Chapter

Chapter 1:
Ethics and its
significance in the
Business Discipline
Chapter
1

THE ETHICS ENVIRONMENT

FOR BUSINESS

During the last 30 years, there has been

an increasing expectation that
business exists to serve the needs of
both shareholders and society.
Many people have a “stake” or interest
in a business, its activities and
impacts.
If the interests of these stakeholders are
not respected, then action that is
often painful to the shareholders,
officers and directors usually occurs
Chapter
1

THE ETHICS ENVIRONMENT

FOR BUSINESS (cont’d)
It is unlikely that businesses can
achieve their long-run strategic
objectives without the support of key
stakeholders, such as shareholders,
employees, customers, creditors,
suppliers, governments, communities
and activists.

Directors, executives and professional

accountants must be aware of the
public’s new expectation for business.
Chapter
1

FACTORS
AFFECTING 1. Unbridled greed 2. Physical
PUBLIC 3. Moral
EXPECTATION
FOR BUSINESS
BEHAVIOR 4. Bad Judgment 5. Activist stakeholders 6. Environmental
Reality

7. Economic 9. Financial 10. Governance

8. Competition
malfeasance failures

11. Accountability 13. Institutional

12. Synergy
reinforcement
Chapter
1

Physical – Environmental concern

& Environmental Reality
Quality of air and water
• Initially, concern on air pollution
emitted by smokestack and exhaust
pipe smog, which may cause
respiratory irritation and disorders.
• Two other problems associated with
air pollution are acid rain and the
dissipation of the earth’s ozone layer
which may cause skin cancer and
damaged eyes
Chapter
1

• During the 1980s and 1990s, there

was a significant increase in the
sensitivity to the lack of fairness and
to discrepancies in equitable
treatment normally afforded to
individuals and groups in society.
• The desire for equity in
employment : pay scales for men
and women.
• The campaign to boycott buying
from corporations that engage in
child or sweatshop labor in foreign
countries.
Chapter
1

Bad Judgments
• Directors, executives and managers
are human and they make mistakes.

• Sometimes the public, or specific groups,

take offence at these instances of bad
judgment and take action to make the
directors and management aware that
they do not approve.
Example : Nestle and the African
mothers.
Chapter
1

Activist
Stakeholders
Two types of activists:
✔ Ethical consumers : interested
in buying products and
services that were made in
ethically acceptable manners.
✔ Ethical investors : not only
make investment for
reasonable return, but should
do so in an ethical manner.
Chapter
1

Economic & Competitive Pressure

Economic downturn : absence of
growth, shrinking margin led to
downsizing in order to maintain
profitability

Pressure to survive 🡺 Falsification of

transaction : window dressing; and
exploitation of the environment or
workers
Chapter
1

Financial Scandals
Public becomes cynical about the
financial integrity of corporations.
Expectation gap : difference
between what the public thinks,
he is getting in audited financial
statements and what he actually
gets.

Continuing financial malfeasance

has led to a crisis of confidence
over corporate reporting and
governance: credibility gap.
Chapter
1

Governance Failures & Risk Assessment

The Enron, Arthur Andersen and

WorldCom series of disasters clearly
spelled that current governing modes on
companies’ reporting are not sufficient to
protect the investors’ interest.

It is evident that directors and executives

do not identify, assess and manage ethics
risk in the same manner or in depth as
construed to other business risks.
Chapter
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Increased Accountability Desire

The lack of trust in corporate processes and

activities; and the realization that unbridled
greed by executives lay behind many of the
financial scandal have produced the desire for
increased accountability and transparency on
corporate matters 🡺 company responded by
publishing more information on their
websites on their CSR performance including
environmental, health and safety etc.
Chapter
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Synergy among Factors & Institutional Reinforcement

❖ Linkages among the factors that reinforce each other

and add to the public’s desire action (increase
awareness for controls on the unethical behavior)

❖ The public’s awareness impacts politicians who react

by preparing new laws or the tightening of
regulations.
Chapter 1

NEW EXPECTATIONS FOR BUSINESS

“In a free-enterprise, private property system a corporate
executive ….. has the responsibility to make as much money as
possible while conforming to the basic rules of society, both .….
in law and in ethical custom. The appropriate way to determine
the allocation of scarce resources to alternatives uses.”
(Friedman, 1970)
Chapter
1

Three critical issues:

1) The deviation from a profit-only focus
does not mean that profit will fall – in fact,
profit may rise.
✔ There is the myth that business could
not afford to be ethical because too
many opportunities would be given
up for profit to be maximized.
✔ Above-average social performance is
positively correlated with profits
(Clarkson, 1988).
Chapter
1

NEW EXPECTATIONS FOR BUSINESS (cont’d)

2) Profit is now recognized as an incomplete measure
of corporate performance and therefore an
inaccurate measure for resource allocation.
✔ Pollution costs are still not fully included in
calculating the profit for the year.
3) Friedman explicitly expected that performance
would be within the law and ethical custom.
✔ Chaos would result if the business was carried out
in an absolutely-no-holds-barred environment.
✔ Increased regulation by government is an
increasing self-emphasis on better ethical
governance and behavior.
Chapter
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THE ETHICS ENVIRONMENT FOR PROFESSIONAL

ACCOUNTANTS
❖ Professional accountants owe their primary loyalty to the
public interest, not just to their own financial interests, company
directors or management, or current shareholders at the expense
of future shareholders.

❖ Therefore, professional accountants will have to ensure that their

ethical values are current and that they are prepared to act on
them to best exercise their role and to maintain the credibility of,
and support for, the profession.

❖ Loyalty to management and/or directors can boven to be

self-interested that they are