Ethics

Unit 2
 Business ethics
Business ethics is the study of complex business
practices and behaviors that gives rise to
ethical issues in organization
 Nature of BE
1. Ethical value
2. Interest of society
3. Business society relationship
4. Provide framework
 Sources of BE
1. Religion
2. Cultural experience
3. Legal system
 Types of BE
1. General business ethics
Shareholder of business, CSR
2. Functional BE
Marketing, HR , Production , IP, skill
3. Internal BE
 Factor influencing BE
1. Value forming-family, religion, school & govt
(carrot & stick)
2. Organisational goal
3. Work & career
4. Superiors
5. Peer & colleagues
6. Professional code
 Approaches to BE
Profit motive
Legal
Moral obligation:-harm principle, fairness,
human rights, veracity(deceptive)
Social
 Importance of BE
Maintain high moral course
Cultivates strong team work and productivity
Support employee growth and meaning
Ensure policy are legal
Avoid criminal act
Promote public image
Manage values
 Managing ethics in workplace
1. Commitment from top management
2. Code of ethics
3. Communicating ethics
4. Ethics training
5. Ethics officer(BOD)
6. Enforcement
7. Audit, revision, refinements
 Ethics & profit
Bribery
Exploitation of MNC
Production of harmful products
 Theories of BE
Normative theories
a) Consequentialist Theroy:- utilitarianism
theory, egoism, altruism
b) Non Consequentialist theory: - duty based,
right based
 1.a) utilitarianism theory
Is founded on the ability to predict the
consequences of an action
1. Greatest good of the greatest number
2. Max of pleasure
3. Min of pains
4. Max happiness
5. Satisfaction of desire
Cost benefit analysis
 1. b) Egoism
Decision that maximize their own self interest
Physical well being, power, pleasure, fame,
satisfying career, good family life, wealth
Types
1. Enlightened egoism long term
perspective(IBM)
2. Psychological egoism-selfishly
 1.c) Altruism
Welfare of others(religion)
Individuals are morally obliged to benefit others
Reasons
1. Biological : blood relation success
2. Neurological :reward center in brain(giving
happiness)
3. Cognitive: doing for other without
reward(empathy)
 2 a) duty based ethics
Commitment to principle and duty
Upholding individual human & legal rights
Tell the truth, correct the wrong, respect
others, avoid injury to others
 2.b) rights based ehtics
Rights are positive & negative rights
Negative rights: freedom from outside
interference- speech, autonomy, privacy
Positive rights : freely pursue his or her interest-
health care, education others
 Stockholder theory
Friedman : arrangement between stockholder
& managers for specific interest
Manager act as agent for stockholders
 Stakeholders theory
Input output model
All interest group- employees, customer,
dealers, government , society
Primary (survival): stockholders, employees,
suppliers, creditors, customers
Secondary (affect) : media, consumers,
government, judiciary, competitors, society,
political group, trade unions, trade
association, financial system, enviornment
 Ethical decision making
Framework for ethical decision making
1. Individual factor :- personal moral, stage of
moral development(own needs, group
values, rule of society)
2. Organization factors: org culture, co-
workers& superior, opportunity

All factor leads to ethical / unethical decision

 Process of ethical decision making
Moral awareness
Moral judgment
Moral motivation
Moral behavior
 Ethics across cultures
1. Areas of cross-culture influences
a) Language
b) Communication
c) Body language
d) Perceptual problem
e) Religion
f) Values & attitudes
g) Customs and manners
h) norms
 Ethics across cultures
2. Ethics issues in cross culture business
a) Sexual and racial discrimination
b) Human rights
c) Price discrimination
d) Bribery
e) Harmful products
f) IP protection
 Stakeholders
Are those individuals or group, inside or outside
the organization, who have the capacity to
influence directly or indirectly the activities of
the organization
Types:
Internal stakeholders-shareholders, workers&
employees, management
External stakeholders- customers, suppliers,
creditors, government, society
 Corporate governance
Is set of processes, customs, policies, laws and
institutions affecting the way a company is
directed, administered or controlled

CG is concerned with ethics, values, morals of

company & its directors
 Scope of CG
Auditors
Stock market
Shareholders
Institutional investors
Government
Regulatory authority
 Need of CG
Impact of globalisation
Economic changes
Change in the structure of shareholding
Financial reporting and transparency
Shareholders net worth and net wealth
 Objective of CG
Eliminate conflicts of interest
Ensure assets are used efficiently
To create trust in company
Effective control on corporate affairs
Promote business development
Improve efficiency of capital market
Promote healthy environment
 Principles of CG
Fairness
Transparency
Responsibility
Trusteeship
Empowerment
control
 System of CG
Internal CG
a) Monitoring by the BOD
b) Remuneration
c) Audit committees
External CG
a) Debt agreement
b) Government regulation
c) Competition
d) external auditor
e) External labor market
 Theories of CG
1. Agency theory
2. Stewardship theory
3. Stake holder theory
4. Sociological theory
5. Resource dependency theory
6. Transaction cost theory
 1. Agency theory
Relationship between shareholder(capital
provided) and management(agent running)
Main focus financial returns

Agent is employed by principal to carry out the

task
Agency refers to relationship between principal
and agent
Agent become accountable
 2. Stewardship theory
Managers merge their ego and sense of worth
with the reputation of the firm other than
financial returns
Model effect:
1. On business
2. On employees
3. On clients
 3. Stakeholder theory
Stake in firm are made-up of large and diverse
group
They seek some benefit from running of the
firm
Workers seek job security, government want
tax, investor wants dividends
 4. Sociological theory
Power & wealth distribution in society
Company part of society and perform for
society wellbeing
Board composition, financial reporting
disclosure, auditing
 5. Resource dependency theory
Role director play in secure resource for
organization with link external environment,
legal advise, enhance organizational
functioning
6. Transaction cost theory:
Firm determine the price & production when its
is large
 Issues of CG
Different role for BOD & Management
Composition of the board & related issues
Separation role of CEO & chairperson
Committees
Appointment of BOD & re-election
Director & executive remuneration
Disclosure & audit
Protection of shareholder rights
 Board of Directors
All directors elected by shareholder to
represent their interest vested with powers of
management
Make decision objectively
Transparency
 Structure of board
1. All executive board: no separation between
ownership & management
2. Majority executive board: non-executive
directors in small (2or3)
3. Majority outside board: non executive
directors form the majority on the board
4. Two-tier supervisory board: supervisory
board has no common membership with
executive board
Size of board
 Board style
1. Rubber stamp board:
2. Country club board: family run business
3. Representative board : stakeholder appoint
directors
4. Professional board:
 Reforms in board
Appoint of independent directors
Imposing stricter reporting systems
Audit committees
Standards of disclosures
Quality of financial statement
 Structural reforms
Stakeholder representation
Ethics officer & ombudsmen
Ethics code
Job tenure
 Compensation issues of BOD
1. CEO compensation: tied to firm performance,
overall level of CEO pay
2. Outside director compensation:
 Role & responsibilities of BOD
1. To establish an orgnaisational vision & mission
2. Give strategic direction and advice
3. Oversee strategy implementation and
performance
4. Develop and evaluate CEO
5. Appropriate HR
6. Effective stakeholder relations
7. Mitigate risk
8. To procure resoruces
 Issues & challenge of BOD
Knowledge gap
Lack of self assessment
Self delusion
Committee inexperience
Leadership issues
No plan for rotation
Failure to remove unproductive members
Too small in size
Lack of information
Lack of skills
 Corporate ethical leadership
Leading in a manner that respects the rights
and dignity of others

Motivating
 Leadership style
ABCDLPST3
1. Autocratic(absolute power)
2. Bureaucratic(by the book)
3. Charismatic (energetic)
4. Democratic (involving members)
5. Laissez faire (leave it be- members decision)
6. People oriented (people development)
7. Servant (no formally recognised)
8. Task oriented (getting job done)
9. Transactional (paying team for job done)
10.Transformational (detail people)
 Habits of strong ethical leaders
Strong personal character
Passion to do right
Proactive
Stakeholder interest
Role model for org values
Transparent in decision making
Holistic view
Ethical leadership for improved CG
Positive impact on culture
Higher employee satisfaction and
commitment
Strong relationship with external stakeholders
Long term market evaluation of the firm