalising the design of a new product to be launched in the
market, introducing a policy for supplier screening based on social and environmental criteria,
or developing a new human resources policy to respond to human rights issues.
As any other management tool, it is not perfect or unique. The ten steps described are not to
be meant as the only possible elements needed for developing a stakeholder management
approach; also, the sequence of steps is not to be taken in a strict prescriptive sense. To be
really effective, in fact, the ten steps should be adapted by every organisation according to
the specific nature and quality of the existing relations with its stakeholders.
In conclusion, stakeholder engagement can be seen as a ‘meta-process’: a process that can

be used to improve decision-making processes within any organisation, bringing into it the
stakeholders’ perspective, and thereby helping the management to better serve the interests
of their stakeholders - which at the end can help the organisation to improve its overall
performance.
? THINK POINT
1. Critically discuss how the organisations can balance the profit motive of doing business
with the well-being of the stakeholders.
2. “Economic value is created by people who voluntarily come together and co-operate to
improve everyone’s circumstances. Managers must develop relationships, inspire their
stakeholders and create communities where everyone strives to give their best to deliver the
value the firm promises”. With reference to the quotation, provide an opinion of whether firms
really exist to benefit those who take part in their economic growth or and how do managers
do this without compromising organisational profits?
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SECTION 5
KEY FEATURES OF THEORIES OF ETHICS
Chapter outcomes
 Determine the application of ethical theories in a business context
 Compare and contrast descriptive, normative and meta ethics
 Analyse the teleological and deontological framework in relation to ethics
 Analyse natural laws and human rights and their relation to ethics
 Appraise the implications of ethics in achieving organisational goals
Readings:
Boatright, J.R. (2011) Ethics and the Conduct of Business Seventh edition. Prentice Hall
5.1 Philosophical Ethics or Moral Philosophy - What is Ethics?

Much of the recent interest in ethics and moral behaviour in business comes from Enron and
Worldcom, as scholars, educators, practitioners, and the public seek to understand the
behaviour of executives in these firms. Many have chosen to view these cases from the
perspective of ethics, that is, the behaviour of these executives is seen as unethical and the
explanation is that they are unethical or immoral people, (Scholl, 1981)
The Cambridge Dictionary of Philosophy states that the word ethics is "commonly used
interchangeably with 'morality' ... and sometimes it is used more narrowly to mean the moral
principles of a particular tradition, group or individual. The word "ethics" in English refers to
several things. It can refer to philosophical ethics or moral philosophy - a project that attempts
to use reason in order to answer various kinds of ethical questions. The English word “ethics”
is derived from an Ancient Greek word êthikos, which means "relating to one's character."
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The Ancient Greek adjective êthikos is itself derived from another Greek word, the noun êthos
meaning "character, disposition.”
5.2 Branches of Ethical Examinations

It is important to consider certain types of ethical examinations when you consider ethics or
business ethics.
There are basically four branches of ethical examinations namely:
5.2.1. Descriptive Ethics - How the world is?

Descriptive ethics deals with the factual investigation of moral standards. It describes moral
praxis (moral opinions, attitudes and actions) up through history and today. It also relates the
presentation of facts that relate to a specific set of circumstances related to an ethical issue
(Almond, 1998).
5.2.2. Normative ethics -How the world should be?

This is a systematic investigation of moral standards (norms and values) with the purpose of
clarifying how they are to be understood, justified, interpreted and applied on moral issues
(Almond, 1998).
Normative ethics relates to:

 What actions and decisions are right or wrong from an ethical point of view
 What makes an action or a decision morally right or wrong or good or bad
 How should we organise basic social institutions (political, legal economic), and how
should such institutions distribute benefits and burdens (rights, duties, opportunities
and resources) among affected parties
 Questions of justice (for example, what is a fair distribution of benefits and burdens in
society?)
 Political philosophy
 Moral assessments of a person’s character or character traits, for example, honesty,
generosity
 Assessments of motives and intentions behind the acts
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 Assessments of moral and legal responsibility (Almond, 1998, Rossouw and Van
Vuuren 2012)
5.2.3. Meta-ethics
Meta-ethics is the study of ethical terms, statements and judgements.
 It is the analysis of the language, concepts and methods of reasoning in ethics.
 It addresses the meaning of ethical terms such as right, duty, obligation, justification,
morality, responsibility.
 Moral epistemology (how is moral knowledge possible?)
 Investigates whether morality is subjective or objective, relative or non-relative, and
whether it has a rational or an emotional basis, (Almond 1998, Rossouw and Van
Vuuren 2012).
5.2.4 Applied ethics

Applied ethics is a part of normative ethics that focus on particular fields. It relates to a
philosophical examination, from a moral standpoint, of particular issues in private and public
life that are matters of moral judgment” (Almond 1998, Roussow and Van Vuuren 2012). Such
fields include:
 Bioethics
 Animal ethics
 Environmental ethics
 Intergenerational ethics
 Climate ethics
 Business ethics
 Computer ethics (Almond 1998; Van Vuuren 2012)
5.3 Ethical theories can be seen within the realm of several frameworks
briefly described below.
5.3.1 Teleological Frameworks

There are three teleological frameworks that can be used to determine the role of ethics
where self-interest is concerned, namely:
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Ethical Egoism- Each individual’s own self-interests drive him. On balance, there are
more positive than negative results.
Utilitarianism - Each individual’s actions will be based on providing the greatest good
to the greatest number of people.
Sidgwick’s Dualism - The middle ground between Ethical Egoism and Utilitarianism.
Sidgwick argues that self-interest can be included in determining the greatest good for
the greatest number and that the other two theories are not mutually exclusive (Almond
1998, Rossouw and Van Vuuren 2012).
5.4 Deontological Frameworks

There are basically three deontological frameworks that guide an individual’s ethical decisions
namely:
5.4.1. Existentialism –The determination of right and wrong is based on the free will of
the person making the decisions. As a result, duty is connected with actions - each
individual determines the value of his/her actions (Boatright, 2012).
5.4.2. Contractarianism(Social Contract Theory) - All individuals agree to social

contracts to be members within society. As a member of society, each individual
agrees to certain social norms. As a result, the values and norms developed by society
must be fair to everyone who is a member of society (Almond, 2010, Boatright, 2012).
5.4.3. Kant’s Ethics – The individual free will to make decisions should to be
converted into universal free will. Kant attempts to bridge the gap between
existentialism and contractarianism by proposing that each individual would act in the
same manner as anyone else in society if they also had to address the same set of
circumstances, (Almond, 2010; Boatright, 2012).
Modern ethics has developed two competing traditions that focus on determining the ethical
character of actions. Both these traditions address the question: What actions are right? The
competing traditions are:
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Teleological – Consequential - argues that the rightness of actions is determined solely by

the amount of good consequences that flow from them, and not by any feature of the actions
themselves.
Deontological – Non-Consequential –claims that actions are inherently right, for instance
telling the truth, or inherently wrong, namely stealing or cheating. In other words, rightness
and wrongness depend on the nature of the action, e.g. bribery is wrong by its very nature
irrespective of consequences.
Virtue Ethics – which asks: What kind of person should I be? The emphasis is on moral
character rather than right action. The Aristotelian (good life) is possible only for virtuous
persons.
Justice like rights is an important moral concept with a wide range of application in the
evaluation of the actions of individuals and broader societal institutions and practises.
The main Ethical Schools and Theories are:
 Deontology : Kantianism, Natural Law (Human Rights) Justice and Fairness
 Consequentialism: Utilitarianism: Rule and Act
 Virtue Ethics: Aristotle
 Justice (as a wider concept):
Capitalism
Socialism
Egalitarianism
Libertarianism
Utilitarian Social Welfarism (Almond, 2010, Boatright, 2012).
5.5 Deontology – Non-Consequentialism

This emphasises rules, duty and rights.
Actions are right if they respect rules and wrong if they violate them.
Other examples of non-consequential reasoning in ethics relate to arguments based on
principles such as: the Golden Rule - Do unto others as you would have them do unto you –
reversibility of an action; those that appeal to basic notions of human dignity and respect for
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persons; and obligation and duty as the fundamental principle in Deontology, (Boatright,
2012, Velasquez, 2012).
5.6 Kant and Kantianism

Immanuel Kant (1724-1804) is well known for his famous ethical treatise Foundations of the
Metaphysics of Morals (1785) in which he set out to restore reason to what he regarded as its
rightful place in our moral life. The ethical theory developed by him provided a foundation for
moral rights. An outstanding explanation of Kant’s moral theory will be found (amongst others)
in Roger Sullivan’s Immanuel Kant’s Moral Theory (1989) New York: Cambridge University
Press.
Kant put forward the notion that there are some things that we ought to do and other things
that we do not, merely by virtue of being rational. Moral obligations arise solely from moral law
that is binding on all rational beings. Reason, according to Kant, makes possible free-will. A
rational being is one who is autonomous.
Kant based his theory on the moral principle that he called the Categorical Imperative that
requires that everyone should be treated as a free person equal to everyone else. Everyone
has a moral right to such treatment and a correlative duty to treat others in this way.
The Categorical Imperative was regarded by Kant as a command that held, no matter what
the circumstances. This command or imperative is according to him unconditional.
Act so that you treat humanity whether in your own person or in that of another, always as an
end and never as a means only.
Kant believed that reason dictates that the principle according to which one is acting (an
action’s maxim) should be able to be a universal law:
Act only according to that maxim by which you can at the same time will it that it should
become a universal law of nature. A person’s reason for acting must be universalisable.
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The categorical imperative placed the moral authority for taking an action on an individual’s
duty toward other individuals and humanity. Performing an action solely because it is our duty
is what Kant refers to as a good will - being good without qualification.
The theory is based on two formulations of the Categorical Imperative each explaining the
meaning of basic moral right and correlative duty, (Velasquez,1998).
The appeal of Kant’s theory may be summarised as follows:
It seems to capture some fundamental aspects of our moral views, for example “How would
you like it if he did that to you?” invokes reversibility, and “What if everybody did that
unacceptable thing?” invokes universalisability.
Many philosophers regard the principle of Categorical Imperative and the universalisability of
judgments favourably. They offer consistency and counter temptations to make exceptions or
apply double standards. Both principles of universalism and respect for persons (even if
insufficient for deciding all questions of ethics) are important avenues of ethical reasoning.
 It provides a strong foundation for rights as these exist in our nature as distinct from
those rights that are bestowed by external agents and which may not be as resilient.
 It also makes sense of cases in which consequences seem to be irrelevant, for
example, a manufacturer’s obligation to honour a warranty on a defective product even
if costs exceed the benefits of satisfying consumers.
The theory offers a good way of evaluating motives from which actions are performed, i.e.
genuine concern and duty or self-aggrandisement and insincerity (Almond, 2010, Boatright,
2012 and Velasquez 2012).
5.7 Natural Law and Human Rights

Another approach in Deontology which can be seen as complementary to Kantianism is the
natural law theory. During the very early classical period, human beings would have found
themselves in an almost near perfect state of nature in which the law of nature operated. This
law of nature was based on moral principles that human beings would have searched for and
discovered by the use of what was regarded as their God-given reason. The law of nature
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was considered to be of a higher order than mere human laws. However, the state of nature
also had its perils and gradually the law of nature took on a political dimension creating
government whose primary purpose was to provide protection of the natural rights of people,
and this later developed into a comprehensive political and legal theory, (Almond, 2010,
Boatright, 2012 and Velasquez 2012).
There is however, some limitation to this theory. Because of the moral significance attached
to rights there is a tendency to stretch the concept to a point where its meaning could be
diluted or even lost, or they could be described as political goals.
In business as in other situations, disagreements could arise over the very existence of a
right, for example, should an employee have a right to due process in discharge decisions?
5.8 Justice and Fairness

This Deontological approach deals with fairness and equality and is a crucial aspect of
morality. The moral authority that decides what is right and wrong, concerns the fair and
equitable distribution of opportunities and hardships to all, (Almond 1998 and Boatright 2012).
Justice and Fairness are concerned with comparative treatment given to members of a group
when:
 Benefits and burdens have to be distributed
 Rules and laws are administered
 Members of a group cooperate or compete with each other
 People are punished for the wrongs they have done
 People are compensated for the wrongs they have suffered.
Justice and fairness are usually divided into the following categories:
Distributive Justice: is concerned with fair distribution of society’s benefits and burdens, e.g. if
there is a shortage, who gets what is available? If there is a burden such as taxes, then
everyone should bear their fair share of the burden. The moral rights of some individuals
cannot be sacrificed in order to secure a somewhat better distribution of benefits for others; at
the same time correcting extreme injustices may justify restricting some individual’s right, e.g.
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property rights may legitimately be redistributed for the sake of justice (Rossouw and Van
Vuuren).
5.9 Co-operation and Competition

Justice implies taking only a proper share of some good. An unjust person (lacking virtue) will
grasp at the lion’s share, while a shirker will avoid bearing a fair share of some burden e.g.
tax evaders. While co-operation and competition are accepted, they have to be underscored
by what is just and fair.
Procedural Justice
This designates fair, decisive practises, procedures and agreements among parties. It asks:
Have the rules and processes that govern the distribution of rewards and punishments, and
benefits and costs, been fair? Similar cases should be treated alike.
Retributive Justice
This is the just imposition of punishment and penalties upon wrong-doers. A criterion for
applying this principle is: Does the punishment fit the crime? – It is not too lenient or too
severe?
Compensatory Justice
This is the just way of compensating people for the losses they have suffered when they were
wronged by others, that is, the past harm and injustice experienced. The compensation
should in some sense be proportional to the loss suffered, e.g. loss of properties under the
Group Areas Act in South Africa; reparation payments through the Truth and Reconciliation
Commission to those who suffered loss of life, property, dignity, etc., under the apartheid
regime; affirmative action programmes for centuries of injustice.
Corrective Justice
This pertains to laws themselves which as instruments of justice, should be considered just.
Distribution has to take into account who has suffered an unfair share of the costs of a
policy, e.g. as in any form of business scenario, and if there are others who have unfairly
benefited from a policy.
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In business, justice also requires that compensation be made available to

 Victims of discrimination (racial, gender, disability)
 Consumers receiving defective products (without abusing the warranty)
 Victims of industrial accidents.
Justice is also an important concept in the evaluation of different forms of social organisation,
for instance, one can ask if the economic system in which business activities are carried on is
a just system. Similarly, this can apply to educational, health, welfare and other such systems.
Practical problems of using the principle of justice do arise. Within the jurisdictions of the
State and the legal system, ethical dilemmas are solved by procedure of law. The problem
arises when the dilemma or issues are solved outside the legal system, (Rossouw and Van
Vuuren, 2010, Boatright 2012).
The questions that arise then are:

 Who decides who is right and who is wrong?
 Who has moral authority to punish whom?
 Can opportunities and burdens be fairly distributed to all when it is not in the
interest of those in power to do so?
Despite the shortcomings, the principle of Justice adds an essential and unique contribution
to other ethical principles. It forces one to ask how fairly benefits and costs are distributed to
everyone regardless of power, position, wealth, station in life and so on ( Boatright 2012,
Velasquez 2012).
5.10 Consequentialism
Consequentialism is a teleological principle derived from the Greek “telos” meaning “end” and
holds that the rightness of actions is determined solely by the amount of good consequences
they produce. Actions are goal-directed and are justified by virtue of the end achieved. The
greatest happiness of all is the right and proper and universally desirable end of human
action, (Rossouw and Van Vuuren, 2010).
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Jeremy Bentham (1748-1832) is generally acknowledged as the creator of classical

Utilitarianism. Classical Utilitarianism holds that pleasure is ultimately the only good and pain
is the only evil. Goodness is defined as human well-being, so what benefits is good and what
harms is evil. For Bentham the two concepts of importance were:
That pleasure and pain govern our lives; and
That pleasure makes life happier and pain makes it worse.
Pleasure and only pleasure was ultimately good, thus pleasure acquired a hedonistic feature.
From this flowed his notion of utility, namely the net benefits and usefulness of any sort
produced by an action. This utilitarian principle may be seen in the following:
An action is right from an ethical point of view if and only if the sum total of utilities (net
benefits) produced by that act is greater than the sum total of utilities produced by any other
act that the agent could have performed in its place - that one action whose net benefits are
greatest by comparison to the net benefits of all other possible alternatives.
Bentham attempted to make ethics practical and even proposed a system whereby the
amount of pleasure and pain that an action produces could be measured - which he called the
Hedonistic Calculus (Rossouw and Van Vuuren, 2010).
Utilitarianism contends that something is morally good to the extent that it produces a
greater balance of pleasure over pain for the largest number of people involved - the greatest
good of the greatest number. The moral character of actions depends on the extent to which
the actions actually help or hurt people.
Why should such actions be regarded as moral or ethical? An answer to this may be:
because ethics is about seeking (or maximising) the ‘goods’ or ‘ends’ that people regard as
worthy pursuits and which are relevant to human happiness and well-being.
John Stuart Mill (1806-1873) refined Bentham’s theory by developing a more defensible
version of the Utilitarian position. He introduced the element of quality in pleasure, the higher
order pleasures such as arts and intellectual pursuits that human beings enjoy over and
above the lower order or basic pleasures.
Act and Rule Utilitarianism
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There are two versions of Utilitarianism - one in which each act is judged on its consequences
- Act Utilitarianism (AU) and the other in which an act is judged on its consequences of
following the relevant rule - Rule Utilitarianism (RU). These may be formally expressed as
follows:
AU - An action is right if and only if it produces the greatest balance of pleasure over pain for
everyone.
RU - An action is right if and only if it conforms to a set of rules the general acceptance of
which would produce the greatest balance of pleasure over pain.
AU seems to be a simpler theory providing an easily understood decision procedure.
RU seems to give a firmer ground to rules of morality and to role obligations considered to be
problems for all teleological theories (Rossouw and Van Vuuren, 2010, Boatright 2012,
Velasquez 2012).
The appeal of Utilitarianism may be summarised as follows:

It is a powerful, widely accepted and highly influential theory in economics with special
reference to issues and dilemmas in business and as a basis for cost/benefit analysis.
It offers a highly prized value, viz. efficiency.
The principle of utility provides a foundation for rights and justice and a relatively firm and
coherent basis for business ethics by fitting in with the intuitive criteria used in discussions of
moral conduct and moral obligations, taking everyone’s interest into account.
Its limitations may be seen in the following:

 The hedonistic thesis does not consider higher order pleasures
 It lacks guidance for comparing quality with quantity of pleasure
 There is the problem of measuring “utility” (Rossouw and Van Vuuren, 2010,
Boatright 2012, Velasquez 2012)
5.11 Virtue Theory

The focus of ethical theories examined thus far has been on action as the key subject matter.
The concern has been with what actions are right and what actions are wrong - an action-
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based focus that invariably overlooked motivations and feelings. The emphasis has been on
ethical principles that ask: what should I do?
We also need to examine the character of the agent (person) who carries out the action. An
agent-based focus examines a person’s moral character and whether or not this exhibits
virtue or vice. It asks the question: what should I be? This is necessary in order to be able to
make judgments about the moral character of a person and about the morality of the person’s
actions.
According to Aristotle a moral virtue is a habit that enables one to exercise reason in all
actions. One lives according to reason when one knows and chooses the reasonable middle-
ground between excesses and deficiency in one’s actions, emotions and desires - neither too
much nor too little. Virtues avoid unreasonable extremes while vices are habits that go to
extremes. Prudence guides one on what is reasonable in a given situation.
Some Examples
 Action of giving people goods they exactly deserve is justice (virtue) or giving too little
or too much is injustice (vice)
 Emotion of fear - responding with courage (virtue) in a reasonably daring way or
responding with recklessness (vice) which is too daring or with cowardliness (vice) not
daring enough
 Desire for food met with temperance (virtue) - not under - or over-indulging. Gluttony
(vice) is unreasonably excessive and austerity (vice) is unreasonably too little
A definition of moral virtue will reflect the following:

 An acquired disposition – not merely a natural character like intelligence, beauty or
strength
 Something we actually practise as exhibited in our habitual behaviour
 Something we admire in a person and that is praiseworthy because it is an
achievement, (Boatright 2012, Velasquez 2012)
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Virtues are means to and constituents of happiness. They are character traits that are
essential to a good life, for example, honesty. Moral virtues are those dispositions that are
generally desirable for people to have in the kinds of situations they typically encounter in
their daily lives. They help us to deal well with all the exigencies of human life. For instance, if
in a situation tempers flare, we need the virtue of tolerance and tact. Since good must be
distributed by consistent criteria, we need the virtues of fairness and non – discrimination,
(Boatright 2012). Virtue ethics makes being virtuous an essential element in leading a moral
life.
5.12 Virtue Ethics and Business

Virtue ethics presupposes a view about human nature and the purpose of life. Applying virtue
ethics to business also depends on a context that includes some conception of the nature and
purpose of business.
Virtues of a good business person need not be altogether different from those of any good
person; but one must not overlook the fact that business faces situations that are peculiar to
business and need certain business-related traits. Therefore, some virtues of everyday life
are not necessarily wholly applicable to business. For example, a manager cannot continue to
be caring of employees when situations demanding laying off of employees is unavoidable, or
when some ‘bluffing’ or ‘concealment’ is accepted in certain negotiations.
In the consideration of theories of virtue, it may be observed that there is no single simple
relationship between a theory of virtue and theories of ethics. However, an ethic of virtue
enhances moral principles by looking at the character that people are required to have.
Ethical principles agree that certain virtues are essential and important (Boatright, 2012).
5.13 Theory of Justice

It has been seen that justice is an important moral concept on an individual level. On a
societal level it is an equally important moral concept used in evaluating actions of society’s
institutions, essentially around issues of the most just distribution of goods such as wealth,
income, status, power and control as these are reflected in social, legal, political and
economic practises and institutions (Boatright 2012).
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5.13.1 Capitalism
Capitalism is a worldwide system. The economies of capitalist nations are interconnected in
complex ways even though their specific systems of capitalism vary. It is no more the
monolithic system it was believed to be especially since the collapse of communism. The new
century with its simultaneous upheavals in politics, economics and technology may well usher
in the development of different forms of international capitalism.
It is an economic system whose major portion of production and distribution is in private

hands in the form of companies and business organisations that exist separately from people
associated with them. It is also an economic system based on profit motive which is a value,
based on a critical assumption about human nature that characterises human beings as
basically economic creatures who recognise and are motivated by their financial interests. In
turn, this pursuit of self-interest gives the system the characteristic of uneven distribution of
wealth.
Capitalism is also used interchangeably with the concept of competition of the free market –
another one of its values. It generally rejects central economic planning, preferring to let the
market forces determine production and distribution, which implies that government regulation
is not necessary. Yet it has been observed that imbalances and inequalities still exist
(Boatright, 2012).
5.13.2 Libertarianism
Libertarianism rests on the value of liberty. It is based on the presumption that freedom from
human constraint is necessarily good and all constraints imposed by others are necessarily
evil, except when needed to prevent the imposition of greater human constraints.
Robert Nozick, one of the exponents of Libertarianism claimed that the only basic right that
everyone possesses is the negative right to be free from the coercion of other human beings.
The only circumstances under which coercion may be exerted on a person, is when it is
necessary to keep that person from coercing others.
The Libertarian view justifies free use of property, freedom of contract, institution of free
markets in which exchange of goods can take place as people choose without restrictions,
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and the elimination of taxes for social welfare programmes. Thus there appears to be no
place for positive rights in this system.
Nozick, Father of Libertarianism, strongly believed in the ability of people to forge their own
destinies without communal interference. This claim in effect means:
“From each according to what he chooses to do, to each according to what he makes for
himself (perhaps with contracted aid of others), and what others choose to do for him and
choose to give him of what they’ve been given previously. In other words: From each as they
choose, to each as they are chosen” (Marcus, 1998:186). This for Nozick, constitutes a just
society.
One of the criticisms of this stance is that: since there are so many different kinds of
freedoms, allowing one kind of freedom to one group entails restricting some other kind of
freedom for some other group. Therefore, if constraints require justification, then so will
freedom.
5.13.3 Socialism
Justice in Socialism is based on the values of needs and abilities, and it is stated that: “From
each according to his ability, to each according to his needs” (Velasquez, 1998). In other
words, work burdens should be distributed according to peoples’ abilities, and benefits should
be distributed according to peoples’ basic needs. This socialist view underscored the thinking
and writings of Lenin and Marx.
Benefits produced through work should be used to promote human happiness and well-being.
This, according to socialism, is the only way that justice will be promoted in society.
Among the criticisms of this principle is: the theory if enforced, would obliterate individual
freedom since the type of work a person enters into is determined by his/her ability and not
his/her choice. Also, goods one gets are determined by needs and not free choice, therefore if
one needs a pair of shoes and some flowers for the house, one would have to take the shoes
only.
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In socialist societies, some central government agency decides what tasks should be
matched to ability and what goods are allotted to needs - all this at the expense of people’s
freedom of choice (Velasquez, 1998).
5.13.4 Utilitarian Social Welfarism

In Utilitarian Social Welfarism, the underlying value is happiness which is a desirable end.
The Doctrine of Utilitarianism has come to be used in the search for balance between
freedom for self-realisation (individual) and a collective concern for the general well-being -
what produces the most good (utility, happiness) for the most people. This then becomes an
index of a just society. Attempts at reshaping social caring programmes usually resort to the
Utilitarian philosophy and personal freedoms as dominant motifs but with some necessary
adjustments.
Sometimes own happiness has to be sacrificed for the happiness of others. For example,
where the majority forms an underclass, the need arises for a search for a moral rule that will
maximise human happiness if it were universally followed. Rule Utilitarianism will be the
answer. One cannot perpetuate a situation in which the underclass has a function for the
advantaged. This would be morally wrong, therefore, unjust. Rule utilitarianism will yield a
higher level of social utility because it requires wider respect for other people’s rights and for
one’s own specific obligations (Chryssides & Kaler, 1993:135).
5.13.5 Egalitarianism
In his book A Theory of Justice published in 1971, John Rawls, an American philosopher,
aimed to give an account of justice that embodies a Kantian conception of equality, and as a
modern alternative to Utilitarianism. Rawls (1971) combines Kant’s respect for each individual
with the utilitarian preference for the greatest good for the greatest number.
Rawls (1971) argues from the principles of the social contract theory. He starts off
interestingly, with a purely hypothetical situation of equal liberty and an initial position of
equality. In this situation the principles of justice are chosen “behind a veil of ignorance” as it
were. The assumption is that this is an appropriate status quo and therefore, the fundamental
agreements reached in it are fair principles of justice being agreed to in an initial situation that
is fair.
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5.14 Rawls’ Principles of Justice

Each person has to have an equal right to the most extensive basic liberty compatible with a
similar liberty for others. Social and economic inequalities are to be arranged so that they are
both:
 Reasonably expected to be to everyone’s advantage
 Attached to positions and offices open to all
These principles, Rawls maintains, are a special case of a more general concept of justice
that can be expressed as follows:
All social values - liberty and opportunities, income and wealth, and the bases of self-respect
are to be distributed equally unless unequal distribution of any, or all of these values, is to
everyone’s advantage.
Rawls (1971) considered justice as the first virtue of social institutions. He maintained that in
a just society the liberties of equal citizenship is a given. Certain assumptions underlined his
principles of justice.
A society is a more or less self-sufficient association of persons who in their relations to one
another recognise certain rules of conduct as binding and who for the most part act in
accordance with them. These rules specify a system of cooperation designed to advance the
good of those taking part in it.
Despite the above, society is typically marked by a conflict as well as by an identity of

interests. Also, social cooperation and an identity of interests make possible a better life for
all; and conflict of interests comes about because persons are not indifferent to how the
greater benefits produced by their cooperation, are distributed. Each prefers a larger share to
pursue their ends.
Thus Rawls (1971) arrived at the need for a set of principles that would provide a way of
assigning rights and duties in the basic institutions of society and that would define the
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appropriate distribution of the benefits and burdens of social cooperation. These constituted
his principles of social justice.
The basic structures of society that Rawls (1971) had in mind were political, economic and
social arrangements. The various social positions contained in this structure present
especially serious inequalities. The principles of social justice apply to these inequalities
which presumably are inevitable in the basic structure of any society. To Rawls (1971), the
justice of a social arrangement depended essentially on “how fundamental rights and duties
are assigned and on the economic opportunities and social conditions in the various sectors
of society”.
Questions of justice arise primarily when free and equal persons attempt to advance their own
interests and come into conflict with others pursuing their self-interests. According to Rawls
(1971), in a well- ordered society there should be institutions that enable individuals with
conflicting ends to interact in mutually beneficial ways, hence the focus on social justice.
The Utilitarian Theory is based on the following premises:

 Something can either be right or wrong but not both
 Obligatory actions are a subclass of right actions but right and wrong are determined
for each action taken by a person and based on the degree to which an action affects
the common good
 The action which has the greatest positive outcome in a given situation is the right
action; everything else is wrong.
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? THINK POINT
Provide a cogent opinion based on the questions raised by this theory are:
What precisely is it that we are trying to improve?
What does the concept of the greatest well-being for the greatest amount of people mean?
If we can define the greatest good, can we actually measure it?
? THINK POINT
DEONTOLOGY
Utilitarianism and ethical egoism are based on the consequences of one’s actions.
Deontology, in contrast, is based on the belief that actions can be judged without regard for
their consequences. There are certain rules which have the value of right or wrong, and we
perform those rules out of an obligation to do the right thing. What are the problems with this
theory?
VIRTUE ETHICS
Unlike the previous theories, virtue ethics does not ask questions about the action per se but
about characteristics that person wants associated with him or herself. Nonetheless, it is
inevitably the case that character traits thought of as virtuous will probably be associated with
behaviours judged as right according to other ethical theories. And the bigger question, why
should some want to be virtuous, is probably answered by referring to ethical behaviour. True
proponents of virtue ethics would argue that we should choose to be virtuous people for the
sake of being virtuous, and these traits can be learned prior to the need for making any
ethical decisions. Likewise, believers in the value of virtue might argue that only a virtuous
person can do things that are judged to be right or good. If we can identify a list of virtues
which most people in most cultures agree are virtues, why theory better than other theories?
Euthanasia: Many believe that it is permissible to administer morphine to relieve pain

foreseeing that a patient will die as a consequence, whereas it is impermissible to administer
morphine with the intention of killing a patient.
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Self-defense: Is it permissible for you to kill another person in order to save your own life?
Here you intend to save your life, the death of the other person being a side-effect of your
saving your own life.
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SECTION 6
APPLICATION OF ETHICAL THEORIES IN A BUSINESS
CONTEXT
Chapter outcomes
 Contrast between morals from ethics in decision making
 Understand the importance ethical standards in business decision making and its
impact on choice of words and actions
 Investigate the relationship between organisational structures and business ethics
 Understand the process of incorporating ethics in decision making using decision
making process
 Assess the impact of ethical decisions to the organisation
Readings:
Wixley T and Everingham G (2010) Corporate Governance Third edition. {place} SiberInk.
Stanwick PA and Stanwick SD (2009) Understanding Business Ethics First edition. New
Jersey: Pearson.
Boatright, J.R. (2011) Ethics and the Conduct of Business Seventh edition. New Jersey:
Prentice Hall.
6.1 Introduction
Much of the recent interest in ethics and moral behaviour in business comes from Enron and
Worldcom, as scholars, educators, practitioners, and the public seek to understand the
behaviour of executives in these firms. Many have chosen to view these cases from the
perspective of ethics, that is, the behaviour of these executives is seen as unethical and the
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explanation is that they are unethical or immoral people. Furthermore, the solution is
improved moral education in business programmes. “Somehow, we need to make future
executives more moral or more ethical”.
This section focuses on the practical application of ethics in decision making. A starting point
would be to create some clarifying distinctions. First, it is important to acknowledge the vast
amount of research and study on the topic, and recognise that the application of ethics within
business decision making, only addresses a small portion of the much broader topic. Second,
the goal is to address decision making ethics in view of our decision making model in a way
that will enable a consistent application of ethics in the decision making process.
6.2 Distinguishing Morals from Ethics in Decision Making

Research shows an overwhelming amount of information just to address the meaning or
distinction between "morals" and "ethics." There are a large range of views that include the
words being synonyms and the word “ethics” being "moral philosophy," or the study of moral
principles. Both relate to determination of right conduct.
The term "moral" will be reserved for use in a personal decision making context. This
means that "moral" will be used when dealing with personal or life decisions with a focus on
"right conduct" as the result of a personal choice. Ethical decision making will be reserved for
use in a group decision making context. Specifically, ethical decision making in business
will be used as providing the guiding requirements or goals for right conduct. These
requirements often come as the result of organisational definition, agreement, or long-
standing custom. There is clear recognition that ultimately a personal choice must be made
with respect to right conduct, but business ethics will provide the assessment framework for
correct behaviour in the business organisation.
6.3 How important is the Source of Ethical Standards in Business Decision

Making?
A large portion of the study of ethics deals with the approach or source of the principles or
standards to be used for ethical decision making in business. A number of schools of thought
have developed that include the following approaches (in no specific order):
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 Utilitarian
 Moral rights
 Universalist
 Cost-benefit
 Fairness or justice
 Common good
 Virtue
 Deontological (based on study of moral obligation)
 Theological
 Contextualist
 Principle-based
The good news is that, in general, most approaches will lead to similar choices for most
decisions involving ethics. There are obvious and sometimes notable exceptions, but these
often involve ethical dilemmas that can only be addressed in the context of the specific
decision being made.
6.4 Ethics in Decision Making Impacts the Choices for Words and Actions
In confining ethical decision making to a business or group context, decisions on ethics are
necessarily limited to actions and words (for example, there should be no deceit in sales
promotion, use words to manipulate performance, ...). Right behaviour can be evaluated
though actions and words, but there is no way to know one's thoughts. According to the
distinction, thoughts and beliefs (e.g. “I want to help and benefit my customer as opposed to I
want their money without regard to what is right,” personal gain at the cost of someone else's
reputation, ...) will be confined to moral decisions that are part of personal decision making.
Clearly one’s thoughts affect one’s words and deeds, and in a group context, ethics in
decision making can be evaluated through the tangible evidence and outcomes from words
and actions. Again, thoughts and motivation are left to the personal realm. As a consequence,
evaluation of appropriate ethical behaviour will have limitations. In all outcomes there are the
following possibilities:
 Right motivation with right action
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 Right motivation with wrong action

 Wrong motivation with right action
 Wrong motivation with wrong action
Given the difficulty in exposing true motivation, ethical assessments will inherently be limited
to an evaluation emphasis on action or outcome.
6.5 Will an Immoral Person Make an Ethical Decision or a Moral Person

Make an Unethical Decision?
Most certainly. However, those that seek to make moral personal decisions have the will or
desire to seek what is right over the long term. This will be reflected in their ethics in decision
making (decisions made in the business context). There will also be the case where a
person's morals may come into conflict with the organisation's ethics. Expect this to be the
greatest source of dilemmas in ethics and decision making in an organisational context.
6.6 How Do We Incorporate Ethics in Decision Making Using a Decision

Making Process?
Figure 6.1: Incorporating ethics in decision-making process
Source: http://www.decision-making-solutions.com
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Addressing ethics in decision making in business or other large organisations or groups

(government) does point to the need to ensure that key focusing decisions (the decisions
highlighted in green) have been made and are in place. In particular, the business decision for
core values should be in place to provide the goals/ requirements that will be used to create
and constrain the criteria used in the network of business decisions. This focusing decision
can influence criteria for decisions throughout the network of business decisions (the
decisions in blue), directly influencing ethical decision making and organisational conduct.
Additional related decisions include choosing the business mission and the code of conduct
that will add compliance criteria to decisions across the business decision network.
Here are some criteria that can help ensure that appropriate ethical considerations are part of
the decisions being made in the organisation:
 Compliance - Does it conform to the company's values and code of ethics? Does it
meet (should exceed) legal requirements?
 Promote good and reduce harm - What solution will be good to the most people while
minimizing any possible harm?
 Responsibility - What alternative provides the most responsible response? Does the
solution ensure meeting our duties as good corporate citizens?
 Respects and preserves rights - Does the option negatively impact an individual's or
organisation's rights?
 Promotes trust - Does the solution lead to honest and open communication? Is it
truthful? Is there full disclosure?
 Builds reputation - Would a headline of your decision generate pride or shame? Does
your solution add to or detract from the identity you want for the organisation?
6.7 When is the Best Time to Address Personal Morals versus

Organisation Ethics?
Future conflict between a person's moral choices and an organisation's ethical decisions are
most easily addressed as someone seeks to join the organisation. If a person is ready to join
a company or business, it is important that he be presented with the company's core values
and code of conduct (if available). The prospective new member must then determine if it is
possible to reconcile his moral choices with the organisation's ethics as conveyed in the
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company's values and code of conduct. Agreement to join the company implicitly assumes
that this reconciliation has taken place, but it can be made explicit by requiring agreement to a
code of conduct.
Given this understanding that should exist between the company and the individual, a change
to the company's values and code of conduct should be given careful consideration.
Changing the basis for the organisation's ethics in decision making, in theory, requires a new
agreement with each individual to reconcile with his personal moral choices. In practise, this
change can lead to conflict as an individual's morals now lead to choices that violate the
company's decision making ethics. http://www.decision-making-
solutions.com/ethics_in_decision_making.html
6.8 The Importance of Ethics in Business

Ethics concern an individual's moral judgments about right and wrong. Decisions taken within
an organisation may be made by individuals or groups, but whoever makes them will be
influenced by the culture of the company. The decision to behave ethically is a moral one;
employees must decide what they think is the right course of action. This may involve
rejecting the route that would lead to the biggest short-term
Ethical behaviour and corporate social responsibility can bring significant benefits to a
business. For example, they may:
 attract customers to the firm's products, thereby boosting sales and profits
 make employees want to stay with the business, reduce labour turnover and
therefore increase productivity
 attract more employees wanting to work for the business, reduce recruitment
costs and enable the company to get the most talented employees
 Attract investors and keep the company's share price high, thereby protecting
the business from takeover
Unethical behaviour or a lack of corporate social responsibility, by comparison, may damage

a firm's reputation and make it less appealing to stakeholders. Profits could fall as a result.
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Along with good corporate governance, ethical behaviour is an integral part of everything that
Cadbury Schweppes does. Treating stakeholders fairly is seen as an essential part of the
company's success, as described here: 'A creative and well managed corporate and social
responsibility programme is in the best interests of all our stakeholders - not just our
consumers - but also our shareowners, employees, customers, suppliers and other business
partners who work together with us.
Ensuring that employees understand the company's corporate values is achieved by the
statement of 'Our Business Principles' which makes clear the behaviour it seeks from
employees.
6.9 Applying Utilitarianism: Is Insider Trading and the Bailout of GM Ethical?

Consequentialism is a normative ethical theory, which means, it is a theory about ethical
action and a proposed method for deciding how one should choose the right ethical act.
(Feiser, 2003) Consequentialism says that the consequences of an action are all that matter
when taking an ethical decision to act. There is important reason for the root word. The word
consequence is selected carefully and it is possible to make a distinction between the word
itself and synonyms such as, results or outcomes. (Haynes, 2006) The word result or
outcome is more commonly understood to mean the product of an action directly and
inevitably follows from that action. Consequences have the possibility of being probable, or
hypothetical. Alternative moral theories to consequentialism are: deontology, which proposes
that ethical decisions should be made by following rules or fulfilling duties; and virtue ethics,
which proposes that the ethical action to be taken is the one that would be taken by a virtuous
person.
Consequentialist theories have been around for a long time. But the term “consequentialism”
was coined by Anscombe 1958 (Frost, 2011). Utilitarianism is by far the most widely known
form of consequentialism, and there often is confusion when distinguishing the
two. Teleology is the classical term for ethical theories that focus on outcomes, or ends, to
determine correct ethical action. (Ferrell) Teleology comes from the Greek words “telos”
meaning, “end” and “logos” meaning, science. Before Anscombe, utilitarianism was the more
general term for ethical theories associated with teleology, focusing on the overall good
created as the desired outcome. Today, consequentialism is the most widely accepted
umbrella term, containing distinguishable sub-categories with a broadening of desired
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outcomes. To summarise concisely, consequentialism evaluates actions based solely on

weighing the consequences of the action against a desired outcome.
6.9.1 Types of Consequentialism

Consequentialism may be divided in different ways depending on how it is applied and the
desired outcome. Many types of consequentialism do not have a formal name, and the
variations we list below are not intended to be comprehensive. The intention is to explore the
most common forms of consequentialism, using the most widely accepted names for these
forms. One can apply consequentialism to a decision by using its two forms: act
consequentialism or rule consequentialism. Act consequentialism examines each act
individually and determines the right act to be the one that produces the greatest number of
consequences consistent with the desired outcome, (Frost, 2011). Rule consequentialism
determines the morally right action to be the one that follows a rule whose observance would
produce the desired outcome. (Sinott-Armstrong, 2003)
There are many desired outcomes. Two of the most widely known are: creating the most
good for the most people - utilitarianism, and creating the most good for one’s self -
egoism. We will discuss utilitarianism in greater detail. Egoism is a selfish way to make
ethical decisions, but some philosophers argue it truly is in everyone’s best interest for
everyone to act in his or her own self interest (Shaw, 2008). To some degree everyone must
act in his own self interest – the opposite extreme, altruism, means we act completely
selflessly and only in the interest of others. The problem with altruism is that eventually, one
who is completely selfless will have nothing left to give. Thus, the altruist destroys his ability to
act in the interest of others.
6.9.2 Strengths of consequentialism

The application of consequentialism is ubiquitously, because all decisions have measurable
consequences. Deontology requires a rule to govern a decision, and not all decisions have a
rule or duty associated with them. Virtue ethics examines a decision in the context of one’s
character, but there is some debate as to what dispositions are virtues. Consequentialism and
be applied systematically. If assigned a numerical value to consequences, an ethical decision
through mathematical evaluation can be reached. In summary, the biggest strengths of
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consequentialism are the relative ease of universal application and its usefulness for practical
application.
6.9.3 Problems with consequentialism

Despite its ease of universal application, applying consequentialist theory to a decision can be
quite time-consuming and complicated in practise. In the ideal case, all consequences are
identified and accounted. However, in almost all real decisions this is not possible. The
process of identifying and weighing all the consequences, or even a number of consequences
deemed sufficient to make the decision, is often too time consuming for decisions that need to
be made quickly.
A second problem with applying consequentialism is observer or agent limitation. Once again
the ideal case is a completely unbiased ethical agent weighing all possible consequences
with equity and neutrality towards all affected parties. This godlike position is not
attainable. No one person can know sufficient information about the consequences to make
perfect judgments about a decision. In real world cases, observers are supposed to inform
themselves as much as possible about the consequences to make the best judgment
possible.
A third problem with consequentialism is dealing with actual and expected consequences. It
is problematic to evaluate the morality of decisions based on actual consequences as well as
probable consequences. If an observer scales the weight of consequences based only on
probability, some poor decisions can be made. A highly undesirable consequence may
appear to be the result of a morally wrong decision. But to the decision maker, this
consequence may be disregarded because it is highly improbable.
6.10 Utilitarianism
Utilitarianism is a consequentialist moral theory focused on maximising the overall good; the
good of others as well as the good of one’s self. The notable thinkers associated with
utilitarianism are Jeremy Bentham and John Stuart Mill. These utilitarians are hedonistic,
meaning, their ideas of good are associated with pleasure or happiness, (Driver) Thus,
classical utilitarianism guides ethical decision makers to make decisions that bring the most
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pleasure for the greatest number of people. Utilitarianism is very closely associated with
consequentialism, to the point where some use the terms interchangeably. Indeed,
utilitarianism and consequentialism share many of the same tenets. One difference, however,
is that consequentialism does not specify a desired outcome, while utilitarianism specifies
good as the desired outcome. For example, rule utilitarianism is the same as rule
consequentialism except rule utilitarianism specifies that decisions should follow rules
promoting the most good, instead of the more general assertion that rules should promote a
certain desired outcome. To summarise with a concise definition: Utilitarianism is a
consequentialist moral theory. Utilitarianism’s desired outcome is the greatest amount of good
possible.
6.10.1 Problems with Utilitarianism Illustrated by Example

Utilitarianism as a sub-category of consequentialism means the theory has many of the same
benefits and drawbacks. There are problems specific to utilitarianism. We illustrate examples
of drawbacks with hypothetical situations.
First, utilitarianism can justify making decisions that violate a person’s human rights. What
may be considered good for some people can violate rights of others? An example of this
problem is a wealthy person who needs an organ transplant. If the wealthy person offers to
donate a large sum of money to a charity to help thousands in exchange for being the top of
the list for an organ transplant, utilitarianism says the wealthy person should be placed at the
top of the list. This is because more good results from the wealthy person receiving the organ
than would result if the next person on the list receives the organ. However, the next person
on the list for the organ has the right to receive the organ first, and it seems unfair for the
wealthy person to use his wealth as an advantage.
Another problem with utilitarianism is that it requires an impartial decision maker. Total
impartiality does not allow special relationships like friends or family. The decision maker
naturally considers the good of people close to his before more distant stakeholders. The
celebrated train dilemma illustrates the impartiality problem. Suppose you can save a
trainload of people heading for a collapsed bridge by pulling a switch to re-route the train. In
doing so, your wife and children will certainly die because they are in the path of the train if it
takes the alternate route. Many will not knowingly sacrifice their family for strangers. But
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utilitarianism forces the decision maker to weigh the overall good. Depending on the number
of people on the train one may have to sacrifice one’s family.
A final criticism of utilitarianism is that it answers the question “What decision is right?” by
answering “What decision brings about the most good, pleasure or happiness?” But the
questions are not the same. It does not necessarily and logically follow that answer to one
question will be the answer to the other. (Rachels). The argument is especially pertinent when
applying act utilitarianism and thinking only of the consequences in the immediate future. For
example, we can use utilitarianism to justify lying to another person to avoid immediate
negative consequences of hurting feelings or damaging the relationship. But if no one ever
provides truthful answers to tough questions, adverse long-term consequences can result.
The lie could lead to further bad decisions made from ignorance or bad information, leading to
far more dire consequences.
6.10.2 Utilitarian Calculations

We apply utilitarian calculations on whether it is right to save a large private business from
bankruptcy. These calculations are meant to illustrate the use of utilitarianism and are not
comprehensive to the extent that all possible short and long-term consequences have been
considered.
6.10.2.1 General Motors Bailout

Consider the bailout of General Motors (GM). Is it right to use government, namely, taxpayers’
money to rescue a private corporation?
First, who are the primary stakeholders affected? These include:
 Government
 Taxpayers
 GM
 Employees
 Shareholders
The secondary stakeholders are:
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 Customers
 Suppliers
 Competitors
Second, examine the consequences for these stakeholders, and evaluate their significance.
For government:
Negative consequences: generating a moral hazard. Large private companies will take on risk
knowing the government will bail them out because they are perceived to be too large to fail.
Without bankruptcy, firms will evaluate risk incorrectly.
Positive consequences: unemployment will not skyrocket in Michigan and its environs.
Government will not have to pay unemployment benefits and there will not be a spiraling
down effect on the economy.
For taxpayers:
Negative consequences: Losing tax dollars that can be spent elsewhere. A probable
consequence is a cut in spending on other government projects such as infrastructure or
welfare.
The initial desired positive consequence: a stable business environment. The long-term
desired consequences are stable to growing employment and a stronger economic
community.
For General Motors:

Positive consequences: the desired positive consequence for the bailout is to continue or
even strengthen its business, avoid bankruptcy, and maintain the company’s reputation with
customers. Although the bailout itself hurts the company’s reputation, an actual bankruptcy
could be worse for its reputation among consumers.
Negative consequences: government control in GM’s operations and the required changes
that are be painful and costly to make. However, a long-term consequence could be that the
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changes made would not be drastic enough. Even with the bailout, GM may go bankrupt in
the future anyway.
For employees:
Positive consequences: A very positive consequence for GM employees is that fewer people
are laid off.
The same positive consequence applies to GM suppliers and their employees. Uninterrupted
production means more business and job stability.
For competitors, the bailout would be short term negative, because they may gain more
market share. Losing out on that extra market share also has negative consequences for the
people who work for the competition such as lower wages resulting from lower sales.
Ultimately, we need to consider if the positive consequences are greater than the negative
consequences. If the positive does outweigh the negative consequences, then we arrive at a
decision that says it is ethical for government to bailout GM. That decision creates the most
good or happiness for the greatest number of people.
6.10.2.2 Numerical Example- Insider Trading

The second example is on insider trading. This example attempts to assign numerical weights
to consequences to arrive at a decision. The principle driving utilitarianism is to choose the
decision that leads to the most good for the greatest number. We need to examine the
consequences for those affected either directly or indirectly.
The primary stakeholders in the decision on whether to commit insider trading are:
 the person wanting to do insider trading (the tippee)
 the person who gives the insider information (the tipper
 The company about which they have the information
Secondary stakeholders refer to investors in the market.
The primary purpose of insider trading is to make money for the insider involved. This is a
huge positive consequence, especially when viewing the decision as an egoist.
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On the other hand, the insider may go to jail, not a pleasurable experience by any account.
Another possible positive consequence is that those who get rich from insider trading will be
benefactors to society through their philanthropy for instance.
For society at large, insider trading means trading unfairly through information not available to
the market. This unfairness may cause people to stop participating in the market because the
market is viewed as an unlevel playing field. If people do not participate in the market, the
market will slowly wither. If the market suffers, capital formation and allocation also will suffer
and in the longer term, the economy as a whole suffers.
Decision: To participate in insider trading or not.
In this example, the total weight of positive consequences is much lower than the weight of
the negative consequences, and thus the possible amount of happiness produced is greatly
outweighed by the possible unhappiness- the decision should be to avoid participating in
insider trading. From this utilitarian calculation, insider trading is unethical.
Consequentialism and utilitarianism are commonly used in decision - making. It is natural and
logical for a person to think of the consequences of their actions before acting. However,
these ethical theories have their weaknesses and should perhaps be applied in combination
with other normative ethical frameworks. In many cases, the ethical choices each theory
recommends are the same.
http://sevenpillarsinstitute.org
6.11 Benefits to the Organisation: What Are the Ethical Decisions That
Impact Any Organisation?
Business ethics is an area of corporate responsibility where businesses are legally and
socially obligated to conduct business in an ethical manner. Business ethics includes five key
elements: honesty, integrity, trust, confidentiality and openness. Within the business world,
ethical decisions are made each day that have an impact across all organisation. (Robertson
2004).
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6.12 Ethical Advertising Decisions

Most businesses, at one time or another will need to advertise their products or services so
they can increase their customer base. It is important they do this in an ethical manner.
Ethical advertising is considered honest when it truthfully portrays what is being sold.
Unethical advertising is deceitful or misleading and can even be considered negative.
Advertising that's considered negative often degrades a competitor's product so the business
can make its product look better (Robertson 2004).
6.13 Ethical Policies on Confidentiality

Almost all codes of ethics used by businesses involve at least some guarantee of
confidentiality. Customers want to know that their private information will not be used in ways
in which they do not approve. Employees want to know their personal files won't be
accessible by anyone other than authorized personnel. When businesses fail to disclose their
intended business practises, such as selling customers' information to third parties, it's
considered unethical behaviour (Robertson 2004).
6.14 Ethical Sales Practises

How a company decides to conduct sales is a major ethical decision that affects all industries.
Ethical sales involve honesty and integrity. For example, a company that honestly discloses
both the advantages and disadvantages of their products or services, and stands behind them
100 percent, is considered to have good ethical practises. On the other hand, a company that
baits customers by offering a good deal, then tries to entice them to purchase more expensive
merchandise through deceitful means is considered to have unethical business practises
(Robertson 2004).
6.16 Ethical Pricing Strategies

While all businesses generally have the final say in what they choose to charge consumers
for products and services, ethical limitations do exist. For example, it would be considered
ethical for a business to raise its prices as a result of increased costs associated with
manufacturing. It would be considered unethical for a business to raise prices in an effort to
gouge certain customers they know are in a predicament that requires them to pay whatever
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is being asked. An example would be significantly raising the cost of water during a natural
disaster (Robertson 2004).
A positive and healthy corporate culture improves the morale among workers in the
organisation, which may increase productivity and employee retention; this, in turn, has
financial benefits for the organisation. Higher levels of productivity improve the efficiency in
the company, while increasing employee retention reduces the cost of replacing employees
(Robertson 2004).
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SECTION 7
CONCEPTIONS OF ENVIRONMENT AND SUSTAINABILITY
Chapter outcomes
 Understand the historical evolution of sustainability and its importance in organisational
context
 Assess the key success factors in the Environmental Sustainability Matrix
 Analyse the Triple Bottom Line approach – 3Ps: Profit, People and Planet
 Determine the implications of sustainability on organisations
Readings
7.1 Introduction
Sustainable Supply Chain Management (SSCM) has grown in importance and its significance
has attracted the attention of governments and businesses alike. The increasing significance
and relevance around sustainability has seen an increasingly vast body of literature around
sustainability and sustainable practises. The Triple Bottom Line (TBL) approach and
integrated reporting methodology is used as the foundation to ensure sustainability.
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The TBL approach is defined as an accounting framework that incorporates three dimensions
of performance: social, environmental and financial or people, planet and profit (3Ps) (Onyali,
2014).
7.2 Definition of Sustainability

Hines (2008) states that “consumer challenges presented to suppliers in the twenty-first
century will be many.” This new type of consumer will “want to buy products and services
when they want them, at an affordable price, representing value for money, from sources that
are reliable and this might mean that the supplier is ethical, environmentally conscientious
and engaged with local communities.”
Sustainability can be defined as follows: -

“About meeting the present material needs without compromising the ability of future
generations to meet their own needs” (Brundtland Report of 1987, United Nations
Economic Commission for Europe, 1987)
“A process of change in which the exploitation of resources, the direction of

investments, the orientation of technological development and institutional change are
all in harmony and enhance both current and future potential to meet human needs
and aspirations” (The World Commission on Environment and Development)
Is “environmental, economic, and social sustainability; and is the ability to continue a

defined behaviour indefinitely. This forms the goal of The Three Pillars of
Sustainability.” (Thwink, 2014).
The most popular definition by far is the one defined by the Brundtland Report of 1987, but
critics have branded it more inspirational than anything else. Critics have labelled this
definition as somewhat misleading as it does not adequately define sustainability, but
sustainable development and was developed to appease developing nations which were
otherwise not going to attend the Stockholm Summit.
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The most appropriate definition is that offered by Thwink (2014) as stated earlier. This
definition is more aligned, multi-faceted and a multi-pronged approach to addressing the
issues of sustainability (Dlamini, 2014).
7.3 A Brief Historical Timeline and Evolution of Sustainability

The definition of Sustainable Development, a legacy from the Brundtland report “Our common
future”, defines Sustainable Development as “development which meets the needs of the
present without compromising the ability of future generations to meet their needs”.
Early Beginnings of Sustainability
Sustainability and the concept of sustainable development according to the Asian

Development Bank (2012) was introduced in 1972 as it recognised the interconnectedness of
social, economic and environmental issues. Globally, there have been milestones that have
marked the progress and evolution of sustainability and the United Nations has been a key
catalyst and integral part of this movement (Dlamini 2014).
In 1948, the United Nations Scientific Conference on the Conservation and Utilisation of
Resources was held in Lake Success - this was the first major meeting of the United Nations
to discuss the subject of sustainability. Authors such as Harrison Brown published works
grappling with sustainability-themed topics such as “The Challenge of Man’s Future”, Rachel
Carson - “Silent Spring”, Paul Ehrlich - “Time Bomb” between 1954 and 1968; these writings
dealt with subject areas that improve the understanding of the interconnections between the
environment, the economy and social well-being and discuss the connection between human
population, resource exploitation and the environment (Asian Development Bank, 2012;
Dlamini 2014).
A Brief Historical Timeline of Sustainable Development and Sustainability
Table 7.1 below provides a brief overview of selected milestones in the sustainability journey.
The table also intends to provide a view of sustainability activities that countries,
organisations, and individuals have done to jumpstart environmental awareness and
sustainability.
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Central to the sustainability milestones are The Worldwatch Institute, the United Nations and
World Trade Organisation. These organisations have played a critical role in ensuring that the
environmental and sustainability agendas remained top-of-mind and negotiations with
countries to sign up and bind themselves to working actively towards reducing carbon
emissions and greenhouse gases, reducing waste output and increasing recycling initiatives.
Bodies representing trade blocs are also a feature in stirring member states to action on
environmental issues and sustainability. Developing nations, such as China and India, who
have experienced significant economic growth and industrialization, have become
increasingly vocal against emissions targets and caps (Dlamini, 2014).
Table 7.1 Sustainability Milestones
Year Event or Milestone
The Worldwatch Institute is established to raise public awareness of global

1975 environmental threats and catalyze effective policy responses; it begins
publishing the annual "State of the World" in 1984.
The Organisation for Economic Co-operation and Development relaunches

1978
research on environment and economic linkages.
The Independent Commission on International Development Issues publishes

1980 "North–South: A Program for Survival;" it calls for a new economic relationship
between North and South - also known as the Brandt Report.
The Worldwatch Institute introduces the annual "State of the World" publication;
1984 it monitors changes in the global resource base focusing on how changes there
affect the economy.
The Third World Network is established to serve as the activist voice of the
1984
South on issues of economics, development and the environment.
The International Conference on Environment and Economics concludes that

1984
the environment and economics should be mutually reinforcing.
The World Commission on Environment and Development publishes "Our

1987 Common Future also known as the Brundtland Report; it weaves together
social, economic, cultural, and environmental issues and global solutions; it
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popularizes the term sustainable development."
The Centre for Our Common Future is established to act as a focal point for
1988
follow-up activities to the Brundtland Report.
The United Nations Conference on Environment and Development is held in

Rio de Janeiro; agreements are reached on Agenda 21 the Convention on
1992
Biological Diversity, the Framework Convention on Climate Change and
nonbinding Forest Principles.
The United Nations Commission on Sustainable Development is established to
ensure follow-up to the United Nations Conference on Environment and
1993
Development to enhance international cooperation and rationalize
intergovernmental decision-making capacity.
The World Trade Organisation is established and gives formal recognition to

1995
trade environment and development linkages.
ISO 14001 is formally adopted as a voluntary international standard for

1996
corporate environmental management systems.
The global sustainability index is launched, tracking leading corporate

sustainability practises worldwide; called the Dow Jones Sustainability Group
1999
Indexes the tool provides guidance to investors looking for profitable companies
that follow sustainable development principles.
The Third World Trade Organisation Ministerial Conference is held in Seattle;
thousands of demonstrators take to the streets to protest the negative effects of
globalization and growth of global corporations and among delegates scuttle
the negotiations; the first of many such anti-globalization protests along with
1999 deep conflicts. This signals a new era of confrontation between disaffected
stakeholders and those in power. Environmental groups and social activists
lobby against the Multilateral Agreement on Investment; this along with
disagreement by governments over the scope of the exceptions being sought
leads to the demise of negotiations.
The World Summit on Sustainable Development is held in Johannesburg
marking the 10-year anniversary of the United Nations Conference on
2002
Environment and Development; the summit promotes “partnerships” as a non-
negotiated approach to sustainability.
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The Global Reporting Initiative (GRI) formulates guidelines on how

2002 organisations should report on the economic, environmental and social
dimensions of their business activities.
The Kyoto Protocol enters into force, legally binding developed country parties
2005 to goals for greenhouse gas emission reductions and establishing the Clean
Development Mechanism for developing countries.
Notions of green economy enter the mainstream; a low-carbon economy and

2008
green growth become new objectives.
The United Nations Conference on Sustainable Development gathers in Rio de

Janeiro to mark the 20th anniversary of the 1992 United Nations Conference on
Environment and Development in Rio de Janeiro and the 10th anniversary of
2012 the 2002 World Summit on Sustainable Development in Johannesburg. It
focuses on two themes: a green economy in the context of sustainable
development and poverty eradication and the institutional framework for
sustainable development.
Source: Asian Development Bank (2012:1)
Table 7.1 illustrates the shift from ‘business as usual’ to extraordinary through a new focus on
sustainability. Organisations have taken sustainability beyond the traditional environmental
bodies that one would expect, such as the United Nations and World Wildlife Fund. The
integration of these bodies and their work in driving sustainability is critical to the success of
achieving a broader sustainability agenda (Dlamini, 2014).
Elkington (2004) discusses three great waves of public pressure that have shaped the
environmental agenda. The roles of governments and the public sector have in the process
mutated in response to each of the waves. Although each wave has been followed by a
downward wave of falling public concern, each wave brings a significantly expanded agenda
of politics and business.
Elkington (2004) continues and elaborates on each of these waves from the 1960s to the
present as follows:
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Wave One – brought an understanding that environmental impacts and natural

resource demands have to be limited, which resulted in an initial outpouring of
environmental legislation. Businesses responded defensively and their primary focus
was compliance.
Wave Two – brought a wider realisation that newer and improved methods of
production technologies were required and this brought about the understanding that
developmental processes had to become more sustainable. Businesses took up the
mantle and sustainability became a source of a new competitive edge.
Wave Three – the focus is on a growing recognition that sustainable development will
require significant changes in the governance of businesses and in the process of
globalisation; this will place greater emphasis and pressure on governments and civil
society forcing companies and governments to move beyond legislation and
compliance.
7.2 Sustainability in South Africa

At the 2009 Conference of Parties (COP) conference held in Copenhagen, the South African
government voluntarily committed to the reduction of greenhouse gas emissions from
projected “business-as-usual scenarios” by 34 per cent in 2020 and 42 per cent in 2025,
subject to conditions. South Africa responded to this challenge by developing the National
Climate-Change Response Policy of 2011. The South African government responded with the
National Development Plan (NDP) which offers a transition to an environmentally low-carbon
economy. In 2012, the Minister of Finance confirmed in the 2014 budget that “… a package of
measures is needed to address climate change and to reduce emissions. This will include the
proposed carbon tax, environmental regulations, renewable energy projects and other
targeted support programmes” (Department of National Treasury: Republic of South Africa,
2014: 5).
The South African government, working together with business organisations, is currently
engaged in a process of reviewing the best approach to implementing carbon budgets to
companies and has just concluded a workshop in November 2014 with Business Unity South
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Africa (BUSA) where implementation proposals were tabled. The Department of

Environmental Affairs (DEAT) (2014) states that the allocation of carbon budgets to
companies forms part of the overall mitigation approach for South Africa and will be used to
develop desired emission reduction outcomes for sectors and subsectors (Dlamini, 2014).
The DEAT proposes that the implementation of carbon budgets be effected in 5 year review
periods as this dovetails with the international system of 5-year review periods. This 5-year
period is long enough to allow flexibility, but also short enough to incentivize the mitigation
and allow for mitigation review potential and ultimately allows for progress and technology to
be assessed. The DEAT proposes that the first carbon budget period be effected in the
periods 2016-2020, the second carbon budget in the periods 2021-2025.
The first period 2016-2020 will be used to implement a mandatory greenhouse gas (GHG)
reporting system, when companies implement measures to achieve the allocated carbon
budget and report on progress through their pollution prevention plans. During this period
actual emissions will be measured against the allocated carbon budget.
The second carbon budget period will be used to build on the experience of the first period,
carbon budgets will become regulatory measures, the compliance of companies with
achieving the carbon budgets will still be assessed, but this will be mandatory and tax above
budgeted emissions will continue (DEAT, 2014).
The South African government through the National Planning Commission which authored the
National Development Plan (NPC, 2011) states that market and policy failures have resulted
in the world economy entering a period of “ecological deficit” as natural capital is being
depleted, degraded and destroyed faster than it can regenerate. Waste and carbon emissions
per capita are climbing faster every year and the ecosystem is a finite system with limits. The
NPC (2011) affirms the inequitability of climate change and states that high income countries,
with one-sixth of the world’s population, are responsible for nearly two-thirds of the
greenhouse gases emitted, but the worst sufferers of these emissions live in the developing
nations.
What the National Planning Commission (NPC) does not explicitly discuss is the undeniable
link between economic development and the use of fossil fuels, producing carbon emissions
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that are at play in developing economies – of which South Africa is a part. The National
Planning Commission (2011) conveys a stark challenge in saying that the challenge in the
next two decades will be to develop policies and regulatory initiatives that will prompt
improved management of resources and harness clean technologies. Political challenge will
also develop to ensure the development of policies and regulatory initiatives that will help
people to cope with new risks, such as land and water management.
7.3 The Key Success Factors in the Environmental Sustainability Matrix

Wagner and Svensson’s Sustainability Business Model (2010) states that the elements of
interaction of the business happen both ways with the environment and other factors that are
in the marketplace and practises that drive the business in how it operates - ‘from cradle to
grave’. The cradle to grave concept means that companies that produce goods are
responsible for the production of goods from inception through to the logical ‘end’ and
disposed of. What happens after disposal is of consequence to the business as this also
defines how it views the role of the environment. Croom, Barani, Belanger, Lyons and
Murakami (2000) argue for the adoption of a cradle to cradle view of product life and supply
chain operations focusing on (re)cycles of biological and technical nutrients.
In line with corporate governance principles, the Triple Bottom Line (TBL) approach focuses
on: Profits, People and Planet. The TBL approach is the traditional bottom line measurement
with an extension to the traditional bottom line measure of pure economic profits, and
measures the organisation's impact on people and on the planet. The triple bottom line is a
way of expressing a company's impact and sustainability on both a local and a global scale.
The rationale and thinking behind the triple bottom line says that companies have a
responsibility to all stakeholders, meaning that anyone who may be in some way affected by
the manner a company does business becomes a stakeholder. Thus shareholders are no
longer the only people a company should be concerned about, but they should just be one
element of the stakeholder group in consideration (Manktelow, 2014).
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Figure 7.1 The Sustainable Development Matrix diagram
Source: Mock (2014: 2)
Figure 7.1 is the Sustainable Development Matrix proposed by Mock (2014) indicating and
detailing the sustainable development matrix. In terms of corporate governance principles, all
profit-driven organisations should subscribe to the King III Commission recommendations of
integrating and providing a holistic reporting framework that is based on the three P’s of profit,
people and the planet.
The sustainability legs have multiple elements that shore it up. The Planet has elements that
have touch-points with both people and profits and vice versa. Each one of the elements
represents the interconnectedness of the profit, people and the planet. Companies pursue
profits, but profits cannot be pursued blindly without protecting the planet as without the
planet, people will not be able to sustain life as we know it and neither can they pursue
economic endeavours without a planet, (Dlamini, 2014).
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7.4 The Triple Bottom Line – 3Ps: Profit, People, Planet

The TBL is a three-pronged approach to company reporting on performance. This is also
known as integrated reporting approach as recommended by the King III Commission on
Good Governance – people, profit and planet. The King III Commission recommended that
companies report not just on profits but also on the people and the planet that make profits
possible.
7.4.1 Profit - The pursuit of ‘for profit organisations’

All companies, whether private or non-profit organisations, share the financial bottom line.
This is the primary imperative of any organisation and the maximisation of stakeholder value
is the primary role of any business. The efficient and effective use of the limited means of
production has a real impact on the success of a business. The idea and view of profit from
the triple bottom line approach is that profits are not just to flow to shareholders, and the
Executive of the company. The profits of the business are to empower and sustain
communities (Aster, 2014) and this is the primary intent with the traditional bottom line. Aster
(2014) also recognises the interdependence between stakeholders and the organisation, in
line with the sustainable business model proposed by Wagner and Svensson (2010); this
leads to the understanding that there can be no economic capital without preserving and
maximising environmental and social capital. What this portrays is interdependence and
integration of these factors; environmental and social. The forwarded theory is that the one
factor is not seen nor exists in isolation as a stand-alone when viewed as a contributor to
economic capital.
Within the profit triangle, companies recognise that their role is to create economic value for
all stakeholders – that is their primary mandate. Furthermore, the elimination of waste is a
critical component of their profit-seeking initiatives and they have to ensure that in their
production methods and providing goods and services, plans are put in place to ensure that
waste generated is reduced or eliminated.
A review of the Good Business Journey (2014) summarised key sustainability indicators for a
listed enterprise, Woolworths, clearly showing improved revenue. Although trading conditions
by Woolworths and other retailer’s admission has been tough and competition has increased,
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Woolworths has performed very well in this tough trading environment. Revenue since 2010
has been tracking double-digit growth figures with the 2013-2014 trading year as a bumper
year at 22.9 per cent growth. A review of the Rand value spent on corporate social
responsibility (CSI) projects by Woolworths over the period 2010 - 2014, shows an upward
trend, with Woolworths’ CSI contribution in this same period having grown R18Million
(eighteen million Rands).
Table 7.2 illustrates Woolworths’ CSI spend between the periods 2010 to 2014. It shows the
CSI spend in Rand terms and the corresponding percentage terms over the same period. The
graph also indicates Woolworths’ revenue and CSI spend as a percentage of revenue over
the same period.
Figure 7.2 Woolworths’ Year on Year CSI Spend (2010 – 2014)

R 45 000 000 000 25.00%
22.9% R 39 900 000 000

R 40 000 000 000
R 35 400 000 000 20.00%

R 35 000 000 000
17.8%
18.4%
R 30 000 000 000

R 28 800 000 000
15.00%
R 25 800 000 000 14.2%
R 25 000 000 000
R 23 700 000 000 12.7%
11.6%
R 20 000 000 000
10.00%
8.9%
R 15 000 000 000
R 10 000 000 000

5.00%
3.6%
R 5 000 000 000 1.4%
1.3% 1.5% 1.4% 1.3%
R 314 000 000 R 370 000 000 R 438 000 000 R 500 100 000 R 518 000 000
R0 0.00%
2010 2011 2012 2013 2014
Revenue CSI Spend (Rands)

Percentage Revenue increase YoY CSI Spend as Percentage of Revenue
CSI Spend growth YoY (percentage)
Source: Adapted from Woolworths (2014: 5)
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Table 7.2 illustrates a combination of indices that have been adapted and plotted to illustrate
Woolworths’ revenue and CSI performance and spend. Table 7.2 shows a positive
relationship between Woolworths’ increasing revenue which has also seen the total CSI
contribution spend increasing. This is a positive and very affirming relationship to see and
also shows Woolworths’ commitment to its sustainability objectives. The lines work together
and with an upward trend, it means that more money has been made available to CSI
initiatives (Dlamini, 2014).
Another positive picture is revealed with the peaked line. This line shows the year-on-year
revenue growth as a percentage of revenue growth from the previous period (starting 2010).
In 2011, the year-on-year growth was up 8.9 per cent, 2012 up 11.6%, reaching its peak at
22.9% and subsequently falling to 12.7% growth in 2014 (Dlamini, 2014).
The line just above the x-axis shows the CSI spend as a percentage of revenue. This line has
tracked around the 1.3 per cent as indicated in Table 6.3 below.
Figure 7.3 Woolworths’ Revenue and CSI Spend Growth Curves
Year on Year Revenue vs. CSI Spend

25.00% 1.6%
1.5% 22.9%
22.50% 1.5%
20.00%
1.4% 17.8% 18.4% 1.5%
17.50%
1.4% 1.4%
15.00%
14.2%
12.50% 12.7% 1.4%
1.3% 11.6%
10.00% 1.3%
8.9% 1.3%
7.50%
1.3%
5.00%
3.6% 1.2%
2.50%
0.00% 1.2%
2010 2011 2012 2013 2014
Percentage Revenue increase YoY CSI Spend growth YoY (percentage)

CSI Spend as Percentage of Revenue
Source: Adapted from Woolworths (2014: 4)
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Table 7.3 illustrates Woolworths’ year on year revenue versus CSI spend over the periods
2010 to 2014. Woolworths’ revenue has increased from 2011, 2012 and 2013 and fallen in
2014. CSI has grown marginally over the same period as a proportion of revenue has grown
0.1 percent year on year, versus revenue growth of 2.7 percent in the period 2011-2012 and
grown 11.3 percent 2012-2013 where CSI spend as a proportion of revenue and CSI
percentage spend have both declined. This represents a worrying picture that while revenue
was up, spend on CSI and percentage spend on CSI initiatives as a proportion of revenue
were both down.
7.4.2 People - The Impact of the Triple Bottom Line on People

Companies employing the TBL methodology in conducting business have due regard for all
the people around them that they are in business with. This stems from the ‘cradle to grave’
approach that looks at material flows from raw inputs through to finished goods, extending
through to the manner in which waste is managed to ensure minimal impact on the earth and
its resources. Aster (2014) states that companies have an ethical responsibility to assume
leadership for the positions they take or assume; meaning that whatever area of commerce or
industry a company takes, companies must ensure that they assume ownership of any by-
products that may come from their pursuit of profits. The by-products of the pursuit of profits
come in the form of pollutants and other such negative effects that affect the environment and
also affect people; in essence, people should not pay the price for companies’ pursuit of
profit. (Dlamini, 2014).
Companies need to realise that they cannot change the course of climate change and global
warming without collaborating with each other. Knowledge-sharing is critically important as
the investment in combatting the effects of climate change will decrease with more companies
sharing knowledge and establishing a platform from which to collaborate and share
knowledge (Mock, 2014). Knowledge transfer is critical as companies who may have
progressed further along the sustainability path will provide invaluable teachings and lessons
for those companies that may be at the infancy stages of their sustainability journeys
(Dlamini, 2014).
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7.4.3 Planet - The Impact of Organisations’ Activities on the Planet

Triple bottom line companies are challenged to take great strides to reduce and minimise their
footprint on the earth. These companies take inordinate steps to measure, reduce their
energy use; their waste-disposal strategies ensure that toxic waste is managed safely, they
proactively try to make use of and tap into renewable energy sources and do not produce
unsafe or unhealthy products and go to great pains to eliminate these from their product
portfolio (Mock, 2014). Companies must ensure that they effectively integrate with nature and
not separate from it.
Hunter (2014) states, that the purest and most valuable form of environmental stewardship is
to model our natural systems in a company’s operations. It is critical that companies identify
and harness renewable energy sources and biological materials to minimise the amount of
non-renewable energy and pollutants that will end up as waste. In the South African context,
the energy sector is carbon-intensive, companies use electricity produced from carbon-
intensive sources and the reduction of this is vital to achieving reduced emissions and waste
levels.
The National Planning Commission through the National Development Plan (2011) explains
that the earth’s climate is changing due to carbon emissions and other greenhouse gases.
The resultant impact of these greenhouse gases are being tangibly felt and seen through
rising temperatures, increasingly erratic rainfall and extreme weather events that are
forecasted to have a disproportionate effect on the African continent. The NPC (2011: 9)
states that due to changing weather patterns in South Africa, parts of the country which were
noticeably dry have become even drier over the last thirty years. Faced with rising
temperatures, changing rainfall patterns, households and industries will have to develop new
ways to reduce their impact on the environment. The way we live, work and consume will be
severely affected and it is not only the responsibility of business to find solutions to mitigate
change, but consumers and society will have to adapt to ensure that the impact on the planet
is not only reduced, but also begin to reverse (NPC, 2011).
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Figure 7.4 Wagner and Svensson’s Sustainable Business Model
Source: Wagner and Svensson, (2010:185)
Figure 7.4 depicting the Wagner and Svensson Sustainable Business Model (2010) indicates
that at the centre of the sustainable business model is a ‘sustainable business approach’, the
arrows show the interaction is not unidirectional, but goes both to and from the factors to be
considered and have an interaction with the business model. Each of the factors adds value
to the organisation’s value chain and the value chain is not isolated from its external
environment.
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Figure 7.5 Wagner and Svensson’s Transformative Business Sustainability Model
Source: Wagner and Svensson (2014: 355)
The Transformative Business Sustainability (TBS) Model (Figure 7.5) proposed by Wagner
and Svensson (2014) is a model that is built on an ‘Earth-to-Earth’ approach which they argue
should be the guiding principle informing corporate initiatives of planning, implementing and
assessing efforts of business sustainability in the marketplace and society. The TBS model
consists of two halves; the right half contains sources which impact the environment and
natural resources. The left half contains the components termed stakeholders; who are
producers and suppliers, the organisation and its employees, retailers and other market
players, customers and society. The TBS model reveals who is involved, the interactions,
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activities employed and performed and the interconnectedness of these activities. At the
upper end of the model is ‘Earth’ and the lower end is ‘Vision/Mission’. The ‘Earth’ component
in the model should be seen as the link between the sources and stakeholders, and is also
considered the ultimate source and stakeholder of all components in the TBS model as it is
exposed to the total footprint of the business network (Dlamini, 2014).
The ‘Vision/Mission’ component should be acknowledged as the link between defined sources
and stakeholders on the Earth’s life and ecosystems. Wagner and Svensson (2014) affirm
that the Earth-to-Earth approach is central to the TBS as it influences and penetrates every
source and stakeholder in the TBS model. The TBS model is premised and based on the
foundational principles and recognition that economic activity cannot be sustained
independently of the functions and systems provided by the natural ecosystems (Wagner and
Svensson, 2014).
7.4.4 Air Emissions and Air Quality

Air emissions and air quality are inextricably linked. Emissions have a direct impact and
influence on air quality. South Africa experiences particular challenges with air quality due to
the abundance of fossil fuel resources used in electricity generation and also the burning of
fossil fuels in the mining sector. The Department of Environmental Affairs (DEA) in the 2013
State of Air in South Africa – Summary (2013: 1) states that the two criteria pollutants which
are the focus of the State of Air Report are particulate matter - PM10 and sulphur dioxide -
SO2. The reason for the measurement of these two is that they are considered problematic
criteria pollutants as they occur at a national level and are also measured at the majority of
stations and there is historical data (Dlamini, 2014).
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Figure 7.6 Particulate Matter Concentration Levels – South Africa
Source: Department of Environmental Affairs and Tourism (2014: 1)
Between 2000 and 2002 there is a slight improvement which is reversed very quickly by air
quality deterioration from 2003 through to 2008. The DEA (2014: 2) states that this is due to
additional stations being added including the South Durban Basin hotspot. Furthermore, the
deterioration was also due to the stations being moved and placed in ‘actual pollution
hotspots’ thus resulting in the deteriorating air quality standards (Dlamini, 2014).
Although particulate matter may not be a focus for Woolworths and vehicle emissions
remaining unchecked, it is impossible to reduce particulate matter without an integrated plan
by government working with organisations. Particulate matter emissions will result from
migration patterns as rural-urban migration and the use of unregulated fires for cooking and
heating. With informal settlements burgeoning around cities, it makes it very difficult to reduce
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particulate matter emissions and this has to become a focus for South African retailers
(Dlamini, 2014).
Figure 7.7 Sulphur Dioxide Concentration Levels – South Africa
Source: Department of Environmental Affairs and Tourism (2014)
Figure 7.7 illustrates an improving picture of declining sulphur dioxide levels which would
mean that pollutant levels are stabilising after a significant decline (around 10 parts per
billion). Although there may be a decline in the SO2 levels as recorded nationally, the results
as recorded in the cities may reveal a very different picture of Figure 6.4 above. The DEA
(2014) affirms that air quality especially in dense urban-industrial areas remains a cause for
national concern.
7.4.5 Climate Change and Global Warming

For a developing country such as South Africa, the threat of global warming is particularly
critical as stated in the 2001 IPCC report that at a national level, global warming in South
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Africa will have an impact on water supply, biodiversity and food security (IPCC, 2001); all
these factors have the environment in common. According to the IPCC (2007) and (2009)
climate change is particularly critical in a continent that is perceived to be vulnerable to
climate change since many African Governments are seen to lack the capacity to act
proactively to the changes that are experienced as a result of global warming. Aras and
Crowther (2013) inform that the changes in weather around the world are apparent to most
people, especially extreme weather conditions such as excessive rain or snow, droughts, heat
waves and hurricanes which have been affecting many parts of the world.
Aras and Crowther (2013) cite further examples in Hurricane Katrina that levelled New
Orleans and the volcanic eruption of Eyjafjallajo¨kull that disrupted air traffic across Europe as
pertinent examples supporting the growing case of global warming. The volcanic eruption was
a resultant effect of global warming leading to the melting of the glacier around it. It is
generally accepted that global warming and climate change is in effect all around us and
continuing to happen, and will continue to do so. Climate change advocates continue to lobby
for the reduction of green-house gases as a means to combat climate change.
Demeritt (2006) cites an opposing view from ‘climate sceptics’ who deny climate change.
These denialists’ voices (Demeritt, 2006) are amplified by the deep pockets of multinational
companies who have a vested interest in fossil fuel consumption, which according to popular
theory is the main contributor to climate change and global warming. Special interest groups
have organised and grouped into a formidable adversary particularly in the United States and
this special interest group had such influence that the United States under the leadership of
President George W. Bush formally withdrew from the 1997 Kyoto Protocol. To
counterbalance the enormous weight of scientific opinion forwarded by the IPCC, climate-
change sceptics point to the fact that 17000 people including a number of Nobel Prize
winners signed the Oregon petition. The Oregon petition states “there is no scientific evidence
that human release of carbon dioxide, methane, or other greenhouse gases is causing or will
cause catastrophic heating of the Earth’s atmosphere and disruption of the Earth’s climate”
(Demeritt, 2006).
McCright and Dunlap (2011) argue that the Western experience of modernity has been built
of industrial capitalism – an economic system predicated on the accelerated extraction and
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consumption of fossil fuels for energy. Climate change denialists have latched on to Western
governments’ denial and slow response to counter climate change impacts and have built up
arguments to challenge the very existence of global warming and climate change. It is in the
best interests of industrial business to deny that climate change and global warming exist;
fossil fuel extraction and carbon-intensive industry players thus have a vested interest in
ensuring that the denial of climate change and global warming continue and gather
momentum. This ensures their continued existence in their current form, without any onerous
checks and balances to mitigate climate change.
The National Planning Commission (2011) highlights the top ten risks by likelihood and
impact as indicated by the World Economic Forum, illustrated in Figure 7.8 Very clearly, the
most apparent risks are environmental and will affect the natural environment. If nothing is
done to mitigate climate change, the other impacts as they appear on the list will become a
reality. Storms and cyclones will lead to flooding and this will no doubt affect potable water
security and these have very real impacts for South Africa.
Figure 7.8 Top Ten Climate Change Risks
Source: National Planning Commission (2011: 50)
The National Planning Commission (2011) states that South Africa needs to move away from
the unsustainable use of natural resources. The NPC (2011) states that as water becomes
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scarcer, global policy initiatives aimed at pricing in carbon emissions, and there are similar
plans and approaches aimed at protecting the oceans, soil, and wildlife which are being used
unsustainably much to the planet’s detriment.
Figure 7.8 highlights the top ten risks which have been highlighted by the World Economic
Forum and have been further discussed and incorporated into the South African
government’s National Planning Commission’s NDP document. The greatest risks appear to
be environmental; appearing 4 times on the list. Ranking first is climate change and this
signifies that the impact and likelihood of climate change happening is a real possibility. The
NPC (2011) states that current climate models indicate that more water will be available for
agriculture in Asia and North America, but progressively less in sub-Saharan Africa, Latin
America and the Caribbean.
7.4.6 Water Quality and Water Scarcity

The Water Project (2015) mentions two types of water scarcity. Physical water scarcity is
precisely that, a physical scarcity or shortage of water to fulfil the needs. Physically there is
limited access to water as there is limited water and unlimited demand for it. The other type of
water scarcity is economic scarcity which is by far the most disturbing form of water scarcity
according to The Water Project (2015). Economic water scarcity is about an unequal
distribution of resources for many reasons, including political and ethnic conflict. Many sub-
Saharan Africa countries suffer under the effects of this type of water scarcity.
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Figure 7.9 Areas of Physical and Economic Water Scarcity
Source World Wildlife Fund (2006: 1)
As Figure 7.9 illustrates, South Africa is a water-scarce country and efficiency of use and
collection is critical. Storm water that would eventually flow into the sea without being used is
collected and purified in a water treatment plant that purifies the water. This can then be used
to flush toilets, run the building’s car wash and the cooling towers for the air-conditioning
units.
7.4.7 Environmentally-Conscientious Consumers

A growing factor that dominates consumers’ minds is the ecological footprint of the products
and services that they use. Aras and Crowther (2013) inform us that “Ecological footprint talks
to the physical area of the earth required for each person to live. Ecological footprint analysis
compares human demand from nature with the biosphere’s ability to regenerate resources
and provide services.” It is measured by assessing the total possible productive land and
marine area that is necessary to produce the population’s required consumption, but also
incorporates the necessary requirement to assimilate and absorb any consequent waste
produced using current technologies.
Figure 7.10 Waste: Packaging Information Labelling
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Source: Woolworths Holdings (2014: 3)

Figure 7.10 enables consumers to use the information on Woolworths’ packaging to
encourage consumers to make informed decisions regarding the correct disposal of the
packaging. Woolworths states that the adoption of new labelling on their packaging makes it
easier for consumers to recycle, meaning less contamination into recycling streams and a
hope that more waste will be recycled leading to more recycling facilities (Dlamini, 2014).
Wagner and Svensson (2014) state that interest in ethical consumption has increased since
the 1990s and this has resulted in consumers taking a more active interest in environmental
issues as they have realised that these issues affect them directly. International trade and
trading patterns have become more transparent and information about companies, their
suppliers and the products they produce is widely available making it even more difficult for
companies to hide information. This access to readily available information places consumers
in the driving seat and gives consumers more power and this power allows consumers to
ultimately decide which products and services are bought or not. This requires companies to
change organisational cultures, embrace innovative methods to meet and adapt to these
changing consumption and consumer preferences.
7.4.8 Environmental Policy and Regulatory Frameworks

Hines (2008: 355) states that there are a number of important policy implications for
governments, organisations and managers engaged in supply chain strategies. Governments
will need to establish regulatory frameworks that acknowledge consumer interests and the
interest of the wider communities they serve (Hines, 2008: 355). Worldwide, the Kyoto
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Protocol has been the general expression of worldwide concern about global warming. The
Kyoto Protocol “defines legally binding targets and timetables for cutting greenhouse-gas
emissions of industrialised countries that ratified the protocol”.
Many parts of the world are experiencing serious water shortage problems. There are
indications that in some parts of the world, some rivers that are used for irrigation purposes
are not even reaching the sea any longer. Millions of people do not even have access to safe
drinking water and South Africa is no exception to this. It is thus forecasted that access to
water will become a major source of conflict in the 21st century. Further, there is the issue of
virtual water where developed nations use water from developing nations, where it is in short
supply, “by embedding it in the products purchased from such countries” (Aras and Crowther,
2013).
The United Nations Global Compact12 - described as the world’s largest voluntary corporate
responsibility initiative - partners public and private enterprises, national and international
agencies together with trade and labour organisations and civic society to support the
protection of the environment, protection of human rights and the notion of social principles.
Participation is entirely voluntary, companies are thus taking part in this programme
voluntarily because it is both the socially accepted and responsible thing to do, but also
because their stakeholders expect them to behave in a manner that is sustainable and will
thus monitor them to ensure that they behave in a manner consistent with sustainable
prescripts. Governments worldwide have already or are adopting legislation that is primarily
aimed at encouraging the sustainable use of the natural environment, with some elements of
legislation dealing directly with issues of climate change. Environmental policies are
increasingly taking centre-court particularly in the areas of environmental impact
assessments. According to the IPCC (2014) report, developing nations are still struggling with
other priorities that are competing for scarce resources, such that socio-economic and
environmental policy agendas of developing countries do not yet prominently embrace climate
change as a very real threat to nation-states and also to food security, and the welfare of its
citizens.
The South African Government through the Department of Environmental Affairs and Tourism
(DEAT, 2014) promulgated legislation; Act No. 107 of 1998 (amended) Chapter 2, Section 8
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“Emissions from Compressed Ignition Powered Vehicles” (1) (a) that states that “No person
may on a public road drive or use, or cause to be driven or used, a compressed ignition
powered vehicle that emits dark smoke.’ The DEAT states ‘dark smoke’ is a density of 60
Hartridge smoke units (coastal areas) or 70 Hartridge smoke units (inland areas). A failure to
comply with the DEAT’s regulations means that ‘the vehicle has to be tested, repaired and if
not repaired, this constitutes a criminal offence and the owner can be charged under the
Criminal Procedure Act, 1977 (Act No. 51 of 1977)’ (DEAT, 2011: 13).
7.5 Implications of Sustainability for Organisations

Dos Santos (2010) states that the threat of global warming has required companies to
become more aware of sustainability in business; Africa in particular is most at threat of the
implications of global warming. This has required Woolworths to respond accordingly to the
implications of sustainability towards and in its business. Aras and Crowther (2013) state that
socially responsible behaviour has evolved and developed, and where previously its primary
concern was ‘within’ the organisation, it is now broader and transcends the traditional
boundaries of the organisation and spans outside the organisation to suppliers and suppliers’
suppliers.
Aras and Crowther (2013) further state that sustainability is concerned with resource
utilisation in the present to ensure that present-day decisions do not constrain future
operations and economic activity. This stirs into action renewable resource use, whilst
reducing the carbon footprint and impact on the environment by employing innovative
manufacturing and distribution techniques and methods. Through its supplier audits
organisations have taken the initiative by understanding the implications of implementing a
sustainable supply chain. This is not just the internal supply chain but extends beyond
corporate boundaries (Wagner and Svensson, 2014).
An environmental protection investment in the present by an organisation is essentially

investing in the organisation’s and society’s future. Manufacturing and production techniques
have to be geared towards and must support and enable the organisation to be able to
operate in the future as it does today in much the same way without any loss. It is important to
note that Woolworths integrated business reporting is also informed and guided by the
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recommendations of King III and the G3.1 guidelines of the Global Reporting Initiative (GRI).
It produces one of the world's most prevalent standards for sustainability reporting - also
known as ecological footprint reporting, environmental social governance (ESG) reporting,
triple bottom line (TBL) reporting, and corporate social responsibility (CSR) reporting (Dlamini,
2014).
Wagner and Svensson (2014) state that the role of business is interwoven with, and
contributes fully to society when it is efficient and profitable. When a company is economically
oriented, the main consideration of the organisation is maximising employment and profits
(shareholder value). Wagner and Svensson (2014) state that the more economically oriented
a company; typically, it is less likely to emphasise ethical or social components. Wagner and
Svensson (2014) continue and affirm that there is evidence that points to the link between
business profit and environmental and social responsiveness.
Companies are compelled to change their operating methodologies which are altering the
competitive landscape and this in turn is compelling more and more companies to move
beyond regulatory compliance and is forcing a rethink about products, processes and
business models.
7.6 Conclusion
This section discussed pertinent sustainability issues, progress and challenges in South
Africa and provided an overview of sustainability challenges in South Africa. South Africa’s
carbon intensive energy industry provides the backdrop to reduce its carbon reliance and
carbon footprint by working with its supply chain partners to ensure a fully sustainable supply
chain network.
This section has drawn attention to challenges in implementing an integrated supply chain
which extends out of its internal and immediate supply chain network and highlighted the
implementation of sustainable supply chain strategies focused on environmental issues. The
challenges are not unique as they try to ensure that its sustainability initiatives are carried
through to suppliers’ suppliers and beyond. Consumers are more aware and with that
awareness they can use their economic influence to determine the success of a company.
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? THINK POINT
Evaluate the actions of environmental groups who may either want to save the forests or
reduce the carbon footprint.
Do you think that the values of these environmentalists are correct?
Do they have an ethical duty to natural law?
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SECTION 8
EVALUATE HOW ETHICS AND RESPONSIBILITY IN BUSINESS
ARE AFFECTED BY ORGANISATIONAL STRUCTURES AND
CULTURES
Chapter outcomes
 Understand the elements of Corporate Culture.
 Gain insights into Policy Development in relation to Corporate Culture and its
applications
 Analyse how an Ethical Workplace will lead to a Business having an Ethical Image;
Management Structures, Styles, Skills and Roles towards developing a Corporate
Culture
 Evaluate Hallmarks of an Effective Integrity Strategy and Strategies for Ethics
Management.
Readings
8.1 Culture and Organisational Structures

The culture of an organisation is often evident in its organisational structure.
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Formal organisations with an emphasis on bureaucracy, line authority, hierarchical

management structures, and defined job titles and areas of responsibility often have
prevailing cultures that emphasize accountability, communication and cooperation.
They also tend to conform to a culture of loyalty and respect for superiors (or for their
positions of superiority). A culture that values and expects defined career pathways may be
evident in formal organisations (Rouse, Wells, Morello-Urso and Conroy, 2011).
Less formal organisations with flatter management structures, less departmentalization and
fewer defined spans of control often exhibit highly flexible, innovative and risk-taking cultures.
Sony Corporation is an example of a company that values innovation. Masaru Ibuka, the
company’s co-founder, created the atmosphere of innovation that allowed the company to
successfully introduce new products such as the Walkman (1979), the Trinitron colour
television (1968), PlayStation (1994) and the first Blu-ray players (2006), (Rouse et al. 2011)
8.2 Elements of a Corporate Culture

A corporate culture normally consists of four essential elements. These elements are
described below.
8.2.1 Values and practises

These are the way things are done in the organisation. Examples of corporate values and
practises include honesty, hard work, teamwork, quality customer service, employee
participation and innovation.
8.2.2 Symbols
These are the events or objects that are established to represent something the organisation
believes to be important. Organisations that believe in fostering positive competition among
employees, or an active lifestyle, can organize various sporting events.
OrganisationOrganisations that want to reinforce a strong employee development culture can
offer employees the opportunity to participate in training and development programmes.
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8.2.3 Rituals, rites and celebrations

These are the routine behavioural patterns in an organisation’s everyday life. For example,
regular social gatherings can be held to help develop a sense of belonging among employees
who work in small teams during the week.
8.2.4 Heroes
Heroes, or champions, are the organisation’s successful employees who reflect its values and
therefore act as an example for others.
8.3 Developing a Positive Corporate Culture

A manager must understand and assess all facets of an organisation’s unique culture,
because this is a powerful tool for achieving objectives. Knowing and appreciating an
organisation’s culture makes it easier to get things done or to initiate a change to routine or
procedures. Competent, effective managers will use the organisation’s culture as a force for
positive change. Research has shown that organisations with a healthy, well-developed and
strong culture are more likely to be successful, because such a workplace is perceived by the
employees to be more positive and personalised. Employees who have clear expectations
feel better about their work - they develop a sense of belonging. A manager who does not
understand an organisation’s culture may experience failure or disappointment.
Management can develop a positive corporate culture by introducing or building on any of the
four essential elements of a corporate culture. Management might, for example, establish
social gatherings that will allow employees to feel valued because they are part of the rituals,
rites and celebrations of the organisation. Once a positive corporate culture is established, it
needs to be kept alive. Management must ensure that staff members are given sufficient
training to reflect the values of the organisation. For example, if treating customers
respectfully is important in the organisation, it should be part of its customer service training
programme.
For a change in corporate culture to be successful and sustainable, it is vital that senior
management in an organisation be role models for staff in those important values.
Management must reinforce company values by communicating with staff, rewarding
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employees who exemplify the appropriate values, and recruiting staff who fit in with the values
of the organisation.
? THINK POINT
1. Describe the structure of your organisation and give an account of how the values can
translate into the organisation’s culture.
2. You have been appointed the CEO of your organisation. The culture is dismissive and not
at all conducive to productivity. The staff is demotivated and they fear their managers.
Develop a strategy to change the situation.
3. Choose a large-scale organisation. Use the Internet to find out about its corporate culture,
after which:
(a) Explain the values employees of that organisation would be expected to demonstrate; and
(b) What symbols or rituals and celebrations did you find that reflect the organisation’s
culture?
8.4 Policy Development and its Application

Having policies and procedures will help an organisation achieve its objectives.
Management can guide the development of policy to reinforce positive aspects of corporate
culture, such as teamwork and cooperation. Policies should be reviewed regularly. The need
to change a policy may originate with any of the stakeholders of the organisation. Regardless
of where the pressure to change occurs, the organisation will need to use a policy
development process.
Once a decision has been made to proceed with the policy development, a team would be
formed to write a draft policy, incorporating the feedback from stakeholders and any changes
to legislation.
After feedback has been received on the draft policy, it should be revised and then
presented to senior management for approval. A final version must be distributed to all
stakeholders and it needs to be clearly communicated to all staff. Management and staff may
need training related to the new policy and its implications. After the policy has been
introduced it will need to be monitored and evaluated to ensure it is easily understood and is
being followed. It is important to note that:
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 Policies and procedures must be developed and implemented to establish and

communicate basic expectations about behaviour, conduct and decision making
 A policy is a set of broad guidelines to be followed by employees when making
decisions
 Policies should be reviewed regularly and changed if necessary, using a policy
development process
? THINK POINT
Obtain a copy of the policies in your organisation

What is the purpose of a set of policies and procedures?
List any other areas for which an organisation needs to have policies.
Outline the difference between a policy and a procedure.
What are the main pressures for a change in policy?
Explain the steps in a policy development process.
Apply your understanding
1. Inspect a number of policies being used in an LSO with which you are familiar.
2. Evaluate the effectiveness of each policy by looking at aspects such as:
(a) the connection of the policy to the organisation’s objectives;
(b) the extent of consistency within the policy; and
(c) how easy it is to follow?
8.5 Conflict of Interest

Conflict of interest occurs when a person takes advantage of a situation or piece of
information for his or her own gain rather than for the employer’s interest. Such conflicts can
often occur when gifts or payments are offered. There is a fine line between what is regarded
as a gift and what may become a bribe. Corruption undermines the integrity of the business
and, if unchecked, infiltrates the workplace culture.
Once a pattern of corruption takes hold and is seen to be acceptable behaviour, it quickly
becomes entrenched within the organisation. Changing the attitudes and practises of
individuals within such an organisation is extremely difficult.
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What begins as a small incident, to which most people turn a blind eye, may soon develop
into corruption on a grand scale. When such corrupt practises are eventually exposed, the
organisation’s image will be severely damaged.
8.6 Financial Management

Organisations have ethical and legal responsibilities in relation to financial management. In
recent years, unethical practises have been highlighted and increasingly questioned. There
are growing calls for codes of behaviour to regulate the activities of organisations in relation to
financial management.
It is generally accepted that financial management decisions must reflect the objectives of an
organisation and the interests of shareholders. An area in which ethical considerations are
important is the valuing of assets.
In preparing budgets, a business estimates its expenditures and revenues. The common
practise of overestimating expenditures and understating revenue to allow for unexpected and
uncertain events is an ethical issue for an organisation.
All financial records should be regularly audited. Internal and external audits assist in
guarding against unnecessary waste, inefficient use of resources, misuse of funds, fraud and
theft.
8.7 Encouraging Ethical Organisational Behaviour

It is not always easy to maintain a consistently high degree of ethical behaviour in the real
world. Employees who want to act ethically sometimes find it difficult to do so, especially if
unethical practises are ingrained into the workplace culture.
One strategy that can be implemented to encourage ethical behaviour is to devise a corporate
code of conduct. This is a set of ethical standards for managers and employees.
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Many organisations now document and distribute their codes of conduct or core values, to
provide internal stakeholders with ethical guidelines for workplace behaviour and practises.
Training may be given to employees to ensure they understand the values of the
organisation. Most organisations also establish formal proceedings for reporting unethical
behaviour in the workplace.
8.8 An Ethical Workplace will lead to a Business having an Ethical Image

A business might express its core values with the following statements:
 We show respect for the law and perform our roles accordingly
 We conduct ourselves with integrity and act in a fair and honest manner
 We value people and show them respect
 We use the funds and assets of the company responsibly and in its best interests
 We are accountable for our own actions and their consequences
An audit is an independent check of the accuracy of financial records and accounting
procedures.
A corporate code of conduct is a set of ethical standards for managers and employees to
uphold.
8.9 Management Structures, Styles and Skills and Roles towards

developing a Corporate Culture
Nobody likes stress. Have you ever walked into someone’s home or workplace and felt
instantly at ease? If you have, that is probably because the people surrounding you were
happy and relaxed, knew what they were doing and where they were going. Management has
a significant role to play in a large-scale organisation, ensuring that the internal environment
is managed properly so that the organisation can achieve its objectives. In this chapter, you
will be studying the role of management and how managers use styles and skills to manage
the organisation ethically and with social responsibility.
Many managers think of ethics as a question of personal scruples, a confidential matter

between individuals and their consciences. These executives are quick to describe any
wrongdoing as an isolated incident, the work of a rogue employee. The thought that the
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company could bear any responsibility for an individual’s misdeeds never enters their minds.
Ethics, after all, has nothing to do with management.
In fact, ethics has everything to do with management. Rarely do the character flaws of a lone
actor fully explain corporate misconduct. More typically, unethical business practise involves
the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs,
language, and behavioural patterns that define an organisation’s operating culture. Ethics,
then, is as much an organisational as a personal issue. Managers who fail to provide proper
leadership and to institute systems that facilitate ethical conduct share responsibility with
those who conceive, execute, and knowingly benefit from corporate misdeeds.
Managers must acknowledge their role in shaping organisational ethics and seize this
opportunity to create a climate that can strengthen the relationships and reputations on which
their companies’ success depends. Executives who ignore ethics run the risk of personal and
corporate liability in today’s increasingly tough legal environment. In addition, they deprive
their organisations of the benefits available under new federal guidelines for sentencing
organisations convicted of wrongdoing. These sentencing guidelines recognise for the first
time the organisational and managerial roots of unlawful conduct and base fines partly on the
extent to which companies have taken steps to prevent that misconduct.
Prompted by the prospect of leniency, many companies are rushing to implement

compliance-based ethics programmes. Designed by corporate counsel, the goal of these
programmes is to prevent, detect, and punish legal violations. But organisational ethics
means more than avoiding illegal practise and providing employees with a rule book will do
little to address the problems underlying unlawful conduct. To foster a climate that
encourages exemplary behaviour, corporations need a comprehensive approach that goes
beyond the often punitive legal compliance stance.
An integrity-based approach to ethics management combines a concern for the law with an
emphasis on managerial responsibility for ethical behaviour. Although integrity strategies may
vary in design and scope, all strive to define companies’ guiding values, aspirations, and
patterns of thought and conduct. When integrated into the day-to-day operations of an
organisation, such strategies can help prevent damaging ethical lapses while tapping into
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powerful human impulses for moral thought and action. Then an ethical framework becomes
no longer a burdensome constraint within which companies must operate, but the governing
ethos of an organisation.
8.9.1 Management structures

A management structure is the way in which an organisation arranges its staff and resources
in order to achieve its objectives. Management structures are typically hierarchical, but have
evolved over time as the needs of organisations have changed. There are three basic types
of management structure:
 Modern management structures include the functional, divisional and matrix structure
 The functional structure involves grouping staff together according to the tasks they
perform (such as finance and human resources)
 The divisional structure groups staff together based on divisions (such as products)
 The matrix structure groups staff into teams which work on specific projects
8.9.2 Key Management Roles

The key management roles are planning, organising, leading and controlling (POLC).
These are the roles that managers perform to achieve the objectives of the organisation.
 Planning is the process of setting objectives and deciding on the methods to achieve
them
 Organising is the process of arranging resources and tasks to achieve the objectives
 Leading is the process of influencing or motivating people to work towards the
achievement of the organisation’s objectives
 Controlling is the process of evaluating performance and taking corrective action to
ensure that the set objectives are being achieved
8.9.3 Management Styles

Management styles are the ways managers work with and through other people to achieve
the objectives of the organisation. The main management styles are autocratic, persuasive,
consultative, participative and laissez-faire. The management style chosen by a manager will
be influenced by the manager’s personality, background, values, beliefs and skills; the
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personalities, backgrounds, values, beliefs and skills of staff; the situation itself; and
constraints, including time and resources.
8.9.4 Management Skills

All managers use skills as they seek to achieve the objectives of the organisation. Some of
the main management skills are communication, delegation, negotiation, team building,
problem solving and technical skills, time management, stress management, and emotional
intelligence. Different management styles rely on different management skills to varying
degrees. Ethical and socially responsible management of the internal environment has many
implications for the organisation. Ethical and socially responsible management will affect the
image and reputation of the organisation. A corporate code of conduct will need to be
produced to guide ethical behaviour to prevent organisations from exploiting staff, polluting
the environment or accepting bribes. Introducing ethical and socially responsible
management can cost money in the short term but will result in consumers purchasing more
products or services in the long term.
8.10 Integrity as a Governing Ethic

A strategy based on integrity holds organisations to a more robust standard. While
compliance is rooted in avoiding legal sanctions, integrity is based on the concept of self-
governance in accordance with a set of guiding principles. From the perspective of integrity,
the task of ethics management is to define and give life to an organisation’s guiding values, to
create an environment that supports ethically sound behaviour, and to instill a sense of
shared accountability among employees. The need to obey the law is viewed as a positive
aspect of organisational life, rather than an unwelcome constraint imposed by external
authorities.
An integrity strategy is characterized by a conception of ethics as a driving force of an

enterprise. Ethical values shape the search for opportunities, the design of organisational
systems, and the decision-making process used by individuals and groups. They provide a
common frame of reference and serve as a unifying force across different functions, lines of
business, and employee groups. Organisational ethics helps define what a company is and
what it stands for.
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Many integrity initiatives have structural features common to compliance-based initiatives: a

code of conduct, training in relevant areas of law, mechanisms for reporting and investigating
potential misconduct, and audits and controls to ensure that laws and company standards are
being met. In addition, if suitably designed, an integrity-based initiative can establish a
foundation for seeking the legal benefits that are available under the sentencing guidelines
should criminal wrongdoing occur.
8.10.1 The Hallmarks of an Effective Integrity Strategy

There is no one right integrity strategy. Factors such as management personality, company
history, culture, lines of business, and industry regulations must be taken into account when
shaping an appropriate set of values and designing an implementation programme. Still,
several features are common to efforts that have achieved some success:
The guiding values and commitments make sense and are clearly communicated. They
reflect important organisational obligations and widely shared aspirations that appeal to the
organisation’s members. Employees at all levels take them seriously, feel comfortable
discussing them, and have a concrete understanding of their practical importance. This does
not signal the absence of ambiguity and conflict but a willingness to seek solutions compatible
with the framework of values
Company leaders are personally committed, credible, and willing to take action on the values
they espouse. They are not mere mouthpieces. They are willing to scrutinize their own
decisions. Consistency on the part of leadership is key. Waffling on values will lead to
employee cynicism and a rejection of the programme. At the same time, managers must
assume responsibility for making tough calls when ethical obligations conflict.
The espoused values are integrated into the normal channels of management decision
making and are reflected in the organisation’s critical activities: the development of plans, the
setting of goals, the search for opportunities, the allocation of resources, the gathering and
communication of information, the measurement of performance, and the promotion and
advancement of personnel.
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The company’s systems and structures support and reinforce its values. Information systems,
for example, are designed to provide timely and accurate information. Reporting relationships
are structured to build in checks and balances to promote objective judgment. Performance
appraisal is sensitive to means as well as ends.
Managers throughout the company have the decision-making skills, knowledge, and
competencies needed to make ethically sound decisions on a day-to-day basis. Ethical
thinking and awareness must be part of every manager’s mental equipment. Ethics education
is usually part of the process.
Success in creating a climate for responsible and ethically sound behaviour requires
continuing effort and a considerable investment of time and resources. A glossy code of
conduct, a high-ranking ethics officer, a training programme, an annual ethics audit - these
trappings of an ethics programme do not necessarily add up to a responsible, law-abiding
organisation whose espoused values match its actions. A formal ethics programme can serve
as a catalyst and a support system, but organisational integrity depends on the integration of
the company’s values into its driving systems.
An integrity strategy is broader, deeper, and more demanding than a legal compliance
initiative - broader in that it seeks to enable responsible conduct and deeper in that it cuts to
the ethos and operating systems of the organisation and its members, their guiding values
and patterns of thought and action. It is more demanding in that it requires an active effort to
define the responsibilities and aspirations that constitute an organisation’s ethical compass.
Above all, organisational ethics is seen as the work of management. Corporate counsel may
play a role in the design and implementation of integrity strategies, but managers at all levels
and across all functions are involved in the process.
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Figure 8.1 Strategies for Ethics Management
8.11 Strategies for Ethics Management

During the past decade, a number of companies have undertaken integrity initiatives. They
vary according to the ethical values focused on and the implementation approaches used.
Some companies focus on the core values of integrity that reflect basic social obligations,
such as respect for the rights of others, honesty, fair dealing, and obedience to the law. Other
companies emphasize aspirations - values that are ethically desirable but not necessarily
morally obligatory such as good service to customers, a commitment to diversity, and
involvement in the community.
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When it comes to implementation, some companies begin with behaviour. Following

Aristotle’s view that one becomes courageous by acting as a courageous person, such
companies develop codes of conduct specifying appropriate behaviour, along with a system
of incentives, audits, and controls. Other companies focus less on specific actions and more
on developing attitudes, decision-making processes, and ways of thinking that reflect their
values. The assumption is that personal commitment and appropriate decision processes will
lead to the right action.
Martin Marietta and NovaCare have implemented an integrity strategy. In these cases,
management has found that the initiative has made important and often unexpected
contributions to competitiveness, work environment, and key relationships on which the
company depends.
Martin Marietta: Emphasizing Core Values

Martin Marietta Corporation, the U.S. aerospace and defense contractor, opted for an
integrity-based ethics programme in 1985. At the time, the defense industry was under attack
for fraud and mismanagement, and Martin Marietta was under investigation for improper
travel billings. Managers knew they needed a better form of self-governance but were
skeptical that an ethics programme could influence behaviour. “Back then people asked, ‘Do
you really need an ethics programme to be ethical?’” recalls current President Thomas
Young. “Ethics was something personal. Either you had it, or you didn’t.”
The corporate general counsel played a pivotal role in promoting the programme, and legal
compliance was a critical objective. But it was conceived of and implemented from the start as
a company-wide management initiative aimed at creating and maintaining a “do-it-right”
climate. In its original conception, the programme emphasized core values, such as honesty
and fair play. Over time, it expanded to encompass quality and environmental responsibility
as well.
Today the initiative consists of a code of conduct, an ethics training programme, and
procedures for reporting and investigating ethical concerns within the company. It also
includes a system for disclosing violations of federal procurement law to the government. A
corporate ethics office manages the programme, and ethics representatives are stationed at
major facilities. An ethics steering committee, made up of Martin Marietta’s president, senior
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executives, and two rotating members selected from field operations, oversees the ethics
office. The audit and ethics committee of the board of directors oversees the steering
committee.
The ethics office is responsible for responding to questions and concerns from the company’s
employees. Its network of representatives serves as a sounding board, a source of guidance,
and a channel for raising a range of issues, from allegations of wrongdoing to complaints
about poor management, unfair supervision, and company policies and practises. Martin
Marietta’s ethics network, which accepts anonymous complaints, logged over 9,000 calls in
1991, when the company had about 60,000 employees. In 1992, it investigated 684 cases.
The ethics office also works closely with the human resources, legal, audit, communications,
and security functions to respond to employee concerns.
Shortly after establishing the programme, the company began its first round of ethics training
for the entire workforce, starting with the CEO and senior executives. Now in its third round,
training for senior executives focuses on decision making, the challenges of balancing
multiple responsibilities, and compliance with laws and regulations critical to the company.
The incentive compensation plan for executives makes responsibility for promoting ethical
conduct an explicit requirement for reward eligibility and requires that business and personal
goals be achieved in accordance with the company’s policy on ethics. Ethical conduct and
support for the ethics programme are also criteria in regular performance reviews.
Martin Marietta’s ethics training programme teaches senior executives how to balance
responsibilities.
Today top-level managers say the ethics programme has helped the company avoid serious
problems and become more responsive to its more than 90,000 employees. The ethics
network, which tracks the number and types of cases and complaints, has served as an early
warning system for poor management, quality and safety defects, racial and gender
discrimination, environmental concerns, inaccurate and false records, and personnel
grievances regarding salaries, promotions, and layoffs. By providing an alternative channel for
raising such concerns, Martin Marietta is able to take corrective action more quickly and with
a lot less pain. In many cases, potentially embarrassing problems have been identified and
dealt with before becoming a management crisis, a lawsuit, or a criminal investigation. Among
employees who brought complaints in 1993, 75% were satisfied with the results.
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Company executives are also convinced that the programme has helped reduce the
incidence of misconduct. When allegations of misconduct do surface, the company says it
deals with them more openly. On several occasions, for instance, Martin Marietta has
voluntarily disclosed and made restitution to the government for misconduct involving
potential violations of federal procurement laws. In addition, when an employee alleged that
the company had retaliated against him for voicing safety concerns about his plant on CBS
news, top management commissioned an investigation by an outside law firm. Although
failing to support the allegations, the investigation found that employees at the plant feared
retaliation when raising health, safety, or environmental complaints. The company redoubled
its efforts to identify and discipline those employees taking retaliatory action and stressed the
desirability of an open work environment in its ethics training and company communications.
Although the ethics programme helps Martin Marietta avoid certain types of litigation, it has
occasionally led to other kinds of legal action. In a few cases, employees dismissed for
violating the code of ethics sued Martin Marietta, arguing that the company had violated its
own code by imposing unfair and excessive discipline.
Still, the company believes that its attention to ethics has been worth it. The ethics
programme has led to better relationships with the government, as well as to new business
opportunities. Along with prices and technology, Martin Marietta’s record of integrity, quality,
and reliability of estimates plays a role in the awarding of defense contracts, which account
for some 75% of the company’s revenues. Executives believe that the reputation they have
earned through their ethics programme has helped them build trust with government auditors
as well. By opening up communications, the company has reduced the time spent on
redundant audits.
The programme has also helped change employees’ perceptions and priorities. Some
managers compare their new ways of thinking about ethics to the way they understand
quality. They consider more carefully how situations will be perceived by others, the possible
long-term consequences of short-term thinking, and the need for continuous improvement.
CEO Norman Augustine notes, “Ten years ago, people would have said that there were no
ethical issues in business. Today employees think their number-one objective is to be thought
of as decent people doing quality work.”
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NovaCare: Building Shared Aspirations

NovaCare Inc., one of the largest providers of rehabilitation services to nursing homes and
hospitals in the United States, has oriented its ethics effort toward building a common core of
shared aspirations. But in 1988, when the company was called InSpeech, the only sentiment
shared was mutual mistrust.
Senior executives built the company from a series of aggressive acquisitions over a brief
period of time to take advantage of the expanding market for therapeutic services. However,
in 1988, the viability of the company was in question. Turnover among its frontline employees
- the clinicians and therapists who care for patients in nursing homes and hospitals -
escalated to 57% per year. The company’s inability to retain therapists caused customers to
defect and the stock price to languish in an extended slump.
After months of soul-searching, InSpeech executives realized that the turnover rate was a
symptom of a more basic problem: the lack of a common set of values and aspirations. There
was, as one executive put it, a “huge disconnect” between the values of the therapists and
clinicians and those of the managers who ran the company. The therapists and clinicians
evaluated the company’s success in terms of its delivery of high-quality health care. InSpeech
management, led by executives with financial services and venture capital backgrounds,
measured the company’s worth exclusively in terms of financial success. Management’s
single-minded emphasis on increasing hours of reimbursable care turned clinicians off. They
took management’s performance orientation for indifference to patient care and left the
company in droves.
At NovaCare, clinicians took management’s performance orientation for indifference to

patient care and left the company in droves.
CEO John Foster recognised the need for a common frame of reference and a common
language to unify the diverse groups. So he brought in consultants to conduct interviews and
focus groups with the company’s health care professionals, managers, and customers. Based
on the results, an employee task force drafted a proposed vision statement for the company,
and another 250 employees suggested revisions. Then Foster and several senior managers
developed a succinct statement of the company’s guiding purpose and fundamental beliefs
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that could be used as a framework for making decisions and setting goals, policies, and
practises.
Unlike a code of conduct, which articulates specific behavioural standards, the statement of
vision, purposes, and beliefs lays out in very simple terms the company’s central purpose and
core values. The purpose - meeting the rehabilitation needs of patients through clinical
leadership is supported by four key beliefs: respect for the individual, service to the customer,
pursuit of excellence, and commitment to personal integrity. Each value is discussed with
examples of how it is manifested in the day-to-day activities and policies of the company,
such as how to measure the quality of care.
To support the newly defined values, the company changed its name to NovaCare and
introduced a number of structural and operational changes. Field managers and clinicians
were given greater decision-making authority; clinicians were provided with additional
resources to assist in the delivery of effective therapy; and a new management structure
integrated the various therapies offered by the company. The hiring of new corporate
personnel with health care backgrounds reinforced the company’s new clinical focus.
At NovaCare, executives defined organisational values and introduced structural

changes to support those values.
The introduction of the vision, purpose, and beliefs met with varied reactions from employees,
ranging from cool scepticism to open enthusiasm. One employee remembered thinking the
talk about values “much ado about nothing.” Another recalled, “It was really wonderful. It gave
us a goal that everyone aspired to, no matter what their place in the company.” At first, some
were baffled about how the vision, purpose, and beliefs were to be used. But, over time,
managers became more adept at explaining and using them as a guide. When a customer
tried to hire away a valued employee, for example, managers considered raiding the
customer’s company for employees. After reviewing the beliefs, the managers abandoned the
idea.
NovaCare managers acknowledge and company surveys indicate that there is plenty of room
for improvement. While the values are used as a firm reference point for decision making and
evaluation in some areas of the company, they are still viewed with reservation in others.
Some managers do not “walk the talk,” employees complain. And recently acquired
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companies have yet to be fully integrated into the programme. Nevertheless, many NovaCare
employees say the values initiative played a critical role in the company’s 1990 turnaround.
The values reorientation also helped the company deal with its most serious problem:
turnover among health care providers. In 1990, the turnover rate stood at 32%, still above
target but a significant improvement over the 1988 rate of 57%. By 1993, turnover had
dropped to 27%. Moreover, recruiting new clinicians became easier. Barely able to hire 25
new clinicians each month in 1988, the company added 776 in 1990 and 2,546 in 1993.
Indeed, one employee who left during the 1988 turmoil said that her decision to return in 1990
hinged on the company’s adoption of the vision, purpose, and beliefs.
http://www.wiley.com
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SECTION 9
REFLECT ON VALUES AND LEVELS OF INTEGRITY IN BEING A
PROFESSIONAL MANAGER
Chapter outcomes
 Analysis the importance of Integrity in Managers for being a professional manager.
 Understand how workplace ethics, hiring practices and moral character of employees
in the organisation contribute directly to the success of the organisation.
 Evaluate the key characteristic of the future global leader and how organisations shape
individuals’ behaviour.
 Appraise the core values in the workplace and impact on the organisation as a whole.
Readings
Stanwick PA and Stanwick SD (2009) Understanding Business Ethics. First edition. Pearson
De George RT (2010) Business Ethics. Seventh edition. Prentice Hall
9.1 Integrity in a Manager

In addition to their job competencies, functional expertise and credentials, successful
managers have personal characteristics that underlie their leadership skills. Integrity is one
such characteristic that is noticeable in leaders who also demonstrate a firm commitment to
business principles. Illustrations of manager integrity can be found during interaction with
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peers, colleagues and subordinates, as well as the general public, within and outside the
workplace (Mayhew, 2007).
9.2 Management Responsibilities

Managers have two primary responsibilities:
 Managing department functions
 Managing people
Although balancing the two can be difficult, one of the biggest challenges managers
encounter is managing the workforce. Employees look to managers for guidance, honest
feedback and leadership. Managers who lead with integrity, approach performance appraisals
with candor, honesty and forthrightness in providing feedback to their employees. An example
of integrity in a manager who conducts regular performance appraisals is one who devotes
enough time to reviewing employee performance to prepare an objective and realistic
evaluation. The manager is honest with employees about their strengths and weaknesses,
and offers guidance in the form of training and development based on employees’
performance goals. Managers who lead with integrity do not sugarcoat employee evaluations
for the sake of being popular or well-liked (Mayhew, 2007).
9.3 Workplace Ethics

According to Mayhew, (2007) employers consider workplace ethics violations serious
business. However, some companies engage in activities that may raise the eyebrows of
regulatory officials. Socially irresponsible corporate behaviour is something that managers
with integrity will not tolerate, even if it means putting their own jobs in jeopardy. Managers
who value integrity, corporate citizenship and business principles report violations that conflict
with workplace ethics or regulatory compliance. They do so in good faith and for the good of
the community the business serves, as well as its employees and clients. An example is a
whistleblower executive who regrettably but publicly discloses the company’s practise of
polluting nearby communities in violation of U.S. Environmental Protection Agency
regulations.
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9.4 Hiring Practises

Managers with integrity are leaders whose hiring practises are above reproach. It is
mandatory that companies hire employees in line with the Employment Equity Act. Managers
who work for equal opportunity employers demonstrate integrity throughout their management
style, and their behaviour exemplifies their commitment to fair employment policies. An
example of a hiring manager with integrity is one who doesn’t use non-job-related factors,
such as race, colour, sex, national origin or religion, as the basis for determining if an
applicant is qualified for a position. On the other hand, neither does the manager with integrity
base his preference for qualified applicants on whether they fulfill certain diversity criteria for
the sole purpose of complying with affirmative action guidelines for companies awarded
government contracts (Mayhew, 2007).
9.5 Moral Character

By virtue of their power and status, managers may face the temptation of engaging in
workplace relationships deemed inappropriate or improper. The Employment Equity Act
provides guidance to employers on actions that are considered unlawful when it comes to
unfair employment practises and workplace harassment. Employers often hold supervisors
and managers to higher standards in their interaction with employees where unlawful
harassment is concerned because employers can be held liable for their supervisor’s actions,
especially in cases of sexual harassment. Integrity in a manager means he refrains from poor
behaviour that is inconsistent with workplace policies or actions that cause others to wonder
about his values. Examples include a romantic relationship with a subordinate that can put his
in a compromising position or an extramarital affair that arises out of a workplace relationship
(Mayhew, 2007).
Many managers think of ethics as a question of personal scruples, a confidential matter

between individuals and their consciences. These executives are quick to describe any
wrongdoing as an isolated incident, the work of a rogue employee. The thought that the
company could bear any responsibility for an individual’s misdeeds never enters their minds.
In fact, ethics has everything to do with management. Rarely do the character flaws of a lone
actor fully explain corporate misconduct. More typically, unethical business practise involves
the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs,
language, and behavioural patterns that define an organisation’s operating culture. Ethics,
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then, is as much an organisational as a personal issue. Managers who fail to provide proper
leadership and to institute systems that facilitate ethical conduct share responsibility with
those who conceive, execute, and knowingly benefit from corporate misdeeds (Mayhew,
2007).
Managers must acknowledge their role in shaping organisational ethics and seize this
opportunity to create a climate that can strengthen the relationships and reputations on which
their companies’ success depends. Executives who ignore ethics run the risk of personal and
corporate liability in today’s increasingly tough legal environment. In addition, they deprive
their organisations of the benefits available under new federal guidelines for sentencing
organisations convicted of wrongdoing. These sentencing guidelines recognise for the first
time the organisational and managerial roots of unlawful conduct and base fines partly on the
extent to which companies have taken steps to prevent that misconduct (Mayhew, 2007).
Prompted by the prospect of leniency, many companies are rushing to implement

compliance-based ethics programmes. Designed by corporate counsel, the goal of these
programs is to prevent, detect, and punish legal violations. But organisational ethics means
more than avoiding illegal practise; and providing employees with a rule book will do little to
address the problems underlying unlawful conduct. To foster a climate that encourages
exemplary behaviour, corporations need a comprehensive approach that goes beyond the
often punitive legal compliance stance (Mayhew, 2007).
An integrity-based approach to ethics management combines a concern for the law with an
emphasis on managerial responsibility for ethical behaviour. Although integrity strategies may
vary in design and scope, all strive to define companies’ guiding values, aspirations, and
patterns of thought and conduct. When integrated into the day-to-day operations of an
organisation, such strategies can help prevent damaging ethical lapses while tapping into
powerful human impulses for moral thought and action. Then an ethical framework becomes
no longer a burdensome constraint within which companies must operate, but the governing
ethos of an organisation (Mayhew, 2007).
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9.6 Demonstrating Integrity: A Key Characteristic of the Future Global

Leader
At a time when shredding documents, creative accounting and ruthless tactics come to light in
the media on a fairly regular basis, it is no surprise that the young leaders of today have
spotted the need for leaders to demonstrate integrity and ethical behaviour. As a matter of
fact, young leaders of today believe that demonstrating integrity will become the most
important characteristic of future leaders (Goldsmith 2003).
9.6.1 What Is Integrity?

"Integrity is the quality of possessing and adhering to high moral principles or professional
standards" (Encarta Dictionary, 2008). In other words, it is not enough to simply espouse
values; global leaders have the added responsibility of influencing through example.
Indeed, events in the business arena involving companies such as Enron and WorldCom
have illustrated how integrity lapses can lead even "benchmark companies" into bankruptcy.
These unfortunate negative public examples of integrity violations have clearly made the
business case for including integrity as a key quality of the leader of the future.
9.6.2 Demonstrating Integrity

The next question you will probably have is: How do I (or do I already) demonstrate integrity?
Following are five significant characteristics of demonstrating integrity as well as some (but
not all!) actions you can take to demonstrate integrity (Goldsmith, 2003).
One characteristic that demonstrates integrity is to behave honestly and practise ethical
behaviour in your interactions. You can accomplish this by:
 Recognizing that you are a model for those whom you lead
 Being consistent and clear about your ethical standards
 Providing facts, not smokescreens
 Speaking up even when it may be risky to do so
 Challenging any system that encourages dishonesty or rewards unethical behaviour
(Goldsmith, 2003)
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A second characteristic that demonstrates integrity is to ensure that the highest standards for
ethical behaviour are practised throughout the organisation. You can do this by:
 Being consistent and clear about ethical standards and expectations
 Encouraging people to express concerns about questionable practises
 Reviewing ethical concerns with your staff or management
 Offering open, candid feedback to management and co-workers
 Recognizing that honesty and fairness in all relations with others is important
(Goldsmith, 2003)
A third characteristic that demonstrates integrity is to avoid political and self-serving

behaviour. You can demonstrate this by:
 Understanding that being competent in your job is the most effective method of
achieving success
 Realizing that organisational politics take many forms; list the tactics you are aware of
 Sharing recognition; not accepting undue credit
 Being a team player
 Combating job politics through objective measurements of performance (Goldsmith,
2003)
A fourth characteristic that demonstrates integrity is to courageously stand up for what you
believe in. You can do this by:
 Understanding that risk taking plays a part in nearly every decision made
 Being willing to take risks to achieve excellence and stay competitive
 Developing a positive attitude when facing objections
 Working to gain support and cooperation from key individuals in your; organisation
 Encouraging and supporting others to speak up and voice their viewpoints (Goldsmith,
2003)
The fifth characteristic that demonstrates integrity is to be a role model for living the
organisation's values. You can accomplish this by:
 Walking the talk: be an example of what you want your employees to be
 Being sure your performance reflects the best standards
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 Acknowledging the unique knowledge and talents of others

 Demonstrating pride in your company
 Coaching employees to follow your example of performing to high standards
(Goldsmith, 2003)
People will not follow leaders whom they do not trust. Great trusted leaders demonstrate
integrity and in doing so, achieve the faith and confidence of their workers, colleagues and
peers, who then become willing followers, loyal employees and trusted co-workers. This
important characteristic is an integral step on the road to success for the great leaders of the
future (Goldsmith, 2003).
9.7 How Organisations Shape Individuals’ Behaviour

The once familiar picture of ethics as individualistic, unchanging, and impervious to
organisational influences has not stood up to scrutiny in recent years. Sears Auto Centers’
and Beech-Nut Nutrition Corporation’s experiences illustrate the role organisations play in
shaping individuals’ behaviour - and how even sound moral fibre can fray when stretched too
thin.
In 1992, Sears, Roebuck & Company was inundated with complaints about its automotive
service business. Consumers and attorneys general in more than 40 states had accused the
company of misleading customers and selling them unnecessary parts and services, from
brake jobs to front-end alignments. It would be a mistake, however, to see this situation
exclusively in terms of any one individual’s moral failings. Nor did management set out to
defraud Sears customers. Instead, a number of organisational factors contributed to the
problematic sales practises.
In the face of declining revenues, shrinking market share, and an increasingly competitive
market for undercar services, Sears management attempted to spur the performance of its
auto centers by introducing new goals and incentives for employees. The company increased
minimum work quotas and introduced productivity incentives for mechanics. The automotive
service advisers were given product-specific sales quotas to sell so many springs, shock
absorbers, alignments, or brake jobs per shift - and paid a commission based on sales.
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According to advisers, failure to meet quotas could lead to a transfer or a reduction in work
hours. Some employees spoke of the “pressure, pressure, pressure” to bring in sales.
Under this new set of organisational pressures and incentives, with few options for meeting
their sales goals legitimately, some employees’ judgment understandably suffered.
Management’s failure to clarify the line between unnecessary service and legitimate
preventive maintenance, coupled with consumer ignorance, left employees to chart their own
courses through a vast gray area, subject to a wide range of interpretations. Without active
management support for ethical practise and mechanisms to detect and check questionable
sales methods and poor work, it is not surprising that some employees may have reacted to
contextual forces by resorting to exaggeration, carelessness, or even misrepresentation.
At Sears Auto Centers, management’s failure to clarify the line between unnecessary service
and legitimate preventive maintenance cost the company an estimated $60 million.
Shortly after the allegations against Sears became public, CEO Edward Brennan
acknowledged management’s responsibility for putting in place compensation and goal-
setting systems that “created an environment in which mistakes did occur.” Although the
company denied any intent to deceive consumers, senior executives eliminated commissions
for service advisers and discontinued sales quotas for specific parts. They also instituted a
system of unannounced shopping audits and made plans to expand the internal monitoring of
service. In settling the pending lawsuits, Sears offered coupons to customers who had bought
certain auto services between 1990 and 1992. The total cost of the settlement, including
potential customer refunds, was an estimated $60 million.
Contextual forces can also influence the behaviour of top management, as a former CEO of
Beech-Nut Nutrition Corporation discovered. In the early 1980s, only two years after joining
the company, the CEO found evidence suggesting that the apple juice concentrate, supplied
by the company’s vendors for use in Beech-Nut’s “100% pure” apple juice, contained nothing
more than sugar water and chemicals. The CEO could have destroyed the bogus inventory
and withdrawn the juice from grocers’ shelves, but he was under extraordinary pressure to
turn the ailing company around. Eliminating the inventory would have killed any hope of
turning even the meager $700,000 profit promised to Beech-Nut’s then parent, Nestlé.
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A number of people in the corporation, it turned out, had doubted the purity of the juice for
several years before the CEO arrived. But the 25% price advantage offered by the supplier of
the bogus concentrate allowed the operations head to meet cost-control goals. Furthermore,
the company lacked an effective quality control system, and a conclusive lab test for juice
purity did not yet exist. When a member of the research department voiced concerns about
the juice to operating management, he was accused of not being a team player and of acting
like “Chicken Little.” His judgment, his supervisor wrote in an annual performance review, was
“coloured by naïveté and impractical ideals.” No one else seemed to have considered the
company’s obligations to its customers or to have thought about the potential harm of
disclosure. No one considered the fact that the sale of adulterated or misbranded juice is a
legal offence, putting the company and its top management at risk of criminal liability.
An FDA investigation taught Beech-Nut the hard way. In 1987, the company pleaded guilty to
selling adulterated and misbranded juice. Two years and two criminal trials later, the CEO
pleaded guilty to ten counts of mislabelling. The total cost to the company - including fines,
legal expenses, and lost sales - was an estimated $25 million.
Such errors of judgment rarely reflect an organisational culture and management philosophy
that sets out to harm or deceive. More often, they reveal a culture that is insensitive or
indifferent to ethical considerations or one that lacks effective organisational systems. By the
same token, exemplary conduct usually reflects an organisational culture and philosophy that
is infused with a sense of responsibility.
Johnson & Johnson’s handling of the Tylenol crisis is sometimes attributed to the singular
personality of then-CEO James Burke. However, the decision to do a nationwide recall of
Tylenol capsules in order to avoid further loss of life from product tampering was in reality not
one decision but thousands of decisions made by individuals at all levels of the organisation.
The “Tylenol decision,” then, is best understood not as an isolated incident, the achievement
of a lone individual, but as the reflection of an organisation’s culture. Without a shared set of
values and guiding principles deeply ingrained throughout the organisation, it is doubtful that
Johnson & Johnson’s response would have been as rapid, cohesive, and ethically sound.
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Acknowledging the importance of organisational context in ethics does not imply forgiving
individual wrongdoers.
Many people resist acknowledging the influence of organisational factors on individual

behaviour - especially on misconduct - for fear of diluting people’s sense of personal moral
responsibility. But this fear is based on a false dichotomy between holding individual
transgressors accountable and holding “the system” accountable. Acknowledging the
importance of organisational context need not imply exculpating individual wrongdoers. To
understand all is not to forgive all (Goldsmith, 2003)
9.8 Leadership and the Importance of Integrity

It is time to re-engage your management team and provide them some refresher training on
leadership in the workplace. The concerned are asked to research and bring in the latest and
greatest leadership training materials. Hopefully, they will find some new insights or
perspectives on the roles of workplace leadership and on what makes a good leader. Most of
the HR professional are tasked with this assignment (Sporleder, 2009).
Hiring for leadership training material can be a little overwhelming. Where do you start and
even if you find something, how do you know it is a good fit for your company’s culture and
management team? Before you spend too much time looking for leadership resources and
materials, why not start at the foundation and ask the question, “Does my management team
understand the foundational aspects of good leadership? Do they realize that good leadership
is only as good as the foundation it is built upon?” Maybe it is time for a refresher that reminds
your leaders of the importance of having a solid foundation built on core leadership values,
especially integrity (Sporleder, 2009).
9.8.1 The importance of core values

Core values are defined as those things which we believe are the most important aspects of
who we are and how we treat others. In workplace leadership, our core beliefs about people
and how we treat them will impact how we manage them day-to-day. Employee leadership
styles can be different, yet effective, because the leader’s core values are solid. Effective
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leaders know that people need something fundamental from their boss in order to perform at
their peak (Sporleder, 2009).
Interestingly enough, core leadership values are not always expressed outwardly. In fact,
leaders who go around saying, “I value integrity” all the time can be suspect to this very
statement. Effective core values involve working behind the scenes. Like an operating system
on a computer. You know it is working because the software applications are working. Core
values are also like the foundation of a building. And like a building, our leadership ability is
only as good as the foundation it is built upon (Sporleder, 2009).
Every leader should ask themselves the questions, “What are my core values? What kind of
leadership values will create the most productive work environment where people will perform
their best? What fundamental leadership beliefs do I have about people that affect how I treat
them and how I manage them?” Without a good understanding of our core values, we will be
less than effective leaders doomed to suffer from mediocre leadership ability (Sporleder,
2009).
9.8.2 The benefits of integrity

Let Us start by determining what core values are and what they ought to be to promote
positive leadership in the workplace.
When you study great leaders, and you can probably list your favourites, you see one
consistent character in each leader - integrity. Integrity is the stable force behind countless
leadership role models. Great leaders model integrity by being honest and doing what is right
no matter what the circumstances. Integrity requires you to make the right choice, even when
you may not receive personal gain from the outcome, and to put your own personal agenda
aside for the greater good of the organisation and the people (Sporleder, 2009).
Effective leaders know that people need a leader who has integrity. Without it, people are
missing a vital ingredient in their ability to perform. Much like the foundation of a building,
integrity is essential for lasting success and provides a work environment with three key
qualities: stability, safety and reference (Sporleder, 2009).
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Stability
People who see their boss as honest and having a strong commitment to doing the right thing
are assured that they work in an environment of stability. They know that their boss’ integrity
will not be shaken when tough decisions need to be made. Their boss will “stick up” for his
employees and support them. He will treat people fairly and will be more willing to share
information with his employees that is necessary for them to do their jobs. Conversely, a
leader who is not upfront with people and hides behind his own deceit for his own self-
protective purposes will create an environment of fear, uncertainty and an atmosphere of
“everyone for themselves!” These sorts of leaders are more prone to play favorites or other
political games and leave their team to figure out the rules of engagement – all distractions to
performance and productivity (Sporleder, 2009).
Safety
Leaders with a strong foundation of integrity make it safe for their employees to perform at
their peak. Leadership integrity gives people a sense of empowerment. A good leader knows
that there is safety in providing people with the freedom to be open and honest. People know
that there will not be retribution for their ideas and opinions. A good leader knows how to
allow people this freedom while, at the same time, ensuring that it is done respectfully and
appropriately. People who feel safe will perform better than people who do not feel safe. It is
also the best ingredient for instilling an environment of innovation. How many times have we
heard of an innovation that not only transformed a business, but the whole industry? Good
leaders know that ensuring an environment of safety encourages innovation. And with
innovation comes transformation (Sporleder, 2009).
Reference
Just like in a building, a leader’s integrity forms a baseline that serves as a reference or
measure. A leader with a strong foundation of integrity is a guiding light to those around him.
Employees tend to emulate what their boss does. In a high performing environment, leaders
with integrity are the role models for others to see and follow and form the standards for how
others ought to behave, (Sporleder, 2009).
9.8.3 Choosing to lead with integrity in the workplace

A good question to ask yourself and your leadership team is, “How much do we value integrity
and how are we demonstrating it?” It may not need to be said, but don’t you think we have
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seen too many examples of leaders in our business world who lack integrity? Isn’t it obvious
the negative impact those leaders have on their people and their business?
If leadership is only as good as the foundation it is built upon, a leader must have a
foundation that is as steady as a rock. Having integrity in our workplace gives us this
foundation. And with this foundation of integrity, a leader is ready to build his unique
leadership style (Sporleder, 2009).
9.9 Core Values for the Workplace

There are many fine values, such as courtesy, confidence, ingenuity, thrift, and so on. The
trouble is that the list of values grows easily and can cause many employees to lose their
focus. They fail to prioritize. A "short list" of values is far more useful in putting the workplace
back on track (Dilenschneider, 2013).
Moreover, when the core values exceed four or five points, it becomes difficult to
communicate and reinforce them. The following are five characteristics for the practical values
having foremost importance:
 Integrity
 Accountability
 Diligence
 Perseverance
 Discipline
There are companies - strong organisations - centered on these values. They are invariably
successful. Almost always, these core values generate other values in employees. But what if
all our organisations started with the same short list? Wouldn't that give American industry, or
the industry of any culture, an important leg up? (Dilenschneider, 2013).
9.9.1 Integrity
Integrity is no simple matter. It is particularly easy for business people to lie. There is a list of
46 reasons that executives lie. The following are examples:
 If I didn't lie about my loyalty to the firm, they would never have promoted me.
 If I hadn't lied, I would have exposed our firm to an unfair lawsuit
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 If the union knew our real profit prospects, they would beat us black-and-blue at the
bargaining table
There seems to be some compelling reasons to lie in certain situations. Although there are a
few plausible defences of lying, it is unsure if it is ever justified. Once a company starts to
condone lying as a matter of course, it is headed for serious trouble. In such businesses, lying
becomes a game. And success goes to those who play it best.
In an article titled, "Where Lying Was Business as Usual," Businessweek reviewed a book on
the Wedtech Scandal, a Washington scandal of the late '80s in which a few government
officials fed fat contracts to a dubious supplier. The reviewer, Harris Collingwood, concludes
his piece, saying, "In the end, what's remarkable about the Wedtech gangsters isn't that they
were crude and thuggish. It's that among the sharp-elbowed hordes pushing through
Washington's corridors of power, they didn't even stand out.", (Dilenschneider, 2013).
9.9.2 Accountability
The value of accountability is the willingness to take responsibility for one's own actions.
Bob Waterman has written a penetrating little book, Adhocracy: The Power to Change. It
narrates an engaging story about accountability in an energy-cogenerating firm called AES.
The people in the Beaver Valley, Pennsylvania, AES plant learned what many workers and
managers know across the country: They learned who is responsible for the way things run.
The answer, of course, is that they are. "They," however, is not anyone of them, but rather a
nameless, faceless force hiding in the organisation. These powerful secret terrorists, these
mega-gremlins - "they" - are always there to gum up the works.
They send the wrong material handling orders. They misprocess the medical claims. They
forget to clean and maintain the machinery.
A courageous top manager in this firm, Bob Hemphill - who is a leader, no doubt about it -
decided to declare war on "they." He sent out coffee mugs emblazoned with, "Who is they
anyway?" He put up posters that read: "Send they a letter."
With a healthy sense of humour, AES eliminated the rationalization, "They make us do it." It
was no longer an acceptable excuse. In a particularly clever step, the workers created a
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system of organisation called the honeycomb structure and organised themselves into
families: the turbine family, the coal-pile family and the scrubber family. Workers were also
encouraged to move from family to family to expand their range of skills. In this way, AES was
able to make the breakthrough on accountability, as each "family" also provided a framework
of values that, in turn, became a basis for improving accountability (Dilenschneider, 2013).
9.9.3 Diligence
There are scores of individuals who equate diligence with drudgery. Too often, managers
demand diligence about the wrong things: filling out forms is one, glaring example.
According to Arno Penzias, the head of research at Bell Labs, the mother of one of his
teachers at Columbia used to ask her son persistently when he was just a young school child,
"Did you ask any good questions today, Isaac?" The question was not what you learnt in
school today, but what good questions did you ask. The mother's priority must have had an
impact on Penzias, because he eventually helped institutionalize the practise of asking useful
questions at AT&T Ben Labs. Asking tough questions has become a hallmark of AT&T
research culture and has helped to establish Bell Laboratories as one of the great creative
institutions in America. The best firms are diligent about uncommon things - for example,
asking creative questions (Dilenschneider, 2013).
9.9.4 Perseverance
Perseverance presupposes confidence, and few companies can match Xerox for its sense of
confidence and determination. Xerox, which pioneered the photocopying business, lost
important ground to the Japanese on price. Now, Xerox is reviving its copying business by
focusing on the value added by advanced technologies and colour copying. Focused
leadership over time implies productive, useful perseverance.
In the '80s, "cutting your losses" quickly was fashionable thinking. In the future, companies
won't be able to exit and enter businesses as quickly as in the last decade. The initial costs of
entry, especially for marketing, will be prohibitive. Once the massive investment has been
made, it becomes increasingly awkward to justify abandoning the business. The vice
chairman of the holding company that includes Revlon said in the Wall Street Journal, "We
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aren't going to spend $30 million to launch a deodorant." The minimum stakes can be
staggering, and the entry costs for other kinds of products are, in fact, much higher.
Employees must be prepared for prolonged competitive horizons. The battles of entrenched
foes, such as Pepsi and Coke, will be more the norm than the exception. Just think: The Cola
Wars between Pepsi and Coke have already lasted longer than the Cold War between the
United States and the Soviet Union.
Discipline does not always imply following orders. Sometimes, it points in the opposite
direction. Business Month named MCI one of the five best-managed companies in 1990. The
late Bill McCowan, MCI's former Chairman and CEO, did "his best to ban... standard
procedures and practises." He would get up in front of his people and say: "I know that
somewhere, someone out there is trying to write up a manual on procedures. Well, one of
these days I'm going to find out who you are, and when I do, I'm going to fire you." For
McCowan, I think, discipline meant that individuals are required to think on their feet. They
have to solve problems sensibly from the earliest days of their careers (Dilenschneider,
2013).
Obviously, there are many ways to sort and define the five cornerstone values: integrity,
accountability, diligence, perseverance, and, discipline. It is hard to contain the focus to these
attributes before other supporting values come into play. Diligence presumes a sense of
urgency, for example, because you can't be just busy; you must be busy in the context of
time. Perseverance also requires judgment because no one would ever persist in a patently
wrongheaded course. Although they may presume other values, the five cornerstone values
are a credible starting point, and, I think, can be considered a priority list of the key workplace
values (Dilenschneider, 2013).
In my view, management now has no choice but to teach values. Business leaders in the
United States have shunned talking about values, because they seem to suggest a religious
or moral outlook. This implication is not necessarily the case. Further, it is not possible to
sustain industrial competitiveness without attention to them. Ask a Japanese CEO to define
his primary job, and he's likely to tell you that his role is to "harmonize" values. It is to help
employees to adjust to the ever-shifting structure of priorities and demands. Values are what
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motivate and sustain behaviour over the long run, and this perseverance is something the
Japanese understand particularly well (Dilenschneider, 2013).
? THINK POINT
Discuss any case in the public and in the private sector where the leadership of a country or a
corporate compromised the integrity of the process for personal gain.
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SECTION 10
WAYS IN WHICH CORRUPTION AFFECTS THE ECONOMY AND
BUSINESS
Chapter outcomes
 Critically analyse the effects of corruption on the economy
 Assess the impact of corruption on the economy and business
 Analyse methods to eradicate corruption in business and hence economy
Reading
10.1 Introduction
Corruption is dishonest activity in which a person abuses his position of trust in order to
achieve some personal gain or advantage for himself, or provide an advantage/disadvantage
for another person or entity.
Corrupt conduct can take many forms including:
 conflicts of interest
 taking or offering bribes
 dishonestly using influence
 blackmail
 fraud
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 theft
 embezzlement
 tax evasion
 forgery
 nepotism and favouritism
10.2 The Effect of Corruption on the Economy

According to an organisation, Corruption Watch, “Corruption affects us all”.
Corruption affects us all. It threatens sustainable economic development, ethical values and
justice; it destabilises our society and endangers the rule of law. It undermines the institutions
and values of our democracy. But because public policies and public resources are largely
beneficial to poor people, it is they who suffer the harmful effects of corruption most
grievously, (Ray, 2007).
To be dependent on the government for housing, healthcare, education, security and welfare,
makes the poor most vulnerable to corruption since it stalls service delivery. Delays in
infrastructure development, poor building quality and layers of additional costs are all
consequences of corruption. Many acts of corruption deprive our citizens of their
constitutional and their human rights.
Economic implications
Corruption and international perceptions of corruption in South Africa, has been damaging to
the country’s reputation and has created obstacles to local and foreign direct investment,
flows to the stock market, global competitiveness, economic growth and has ultimately
distorted the development and upliftment of our people (Ray, 2007).
Public money is for government services and projects. Taxes collected, bonds issued, income
from government investments and other means of financing government expenditure are
meant for social grants, education, hospitals, roads, the supply of power and water and to
ensure the personal security of our citizens.
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Corruption and bad management practises eat into the nation’s wealth, channelling money
away from such projects and the very people most dependent on government for support.
Countless studies around the world show how corruption can interrupt investment, restrict
trade, reduce economic growth and distort the facts and figures associated with government
expenditure. But the most alarming studies are the ones directly linking corruption in certain
countries to increasing levels of poverty and income inequality.
Because corruption creates fiscal distortions and redirects money allocated to income grants,
eligibility for housing or pensions and weakens service delivery, it is usually the poor who
suffer most. Income inequality has increased in most countries experiencing high levels of
corruption (Ray, 2007).
The need for good governance

Adherence to good governance creates an environment where corruption struggles to
flourish. Failure to adhere to the practises of good governance means stakeholders
increasingly demand accountability. Mass action and strikes are organised in protest as
citizens begin to lose faith in the ability or willingness of their elected officials. Political
instability increases. Investment declines. The sale of shares by investors decreases the
value and rating of companies. Their regulators can deny them licences, a stock exchange
listing or the ability to sell products and services. Other organisations refuse to do business
with them. And donors or economic organisations grant fewer loans or aid to nations whose
governance is murky (Ray, 2007)
10.2.1 Key principles of good governance include:

Honesty – Organisations are the sum of their parts. Employees and managers who operate
in good faith, with integrity and no conflicts of interest, will underpin the governance
cornerstone of honesty and elicit trust from stakeholders.
Transparency – Decisions made, action taken and how it is reported to stakeholders must be
communicated clearly and made easily available for those affected by the organisation.
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Responsiveness – Listening to stakeholders, taking action or reporting transparently should

be done within a reasonable time of a request, complaint or concern.
Management independent of governing bodies – There must be a separation of powers

and chain of accountability. Friends and family members, or suspected conflicts of interests
cannot overlap between layers of management and directors, boards or senior politicians.
Independence ensures better judgement, assessment of risk and optimum performance.
Rule of law – Institutions must comply with the laws, codes, guidelines and regulations of the
nations in which they operate.
Effectiveness and efficiency – Good governance is also delivering to mandates, meeting

the needs of stakeholders, curtailing expenditure, streamlining decision-making and action,
and making the best use of available resources.
Fairness – Good governance entrenches the principle of fairness, and treating stakeholders
equally.
Justice – Justice and governance concerns the moral responsibility and integrity of
individuals within an organisation and the behaviour of the organisation itself.
Accountability – Ensuring that public and private institutions, corporations and individuals
entrusted with public resources and civil society are held to account, means they are
answerable to their stakeholders
http://www.corruptionwatch.org.za
10.3 The Effects of Corruption on Business

Business corruption affects society at large. Corruption inevitably leads to a diminished
business climate when the public trust is put at risk, according to Stanford Graduate School of
Business. Corruption can take many forms that can include graft, bribery, embezzlement and
extortion. Its existence reduces business credibility and profits when professionals misuse
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their positions for personal gain (Ray 2007). The problems brought about by corruption are
discussed below.
10.3.1 Inefficiency
When resources are tampered with and used improperly, the efficiency of a business suffers.
There are insufficient resources to effectively run the business and maintain its levels of
operations. When the news about corrupt business professionals breaks, customers lose
respect and trust, requiring company officials to spend valuable time and resources to monitor
the fallout and reassure clients the company is still viable. Legal fees, penalties and public
relations efforts reroute important resources form the core business and lead to an inefficient
use of company funds and personnel (Ray 2007).
10.3.2 Lost resources

In addition to the inefficient use of resources, corruption can have a number of other
economic impacts on business. Employee ranks often are inflated to cover up the corrupt
professional’s activities. The cost of increasing employee ranks in addition to any
embezzlement that is going on is passed on to consumers in the form of higher prices. Prices
also can be inflated when corruption takes place outside a company in the form of corrupt
government officials who take bribes. Consumers pay the costs of vendor corruption when
purchasing agents require payoffs, or when vendors skim profits and raise prices to cover
their illegal activities (Ray 2007).
10.3. 3 Weakened development

Investors are sceptical about doing business with companies and municipalities that are
known for corruption. Whether you are seeking investment to grow your firm or you sell
investments for a living, you will have a much harder time finding willing investors when bribes
or in-kind favors are required, or your business has a history of corruption within its ranks.
Competition is unfairly affected when investors’ risk is multiplied by changing business
climates that follow corrupt business practises. Due diligence is defeated when the facts
change according to the current levels of corruption. Practical investors steer clear of
businesses with a corrupt history (Ray 2007).
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10.3.4 Increases crime

The results of corruption in business add to the burgeoning roles of crime-fighting government
agencies, police departments and internal investigators. The trickledown effect of corruption
usually ends up feeding black market interests, and may even support the efforts of organised
crime as the activities infiltrate various business levels. Corruption begets continued criminal
activity when it goes undetected. The effects of corruption in emerging third world countries is
evident and widespread, but even in America, where competition and greed can outweigh the
good of society, corruption fuels the growth of criminal enterprises and eventually affects the
society in which the business operates.
http://smallbusiness.chron.com
10.4 The cost of corruption is a serious challenge for companies

New tools, technologies and strategies aim to make it easier to embed anti-corruption and
bribery policies into businesses.
Bribery, corruption and facilitation payments were the most commonly reported issues
recorded by the Institute of Business Ethics' media monitoring during 2013. They accounted
for 13% of all the stories on business ethics. The sectors most frequently mentioned were
extractives (70%), defence and security (63%), pharmaceuticals (47%) and broadcast/media
(33%).
Businesses still have some way to go to embed anti-bribery and corruption mechanisms
effectively into their culture. This gap between saying and doing is also reflected in external
studies. A survey by Control Risks and the Economist Intelligence Unit found that 25% of
companies felt there was at least a "somewhat likely chance" their company would be
required to investigate a suspected violation of anti-bribery laws involving an employee in the
next two years.
The effects of corruption on society are well documented. Politically it represents an obstacle
to democracy and the rule of law; economically it depletes a country's wealth, often diverting it
to corrupt officials' pockets and, at its core, it puts an imbalance in the way that business is
done, enabling those who practise corruption to win.
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The language of bribery also deceives, implying that what is being offered or expected is of
no consequence. But corruption is not a victimless crime; it leads to decisions being made for
the wrong reasons. Contracts are awarded because of kickbacks and not because they are
the best value for the community. Corruption costs people freedom, health and human rights
and, in the worst cases, their lives. It may also cost companies, as the UK Anti-Bribery Act
takes force, making an organisation culpable if it fails to have "adequate procedures" in place
to stop bribery and corruption.
10.5 The Challenge for Companies

Most companies offer employees some guidance on anti-bribery and corruption. However, the
global nature of today's business means that organisations can have difficulties when trying to
embed policies around the globe.
Mao Zedong said "food before ethics". While no one would suggest that bribery and
corruption are good things, if you believe your job is dependent on offering or paying a bribe,
the corruption policy sent round by head office may have little bearing on your decision at that
moment.
Employers need to provide relevant support to staff to help them recognise, understand and
respond to the ethical challenges they may face.
Creating a culture that influences employees' actions, decision making and behaviour can be
a challenging and lengthy process, requiring sensitivity, patience and resources. Corruption
can be so ingrained into a company's culture as to be considered "the way business is done".
This can be the case especially for companies who use agents, or who operate in countries
where enforcement of anti-corruption regulation is poor and facilitation payments are seen as
the norm. Getting staff to see that a backhander is actually a form of corruption takes time
and requires regular communication and training.
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10.6 Support for Staff

Difficult decisions for employees often arise in everyday situations, when travelling, when
offering or accepting gifts and hospitality or when negotiating with customers and suppliers.
Anyone can offer or be offered a bribe. Being clear about what can and can't be accepted is
good business practise and reduces the risk of corruption.
The Institute of Business Ethics has developed a free app, the Say No toolkit, which provides
the practical guidance to recognise a difficult situation and to do the right thing in response. It
has been designed to help employees have the confidence to make the right decision in
situations which could lead to accusations of bribery.
10.7 Tone at the Top

However, even with the support of a decision-making tools and apps, it is one thing to know
the "right" decision to make, but often another to be able to apply that decision. Factors such
as fear, ignorance, and real or perceived pressure to meet business targets, or pressure from
a more senior figure, can make ethical decision-making harder.
Visible support from leadership is critical and the impact of leading by example should not be
underestimated. If senior management declare a zero-tolerance approach to bribery and
corruption, they must demonstrate that they will support staff if they lose contracts or business
in the short-term as a result. Creating a culture of integrity and openness – where ethical
dilemmas arising from doing business in corruption hotspots are discussed, and employees
feel supported to do the right thing - is a powerful way to help mitigate against the risk of an
ethical lapse.
The culture of an organisation is ultimately set by people at the top. Leaders who regularly
talk about ethical issues, support staff to uphold ethical standards and behave in an open and
transparent way send the message to all employees, and to the wider world, that the fight
against corruption is taken seriously.
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? THINK POINT
Discuss the policy your organisation has in place to deal with corruption.
Highlight any corrupt activities which have occurred in either the public or private sectors over
the past year.
Provide a critical opinion of whether a policy on corruption deters corrupt activities in the
public and private sectors.
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Governance and Sustainability

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1 GOVERNANCE AND SUSTAINABILITY

MASTER OF BUSINESS ADMINISTRATION

GOVERNANCE AND SUSTAINABILITY

SECTION 1 Governance and Sustainability Study Guide 3

SECTION 2 The Impact of Underlying Mechanisms on Governance 7

SECTION 3 Arguments for and Against Corporate Social Responsibility 43

SECTION 4 Different Theoretical Models of Stakeholder Management 73

SECTION 5 Key Features of Theories of Ethics 97

SECTION 6 Application of Ethical Theories in a Business Context 119

SECTION 7 Conceptions of Environment and Sustainability 136

SECTION 8 Evaluate How Ethics and Responsibility in Business are Affected by

SECTION 9 Reflect on Values and Levels of Integrity in being a Professional 186

Structure of this Study Guide

Different Theoretical Models of Stakeholder Management Guide details what you

SECTION 5 are required to learn.

Conceptions of Environment and Sustainability (textbooks and journal

Evaluate How Ethics and Responsibility in Business are An overview of relevant

2. HOW TO USE THIS MODULE

Module Title: Governance and Sustainability

2.1 Background to Corporate Governance

2.2 How did Corporate Governance Develop?

2.3 The Law Surrounding Corporate Governance

According to Mongalo (2010), in corporate governance, the emphasis is on matters such as

Corporate governance is generally understood to mean the way or systems by which

The Articles of Association provides that corporate governance is entrusted to members at a

Some of the major issues in corporate governance include:

2.4 The Cadbury, King, Greenbury and Hampel Committees

2.5 The King Report on Corporate Governance

It was applicable to all companies listed on

The key principles from the first King report covered:

In addition to those types of organisations listed in King I,

2.6 Legislative Enforcement

2.7 King III

sustainability reports according to the Global Reporting Initiative's Sustainability Reporting

The report incorporated a number of global emerging governance trends:

Fundamental and affected transactions in terms of director’s responsibilities during mergers,

2.8 Corporate Sustainability

The concept of corporate sustainability therefore implicitly includes the following:

 The management of stakeholder expectations, balancing and managing the social,

The need to change the Governance paradigm

To maximise company value, it is essential to develop a system made up of people, policies

2.10 The Need for Governance Models

 The management and Board of Directors have an advantage in relation to

The differences in consensus of what constitutes good governance practises, varies. In

2.11 Integrated reporting

Integrated reporting is a "process that results in communication, most visibly a periodic

Integrated reporting is the integrated representation of a company’s performance in terms of

2.12 The Benefits of Corporate Governance

enactment of Sarbanes-Oxley has demonstrated this, punishing both publicly-traded and

2.12.2 Prevents Market Shocks

2.12.3 Shareholder Activism

2.12.4 Decreases Conflicts of Interest

2.13 The Underlying Mechanisms on Corporate Governance

According to Hitt, Ireland and Hoskisson, (2004) corporate governance is a relationship

2.13.1 Internal Mechanisms

2.13.1.1 Concentration of Stock

2.13.1.2 Board of Directors

2.13.1.3 Executive Compensation

2.13.2 External Mechanisms

2.14 Independent Audit

2.15 Small Business Relevance

2.16 Private or Public Enforcement to Entrench Good Governance

A sound enforcement strategy requires three-pronged analysis:

The promulgation of the Companies Act, No 71 of 2008, signalled the completion of a