Ethics & Corporate Governance

Saif Ullah
Brief Profile of Faculty
• Ph.D (Corporate Governance) – In Progress at SZABIST
• M.Phil from IoBM in 2013
• CIMA Advanced Diploma in Management Accounting
• Teaching as Visiting Faculty Since 2012
• Taught at SZABIST- IoBM-KASBIT-HAMDARD-
GREENWICH-INDUS-NEWPORT
• Teaching at SZABIST since 2014
• Taught Ethics & Corporate Governance to EMBA in
Spring 2017 & 2018
• Conducted many workshops for data analysis
• Supervised Thesis/Research projects of many students
• Research Papers published in HEC approved Journals
• 310 citation from research work
2
 Business Ethics
• Comprises principles, values, and standards that guide
behavior in the world of business

• Principles: Specific boundaries for behavior that are

universal and absolute
– Freedom of speech, civil liberties

• Values: Used to develop socially enforced norms

– Integrity, accountability, trust
 Why Study Business Ethics?
• Business decisions under great
scrutiny
– Global financial crisis created
diminished stakeholder trust
• Deals with questions about
whether practices are
acceptable
• No universally-accepted
approach for resolving issues
Source: © Jack Hollingsworth/Corbis
 Why Study Business Ethics?

• Reports of unethical behavior are on the rise

• Society’s evaluation of right or wrong affects its
ability to achieve its business goals
• Studying business ethics is a response to
Laws, and stakeholder demands for ethics
initiatives
• Individual ethics alone is not sufficient
• Studying business ethics helps identify ethical
issues to key stakeholders
 A Crisis in Business Ethics

• Consumer trust of businesses is declining

• No sector is exempt from ethical misconduct
• Stakeholders determine what is ethical/unethical
– Investors
– Employees
– Customers
– Interest groups
– Legal system
– Community

Source: Stockbyte
A Timeline of Ethical and Socially
Responsible Concerns
 Before 1960: Ethics in Business

• Theological discussions of ethics emerged

– Catholic social ethics included a concern for
morality in business, workers’ rights and living
wages
– Protestants developed ethics courses in their
seminaries and schools of theology
• The Protestant work ethic encouraged hard work
The 1960s: The Rise of Social Issues in
Business
• Societal social consciousness emerged
– Anti-business sentiment rose
• JFK’s Consumer Bill of Rights-
A new era of consumerism
– Right to safety, to be
informed, to choose,
and to be heard
• Consumer protection groups
fought for consumer
protection legislation
– Ralph Nader Source: Hisham Ibrahim
 The 1970s: Business Ethics as an
Emerging Field
• Business professors began to write about social
responsibility
– An organization’s obligation to maximize positive
impact and minimize negative impact on stakeholders
• Philosophers became involved
• Businesses became concerned with public image
• Conferences were held and centers developed
• Issues:
– Bribery – Product safety
– Deceptive advertising – Environment
– Price collusion
 The 1980s: Consolidation

• Membership in business ethics organizations

increased
• Ethics centers provided:
– Publications, courses, conferences and seminars
• Firms established ethics committees
• Defense Industry Initiative on Business Ethics and
Conduct (DII) emerged
– Foundation for the Federal Sentencing Guidelines
for Organizations
• Corporate support for ethics
 The 1990s: Institutionalization of
Business Ethics

• The Federal Sentencing Guidelines for Organizations

(FSGO)
– Set tone for compliance
• Preventative actions against misconduct
– A company could avoid/minimize potential
penalties
 The Federal Sentencing Guidelines for
Organizations
• Standards and procedures capable of detecting and
preventing misconduct
• High level oversight
• Care in delegation of authority
• Effective communication (training)
• Systems to monitor, audit, and report misconduct
• Consistent enforcement
• Continuous improvement
 The 21st Century: A New Focus

• Continued issues with corporate non-compliance

– Growing public/political demand for improved ethical standards
• Sarbanes-Oxley Act (2002)
– Most extensive ethics reform
– Increased accounting regulations
• FSGO reform (2004)
– Requires governing authorities to be well-informed regarding
business ethics programs
• Firm’s greatest danger is not discovering misconduct
early
• Basic assumptions of capitalism being debated
– Fears in the wake of global recession and financial meltdown
 Organizational and Global Ethical
Culture
• Ethical culture describes the component of
corporate culture that captures the values and norms
that an organization defines as appropriate conduct
• Creates shared values
• Goal is to:
• Minimize need for
enforced compliance
• Maximize utilization of
principles/ ethical
reasoning
Source: Triangle Images
 Ethics Contributes to Employee
Commitment
• Comes from employees who believe their future
is tied to the organization’s
• Are willing to make personal sacrifices for the
organization
– The more dedication on the part of the company,
the greater the employee dedication
– Concerns include a safe work environment,
competitive salaries and benefit packages, and
fulfillment of contractual obligations
 Ethics Contributes to Investor
Loyalty
• Companies perceived by their employees as
having a high level of honesty and integrity are
more profitable than companies with a low level
of honesty and integrity
• Ethical climates in organizations provide platform
for:
– Efficiency
– Productivity
– Profitability
 Ethics Contributes to Customer
Satisfaction
• Consumers respond positively to socially concerned
businesses
– Being good can be extremely profitable
• Customer satisfaction dictates business success
• A strong organizational ethical climate
places customers’ interests first
• Research shows a strong relationship between ethical
behavior and customer satisfaction
 Ethics Contributes to Profits
• Corporate concern for ethical
conduct is being integrated with
strategic planning
– Maximize profitability
• Corporate citizenship is
positively associated with:
– Return on investment and
assets
– Sales growth Source: PhotoLink

• Studies have found a positive

relationship between citizenship
and performance
 Relationships and Business
• Building relationships is one of
most important areas in business
today
– Can be associated with
organizational success and
misconduct
• Stakeholder framework
– Helps identify internal and
external stakeholders
– Helps monitor and respond to
needs, values, and
expectations of stakeholder Source: Stockbyte

groups
 What Is a Stakeholder?
• Stakeholders are those who have a stake or claim in
some aspect of a company’s products, operations,
markets, industry and outcomes
– Customers – Investors
– Employees – Suppliers
– Government agencies – Communities
• Stakeholders can influence and are influenced by
businesses
 Primary vs. Secondary Stakeholders

• Primary stakeholders: Those whose continued

association is necessary for a firm’s survival
– Employees, customers, investors, governments
and communities
• Secondary stakeholders: Are not essential to a
company’s survival
– Media, trade associations, and special interest
groups
The Stakeholder Interaction Model
 Stakeholder Orientation
• The degree to which a firm understands and
addresses stakeholder demands
• Three activities:
– Generation of data about
stakeholder groups
– Distribution of the information
throughout the firm
– Organization’s responsiveness
to this intelligence

Source: Digital Vision

 Social Responsibility
• Is an organization’s obligation to maximize its positive
impact on stakeholders and minimize its negative
impact
• Four levels of social responsibility:
– Economic
– Legal
– Ethical
– Philanthropic

Source: Nancy Ney

 Social Responsibility and the
Importance of Stakeholder Orientation
• From a social responsibility perspective, business
ethics embodies standards, norms, and expectations
that reflect concerns of major stakeholders
• Social responsibility is associated with:
– Increased profits
– Increased employee commitment
– Greater customer loyalty
 Social Responsibility and Ethics

• Social responsibility can be viewed as a contract

with society
• Business ethics involves carefully thought-out
rules (heuristics) of conduct that guide decision
making
The Steps of Social Responsibility
 Corporate Citizenship
• The extent to which businesses strategically meet
their economic, legal, ethical, and philanthropic
responsibilities
• Four interrelated dimensions:
– Strong sustained economic performance
– Rigorous compliance
– Ethical actions beyond what is required by the law
– Voluntary contributions that advance reputation
and stakeholder commitment
 Reputation

• Reputation is one of an organization’s

greatest intangible assets with tangible value
– Difficult to quantify,
but very important

Source: Digital Vision

 Corporate Governance
• Formal systems of accountability, oversight, and
control
• Accountability
– Refers to how closely workplace decisions are
aligned with a firm’s stated strategic direction
• Oversight
– Provides a system of checks and balances that
limits employees and minimizes opportunities for
misconduct
• Control
– The process of auditing and improving
organizational decisions and actions
Common Corporate Governance
Issues
 Corporate Governance Models

• Shareholder model
– Founded in classic economic precepts
– The maximization of wealth for investors and
owners
• Stakeholder model
– A broader view of the purpose of business
– Includes satisfying concerns of a variety of
stakeholders
 Boards of Directors
• Hold final responsibility for their firms’
success, failure, and ethicality of actions
• Increased demands for accountability/
transparency
• Trend toward “outside directors” chosen for
expertise, competence, and strategic decision
making
• Executive compensation a large and growing
concern
 Executive Compensation

• Many boards spend more time discussing

compensation than ensuring integrity of
financial reporting systems
– How closely linked is executive compensation to
company performance?
– Does performance-linked compensation
encourage executives to focus on short-term
performance at the expense of long-term growth?
 The Reactive-Accommodative-
Proactive Scale

Rating Strategy Performance

Reactive Deny Doing less than
Responsibility required

Defensive Admit Doing the least

responsibility, but that is required
fight it

Accommodative Accept Doing what is

responsibility required
Proactive Anticipate Doing more than is
Responsibility required
 Implementing a Stakeholder
Perspective
1. Assessing the corporate culture
2. Identifying stakeholder groups
3. Identifying stakeholder issues
4. Assessing organizational commitment to
social responsibility
5. Identifying resources and determining
urgency
6. Gaining stakeholder feedback