Ethical Issues in Business

BUSS8010

Session 5
Stakeholders

Prepared by: Sanjukta Choudhury Kaul, Ph.D

skaul@binus.edu
 The Corporation and
Internal Stakeholders
 Stakeholder Management
Approach to Leadership
• The organization’s leaders and culture:
• Are integrated or fragmented
• Tolerate or build relationships
• Protect the organization or create and generate mutual benefits and
opportunities
• Develop and sustain short-term or long-term goals and relationships
• Encourage idiosyncratic implementation or coherent approaches driven by
visions, missions, and values
Figure 6.1: Strategic Alignment
Questions
 Collins and Porras’ Visionary
Companies (core ideology)
• 3M
• American Express
• Boeing
• Citicorp
• Ford
• General Electric
• Hewlett-Packard
• Johnson & Johnson
• Marriott
• Merck
• Motorola
• Philip Morris
• Procter and Gamble
• Wal-Mart
• Disney
 Leadership Stakeholder Competencies

1. Define and lead the social, ethical, and competitive

mission of organizations
2. Build and sustain accountable relationships with
stakeholders
3. Dialogue and negotiate with stakeholders, respecting
their interests and needs beyond economic and utilitarian
dimensions
4. Demonstrate collaboration and trust in shared decision
making and strategy sessions
5. Show awareness and concern for employees and other
stakeholders in the policies and practices of the company
 Leadership Responsibilities

• Set the vision, mission, and direction.

• Create and sustain a legal and ethical culture throughout the
organization.
• Articulate and guide the strategy and direction of the
organization.
• Ensure the competitive and ethical alignment of organizational
systems.
• Reward ethical conduct.
 Leadership Processes

• Seek to revolutionize every strategy and process for optimal

results while maintaining the organization’s integrity
• Empower everyone to perform beyond stated standards, while
maintaining balance of life and personal values
• Understand and serve customers as they would themselves
• Create and reward a culture obsessed with fairness and goodwill
toward everyone
• Act with compassion and forgiveness in every decision toward
every person and group
• Do unto their stockholders and stakeholders as they would have
them do to their company
• Treat the environment as their home
 Firms of Endearment

• Competitive advantage through a business model in which all

stakeholders add and benefit from gains in value created from a
deeper set of resources.
• Possess a humanistic soul. “From the depths of this soul, the will to
render uncommon service to all stakeholders flows. These companies
are imbued with the joy of service—to the community, to society, to
the environment, to customers, to colleagues.”
• Leaders who “facilitate, encourage, reward, recognize, and celebrate
their employees for being of service to their communities and the
world at large, for no reason other than that it is the right thing to
do.”
 Spiritual or Servant Leadership

• Understand and practice reflective “being” as well as

“doing”
• Use discernment, prayer, and patience in strategic
decision making
• See the leadership role as a calling
• Seek to connect with people and connect people to
people with meaning and in meaningful ways
• Create communities, environments, and safe havens
• Lead with reflection, choice, passion, reason,
compassion, humility, vulnerability, and prayer, as well
as courage, boldness, and vision
The Symptoms of Ethical Failure

• Ethical blindness
• Ethical muteness
• Ethical incoherence
• Ethical paralysis
• Ethical hypocrisy
• Ethical schizophrenia
• Ethical complacency
Figure 6.5: Moral Leadership Styles
 Ethical Issues Pertaining to Leaders

CEO pay

CEO performance evaluations

Contingency Alignment Model

Inputs: Customer Requirements
Transformation: Customer Partnership
Outputs: Customer Satisfaction
 Corporate Culture

Shared values and meaning held by the

organization’s members, transmitted through:
• the values and leadership styles that the leaders espouse
and practice
• the heroes and heroines that the company rewards and
holds up as models
• the rites and symbols that organizations value
• the way that organizational executives and members
communicate among themselves and with their
stakeholders
 Observing Corporate Culture

• Studying the physical setting

• Reading what the company says about its own
culture
• Observing and testing how the company greets
strangers
• Watching how people spend time
• Understanding career path progressions
• Noting the length of tenure in jobs, especially for
middle managers
• Observing anecdotes and stories
 Strong Corporate Cultures

• have a widely shared philosophy

• value the importance of people
• have heroes (presidents and products) that symbolize the success of the
company
• celebrate rituals
 4 Principles of Ethically Effective
Firms
• Ease of interacting with diverse internal and external stakeholders;
incorporate good of stakeholders
• Obsession with fairness for ALL parties, not just fairness for
themselves
• Individual-level responsibility, not collective
• Purposeful activities that tie firm to its environment
 Problems and Symptoms of
Unethical Cultures
• Problems: secrecy, hidden agendas, isolated
executives, emphasis on status

• Symptoms: inward, short-term focus,

morale/motivation problems, inconsistent policies,
physical settings, clashes and conflict, ambiguous
values and beliefs with no priority
 Purposes of Strategy

An organization’s strategy influences legality, morality, innovation, and

competitiveness in the following ways:
• Strategy sets the overall direction of business activities.
• Strategy reflects what management values and prioritizes.
• Strategy sets the tone of business transactions inside the
organization.
 Structural Issues Related to
Ethics
• Decision making centralized or decentralized
• Systems organic or mechanistic
• Hierarchy tall or flat
• Procedures formal or informal
• Level of autonomy of internal stakeholder
• Level of flexibility, responsiveness of systems and
internal stakeholders
 Figure 6.8: Examples of Cross-Function Value
Differences

Orientations Marketing R and D Production Finance Information

and Sales and Systems
Accounting

Background Liberal arts; Electrical Mechanical Finance; Software

social sciences; engineering; engineering; accounting; engineers; data
entrepreneurial; technical operations auditing; tax management;
technical programming

Goals and High product mix; Innovation; Product yield; Low-cost; Problem
customer Competitiven quality control efficiency; solving;
“Stakes” satisfaction ess accountability integration

Focus and Product/service Discovery; Stable product Low costs, Satisfied users;
leadership; resources to lifecycle; high yields; State-of-art
Rewards bonuses; innovate; security; accuracy; tech; new skills
autonomy prestige bonuses advancement

Time Short to medium Medium to Short to Continuous Continuous

long continuous
Horizon
 Corporate Self-regulatory Tools

• Ethical codes:
• Define the moral identity and tone of the company
• Provide a stable, permanent set of guidelines
• Control erratic and autocratic power or whims of employees
• To serve business interests
• To provide an instructional and motivational basis for
training employees
• To constitute a legitimate source of support for
professionals and to offer a basis for adjudicating disputes
among professionals
• Ombudspersons and Peer Review Programs
• Ethics Departments and Programs
 Problems with Ethical Codes

• Most codes are too vague to be meaningful

• Codes do not prioritize beliefs, values, and norms
• Codes are not enforced in firms
• All employees are not informed of codes
 Ethical Readiness Checklist

• Do the top leaders believe that key stakeholder and

stockholder relationship building is important to the
company’s financial and bottom-line success?
• What percentage of the CEO’s activities are spent in building
new and sustaining existing relationships with key
stakeholders?
• Can employees identify the organization’s key stakeholders?
• What percentage of employee activities are spent in building
productive stakeholder relationships?
• Do the organization’s vision, mission, and value statements
identify stakeholder collaboration and service? If so, do
leaders and employees “walk the talk” of these statements?
 Ethical Readiness Checklist (con’t)

• Does the corporate culture value and support participation

and open and shared decision making and collaboration
across structures and functions?
• Does the corporate culture treat its employees fairly, openly,
and with trust and respect? Are policies employee-friendly?
Are training programs on diversity, ethics, and professional
development available and used by employees?
• Is there collaboration and open communication across the
organization? Are openness, collaboration, and innovation
rewarded?
 Ethical Readiness Checklist (con’t)

• Is there a defined process for employees to report complaints and

illegal or unethical company practices without risking their jobs or
facing retribution?
• Does the strategy of the company encourage or discourage
stakeholder respect and fair treatment? Is the strategy oriented
toward the long or short term?
• Does the structure of the company facilitate or hinder information
sharing and shared problem solving?
• Are the systems aligned along a common purpose or are they
separate and isolated?
• Do senior managers and employees know what customers want
and does the organization meet customer needs and expectations?
 The Corporation
And
External Stakeholders
 Corporate Social Responsibility
• Corporate social responsibility (CSR) involves an organization’s duty and
obligation to respond to its stakeholders’ and the stockholders’
economic, legal, ethical, and philanthropic concerns and issues
• Social concerns of stakeholders
• Corporate interests

• What is the philosophical and ethical context

from which corporate social responsibility and
ethical decisions are made? What role does
the free market play?
 Free Market Constraints

• Minimal moral restraints

• Full competitiveness with entry and exit
• Relevant information available to everyone
• Accurate reflection of all production costs in prices
(assumes an equal balance of power, knowledge, and
sophistication)
• Problems:
• Resource-rich firms create unequal information
• Advertising is used questionably
• “Invisible hand” does not exist for all situations (imperfect
markets)
 Social Contract

• A set of rules and assumptions about behavior

patterns among the parties to the contract
• Changing
• Used to be: stable, reliable, predictable
• Now: disregard for safety, equity, responsibilities toward
customers and society as a whole
• Uneasiness with corporate power and influence
(violates the quid pro quo norm)
• Covenantal Ethics – concerned with both social and
economic relationships
Figure 4.1: External Stakeholders, Moral Stakes,
and Corporate Responsibilities
 Moral Bases for Social
Responsibility

• Trustee for society’s resources

• Two-way open system, open disclosure
• Social costs and benefits
• Consumer pays for consumption and effects on society
• Social involvement in core competency areas
 Competitive Advantages for
Socially Responsible Firms

1. Reputation
2. Successful social investment portfolios
3. Ability to attract quality employees

Expectation of public that organizations will engage in philanthropy

Corporate Social Responsibility and Stakeholder
Management

• Balancing “Carrot” and “Stick” approaches

• Carrot – voluntary self-regulation
• Vision/Mission/Values
• Ethics programs
• Best Practices/Risk Management
• Philanthropy
• Stick – external regulatory compliance
• Laws; court cases
• Regulation
• Congressional oversight
 Summary of Sarbanes-Oxley 2002

• Establishes an independent public company accounting

board to oversee audits of public companies
• Requires one member of the audit committee to be an
expert in finance
• Requires full disclosure to stockholders of complex financial
transactions
• Requires CEOs and CFOs to certify in writing the validity of
their companies’ financial statements
• Prohibits accounting firms from offering other services, like
consulting, while also performing audits
 Summary of Sarbanes-Oxley 2002
(con’t)
• Requires ethics codes, registered with the Securities and
Exchange Commission (SEC), for financial officers
• Provides a 10-year penalty for wire and mail fraud
• Requires mutual fund professionals to disclose their vote on
shareholder proxies, enabling investors to know how their
stocks influence decisions
• Provides whistle-blower protection for individuals who report
wrongful activities to authorities
• Requires attorneys of companies to disclose wrongdoing to
senior officers and to the board of directors, if necessary
 “Best Practices” for
Corporate Boards of Governance
1. Separating the role of chairman of the board when the CEO
is also a board member
2. Setting tenure rules for board members
3. Regularly evaluating itself and the CEO’s performance
4. Prohibiting directors from serving as consultants to the
companies which they serve
5. Compensating directors with both cash and stock
6. Prohibiting retired CEOs from continuing board membership
7. Assigning independent directors to the majority of
members who meet periodically without the CEO
 Cons and Pros of Sarbanes-Oxley
Cons
• It is too costly
• Government costs also increase to
regulate the law
• It impacts negatively on a firm’s global
competitiveness
• CFOs are overburdened and pressured
by having to enforce and assume
accountability
• An exodus will occur of public companies
returning to private ownership
Pros
• The costs of implementing is minimal
compared to the costs of not having it
• The changes required to enact this law are
difficult, but more than 70% of directors
viewed the law as positive
• The data does not support the argument
that this law presents a competitive
disadvantage to global firms
• Financial officers may in fact be suffering
from the lack of internal controls they had
before
• If a company uses the Sarbanes-Oxley Act
as a reason to not go public, the firm
should not go public or use investors’ funds
 Revised 1991 Federal Sentencing Guidelines:
Compliance Incentive

1. Established standards and procedures capable of reducing the

chances of criminal conduct
2. Appointment of compliance officer(s) to oversee plans
3. Took due care not to delegate substantial discretionary
authority to individuals who are likely to engage in criminal
conduct
4. Established steps to effectively communicate the organization’s
standards and procedures to all employees
5. Took steps to ensure compliance through monitoring and
auditing
6. Employed consistent disciplinary mechanisms
7. When an offense was detected, took steps to prevent future
offenses, including modifying the compliance plan, if
appropriate
 The Role of Laws and the Regulatory
System in Corporate Governance

• Regulate competition
• Protect consumers
• Promote equity and safety
• Protect the natural environment
• Ethics and compliance programs to deter and provide for enforcement
against misconduct
 Five Goals of Government Policy
Makers toward Consumers
1. Providing consumers with reliable information
about purchases
2. Providing legislation to protect consumers against
hazardous products
3. Providing laws to encourage competitive pricing
4. Providing laws to promote consumer choice
5. Protecting consumers’ privacy
 Examples of Laws Promoting and
Prohibiting Corporate Competition
• Sherman Antitrust Act, 1890: Prohibits monopolies
• Clayton Act, 1914: Prohibits price discrimination, exclusivity, activities
restricting competition.
• Federal Trade Commission Act, 1914: Enforces antitrust laws and activities.
• Consumer Good Pricing Act, 1975: Prohibits price agreements in interstate
commerce between manufacturers and resellers.
• FTC Improvement Act: Empowers the FTC to prohibit unfair industry
activities.
• Antitrust Improvements Act, 1976: Supports existing antitrust laws and
empowers Justice Department investigative authority.
• Trademark Counterfeiting Act, 1980: Gives penalties for persons violating
counterfeit laws and regulations.
• Digital Millennium Copyright Act, 1998: Protects digital copyrighted
material such as music and movies.
 Responsibility toward
Consumers
• Duty to inform fully and truthfully
• Duty to not misrepresent or withhold information
• Duty to not force or take undue advantage of through fear or stress
• Duty to take ‘due care’ to prevent foreseeable injuries
 Examples of Laws
Protecting Consumers

• Pure Food and Drug Act, 1906: Prohibits mislabels on food and drugs in
interstate commerce.
• Federal Hazardous Substances Act, 1960: Controls labels on hazardous
substances of products used in houses.
• Truth and Lending Act, 1960: Requires full disclosure of credit terms to buyers.
• Consumer Product Safety Act, 1972: Establishes safety standards and
regulations of consumer products (created the Consumer Product Safety
Commission (CPSC)).
• Fair Credit Billing Act, 1974: Requires accurate, current consumer credit
reports.
• Telephone Consumer Protection Act, 1991: Issues procedures to avert
undesired telephone solicitations.
• Children’s Online Privacy Protection Act, 1998: Requires the FTC to make rules
to collect online information from children under 13 years old
• Do Not Call Implementation, 2003: Coordinates the FTC and FCC to provide
consistence rules on telemarketing practices.
 Examples of Laws
Protecting the Environment
• Clean Air Act, 1970: Designated air-quality standards; state implementation
plans required for approval.
• National Environmental Act, 1970: Established policy goals for federal
agencies; enacted the Council on Environmental Quality to monitor policies.
• Federal Water Pollution Control Act, 1972: Prevents, reduces, and eliminates
water pollution.
• Endangered Species Act, 1973: Provides a conservation program for
threatened and endangered plants and animals and their habitats.
• Noise Pollution Act, 1972: Controls noise emission of manufactured products.
• Safe Drinking Water Act, 1974: Protects the quality of drinking water in the
U.S; sets safety standards for water purity and requires owners and operators
of public water to comply with standards.
• Toxic Substances Act, 1976: Requires testing of certain chemical substances;
restricts use of certain substances.
• Food Quality Protection Act, 1996: Requires a new safety standard that must
be applied to all pesticides used on foods: reasonable certainty of no harm.