CHAPTER 08

CORPORATE ETHICAL
GOVERNANCE &
ACCOUNTABILITY

Source:
Brooks & Dunn – Chapter 05

Dr. Md Tapan Mahmud

AIS, FBS, BUP
 LEARNING OBJECTIVES

• What is the new expectation from business of the people?

• Should the business be accountable to shareholders or to stakeholders?

• How can we design a governance system based on stakeholders’ interests?

• How to develop, implement and manage an ethics culture?

 NEW EXPECTATION FOR BUSINESS

Only Business Business +

Society
(Profit only) (Interdependence)

• The traditional world of business was all about making profit, even costing the
environment and or society’s welfare.

• But, now the mandate has changed and has taken a newer shape of logical
interdependence which triggers caring for the environment and society.
 NEW EXPECTATION FOR BUSINESS

• Even a man like Milton Friedman who only cares for capitalism, laissez-fair and
profit has given away the following thought:

• 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.

• This is the appropriate way to determine the allocation of scarce resources to

alternative uses.
 NEW EXPECTATION FOR BUSINESS

• We can argue for Mr. Friedman from the three given critical points of views:
1. The deviation from a profit-only focus doesn’t mean that profit will fall;
in fact, profit may rise.

2. Profit is now recognized as an incomplete measure of corporate

performance and therefore an inaccurate measure for resource allocation.
(people tend to allocate their scarce resources to those companies that
perform well.)

3. Friedman explicitly expected that performance would be within the law

and the ethical custom.
CORPORATE GOVERNANCE OVERVIEW
Self Study:
1. Functions of the Audit
Committee

2. Functions of
Compensation
(Remuneration)
Committee

3. Function of Governance
(Nomination)
Committee

4. Who is a whistleblower?
CORPORATE GOVERNANCE OVERVIEW
 CORPORATE GOVERNANCE OVERVIEW

• The purpose of a corporation is much more than to simply be profitable.

Corporations need to: (Balance various stakeholders’ interests)
• Deliver value to customers
• Invest in employees
• Deal fairly and ethically with suppliers
• Support the communities in which they operate
• Generate long-term value for shareholders

CG Components
Needed to create A corporate culture of consciousness, transparency and openness
Refers to A combination of laws, rules, regulations, procedures and voluntary (accepted) practices
Lead (expected) to Maximizing shareholders’ (long-term) value, and balancing other stakeholders’ benefits
Focus is shifted From economic to the social sphere
Ensures Greater transparency and accountability
CORPORATE GOVERNANCE OVERVIEW
ACCOUNTABILITY TO SHAREHOLDER OR STAKEHOLDER?

• The growing capacity of non-shareholding stakeholders to influence the

achievement of corporate activities and their increasing sensitivity made it
attractive for corporations to encourage stakeholder support.

• Corporate activities designed to favor current executives, directors and some

shareholders are not necessarily in the interest of future or current shareholders.

• Given the recurring corporate scandals and the documented capacity of

stakeholders to influence the achievement of corporate objectives, it would be well
within the directors’ duty to safeguard the interests of shareholders and prudent to
consider the interests of stakeholders when creating their governance structure.
ACCOUNTABILITY TO SHAREHOLDER OR STAKEHOLDER?

• Three broad categories of duties stem from the charter of fiduciary duties:
1. Obedience: To avoid committing acts beyond the scope of the powers of a
corporation as defined by its charter or the laws of the state or incorporation.
2. Loyalty: A director must act in good faith and must not allow his personal
interests to prevail over the interests of the corporation.
3. Care: it requires a director to be diligent and prudent in managing the
corporation’s affairs.

• Stakeholders’ interests can potentially conflict with some shareholders’ interests,

so directors may have to examine the trade-offs between shareholders and
stakeholders and choose one or the other, or a blended solution.

• Fortunately, a longer-term shareholder perspective frequently coincides with

stakeholder interests.
ACCOUNTABILITY TO SHAREHOLDER OR STAKEHOLDER?
• Based on the reality of
stakeholder pressures and the
to gain stakeholder support,
corporations realize that they
are strategically accountable to
stakeholders (if not legally, in
all jurisdictions).
• So, they are governing
themselves to minimize the
risks and maximize the
opportunities inherent in the
stakeholder accountability
framework.
• De facto, corporations are
increasingly realizing that they
are accountable to all of the
stakeholders here.
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
• We can divide this topic into two parts:

1. Governance process based on stakeholders' interest

2. Identifying organizational values- The foundation of behavior
 GOVERNANCE FOR
BROAD
STAKEHOLDER
ACCOUNTABILITY

G O V E RN A N CE P RO C ES S
BA SE D O N S TA K E H O L D E RS ’
I N TE RE ST S
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
G O V E RN A N CE P RO C ES S B A S ED O N S TA K EH O LD ERS ’ I N T ER ES TS
• The corporation is accountable legally to the shareholders, but strategically to
additional stakeholders.

• Shareholders are in fact a stakeholder group, and probably the most important on a
continuing basis, but they are no longer the only stakeholder group whose interests
should influence corporate actions.

• In order to minimize harmful stakeholder reactions and optimize opportunities in

the future, corporations should assess how their actions impact upon the interests of
their important stakeholder groups.

• So, “Stakeholder Impact analysis” has become significantly more developed as have
the tools employed in examining, ranking and assessing stakeholder interests.
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
G O V E RN A N CE P RO C ES S B A S ED O N S TA K EH O LD ERS ’ I N T ER ES TS
• In a stakeholder Accountability Governance process the BOD take all stakeholders’
interests into account and make sure that they are built into the company’s vision,
mission, strategy, policies, codes, practices, compliance mechanism and feedback
arrangements. If this is not done, the company’s actions may fail to take important
interests into account, and the company may lose the support of one or more
stakeholder groups.

• Ex: You are producing a product with low-quality ingredients, and you are not
caring for the customer value and product safety. On top of it, you are focusing
much more on short term profit rather than the stabilized long-term option.

• In this case, the company might suffer and lose customer, profit and even business
in the long-run.
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
G O V E RN A N CE P RO C ES S B A S ED O N S TA K EH O LD ERS ’ I N T ER ES TS
• An important element of the modern Stakeholder Accountability Governance
Process system is an “ETHICS OFFICER” (EO) or Ombudsperson – his duties &
responsibilities are the following:
1. He watches over the ethical culture,
2. He serves as the person to whom whistle-blowers report anonymously.
3. EO should report to the audit committee of the board
4. He works as the conduit through which a generic report of whistle-blowers reaches
the board.
5. The EO may report on a day-to-day basis to the CEO,
6. He should be ready to blow a whistle inside their corporation, and
7. He reports the financial wrongdoings to the audit committee.
 GOVERNANCE
FOR BROAD
STAKEHOLDER
ACCOUNTABILITY
I D EN TI F Y I N G
O RG A N I ZATI O N A L
VA LU ES – TH E
F O U N D AT I O N O F
B EH AV I O R
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
I D EN TI FY I N G O RG A N I Z AT I O N A L VA L U E S – TH E F O U N D ATI O N O F BEH AV I O R
• The new framework for accountability is based on responding to shareholder and
other stakeholder interests.

• The modern governance framework should direct corporate employees to integrate

those interests into their a) strategies, b) planning, and c) decision-making.
Consequently, the following should be done:
• Discovering what those interests are
• Which are the most important, and
• Where the risks are that should be managed

• These steps should be taken before considering the organization’s vision, mission,
strategies, policies and procedures.
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
I D EN TI FY I N G O RG A N I Z AT I O N A L VA L U E S – TH E F O U N D ATI O N O F BEH AV I O R
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
I D EN TI FY I N G O RG A N I Z AT I O N A L VA L U E S – TH E F O U N D ATI O N O F BEH AV I O R
• What is required here is that:
• An exploration of the stakeholder interest,
• Build expectations regarding stakeholder interests for the organization,
• Install these respects into the values of the employees that drive behavior.

• This will lessen the chance that employees will be motivated to make decisions and
take actions that are not in the interest of stakeholders.

• Beliefs motivate people to act. Beliefs stem from many sources, but principally
from the values an individual holds. Some values were taught directly or through
examples by their parents, respected individuals, bosses, friends, and so on. And, the
other values stem from the rules and motivational system in place (or absent) at the
organization.
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
I D EN TI FY I N G O RG A N I Z AT I O N A L VA L U E S – TH E F O U N D ATI O N O F BEH AV I O R
• People make things happen, so it is essential that their motivations are aligned with
stakeholders’ expectations.

• This can only be reliably accomplished by ensuring that the values underlying
corporate motivational elements (i.e. culture, codes, policies etc.) are similarly
aligned.

• The identification, assessment, and ranking of stakeholder interests should develop

a comprehensive set of values for an organization.

• However, it should be recognized that values and their priority vary in different
cultures. This will present increasing complexities as the number of cultures
(diversity) that an organization deals with inflates.
 GOVERNANCE FOR BROAD STAKEHOLDER
ACCOUNTABILITY
I D EN TI FY I N G O RG A N I Z AT I O N A L VA L U E S – TH E F O U N D ATI O N O F BEH AV I O R
• Importance to a certain aspect varies from culture to culture:
• Rights of Individual
• Duty to Family
• Duty to the Company
• Duty to Savior - Religious beliefs

• Corporations should consider which set of values most align with those of their
shareholders, and of their most important stakeholders.

• Then, how to choose from overlapping interests?

• They can impose a generic filter by choosing those that can influence their largest
consumer and capital markets.
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
• Now, the managers, owners and directors are understanding that :
• Their organization should be wise to consider the interests of stakeholders, not just
shareholders;
• Appropriate ethical values are to be considered when decisions are being made.

• Because organizational, professional, and personal values provide the framework

for decision-making. It is vital that organizations create an environment or culture
where appropriate values are :
• Created
• Understood
• Fostered
• Committed to and
• Used by all concerns.
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
• Following 3 topics will be discussed under this point:
1. Ethics Program Orientation
2. Ethical Culture
3. Development and Maintenance of an Ethical Corporate Culture
DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
1. ETHICS PROGRAM ORIENTATION
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
1. ETHICS PROGRAM ORIENTATION
• The most important factor in encouraging employee observance is that the
employees perceive that the ethics program is value-based. Rankings of approach:
• Value-based
• Compliance based
• External orientations
• CYA

• It was suggested that combined approaches could be effective, such as if a values

orientation were “backed up with accountability systems and disciplines for
violators”.
• where “values can include concern for customers, suppliers, and the community as
well as the shareholders and internal stakeholders such as employees”.
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
2. ETHICAL CULTURE
• It combines formal and informal elements:
1. Ethical leadership by executives and supervisors
2. Reward systems to incorporate ethical considerations,
3. Perceived fairness, fair treatment of employees, • The contents of
4. Open discussion of ethics in the organization, ethical culture can
particularly be
5. Authority structure that emphasizes an employee’s accountability
useful for a
and responsibility to question his or her own actions, and an
company that is
obligation to question authority when something seems wrong.
assessing what it
6. Organizational focus that communicates care for employees and the might do to institute
community, rather than self-interest a new ethics
7. Official policies and procedures (code of ethics, practices, conduct), program or improve
its current ethical
8. Supporting offices (e.g., ethics officer, ombudsperson), culture.
9. Supporting structures (e.g., telephone hotline, whistle-blower
protection, training).
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
2.1 DEFICIENCY OF COMPLIANCE/WRITTEN ETHICAL CULTURE
• While most companies have embraced the concept of written ethical guidance; they
have fallen far short of embracing many of the supportive mechanisms that are
important to the development & maintenance of a healthy ethical culture, such as:
• Lack of CEO involvement,
• Lack of training,
• Failure to renew employee commitment to the code annually,
• Lack of communication and meetings dealing with ethics,
• Lack of formal program follow-through,
• Inappropriate placement of the ethics function within the legal department which
focuses on compliance rather than the welfare of employees and other stakeholders,
• Employing “quick-fix” approaches rather than building a long-term solution.
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
2.2 DEFICIENCY – WHY VALUE ORIENTATION?
• The dominant influence in U.S. is to orient top management commitment and
corporate ethics programs toward compliance rather than integrity or values.
• This orientation will not provide the best adherence to the (best) desired ethics
values.

• If the management can implement an ethics program by ensuring the following,

then it will produce significant benefits:
• Embedding and encouraging shared values,
• Supporting employee aspirations,
• Communicating values, and
• Building trust/confidence
 DEVELOPING, IMPLEMENTING & MANAGING AN ETHICS
CULTURE
2.2 DEFICIENCY – WHY VALUE ORIENTATION?
• Ethics Renewal: It refers to Building trust within an organization.

• It can have favorable impacts on employees’ willingness to share information and

ideas

• Thereby it enhances the innovation aspiration of the enterprise and its ability to
adapt and take advantage of its opportunities.

• Properly cultivated trust also creates commitment to organizational goals and

enhances productivity; all of which will raise the ability of the enterprise to profit
and to compete.
 3. DEVELOPMENT AND MAINTENANCE OF AN ETHICAL
CORPORATE CULTURE

Steps Purpose
1. Assign Responsibility
Chairman or CEO Top level accountability and adequate budget
Ethics Officer Champions, arbiters
Ethics Committee Monitoring, feedback, advice and cheerleading
2. Ethics Audit To understand the organizations ethical practices and its
networks of stakeholders and interest
3. Ethics Risk Assessment To identify important ethics problems (dilemmas) that could
arise
4. Top management support Absolutely vital to successful adherence
5. Develop consensus on key ethical Necessary to frame policies and procedures
values
6. Develop code of conduct, ethical To provide guidance for employees and all other stakeholders
decision-making criteria and protocols
incl. sniff tests
 3. DEVELOPMENT AND MAINTENANCE OF AN ETHICAL
CORPORATE CULTURE
Steps Purpose
7. Develop Ethics programs To successfully present and provide supporting mechanism for the
Leaders' involvement guidance process.
Launch
Training
Reinforcement Policies
• Compliance sign-off
• Measurement of
performance
• Include in strategic
objective
• Include in Management
Objective
• Including in monitoring
and reward Structure
• Communication
programs
• Exemplar Award
System
 3. DEVELOPMENT AND MAINTENANCE OF AN ETHICAL
CORPORATE CULTURE

Steps Purpose
8. Ethics inquiry service Information, investigation and whistle-blowers protection
9. Crisis Management To ensure that ethics are part of survival reactions
10. Establish a review mechanism To find out the loopholes and fix up thereby