Business Ethics

Significance of Business Ethics

-Business ethics are standards of actions or decisions that (a) constrain one (legally or morally) to a right course (b) that require a concern for the impact of one's actions or decisions on others -A company's ethics has important implications for its functioning as an organization, its ability to manage risk, its reputation in the marketplace, & its standing in the community -Business activity would grind to a halt without trust, fair dealings, and honest communication. -Markets are amoral but market participants use personal value systems for decision making. -Most individuals make ethical judgments on the basis of instinct & emotions. Challenge is to keep the bias/prejudice aside

Relevance of Business Ethics

-Creating a good image -Stopping business malpractices -Improving customers' confidence -Safeguarding consumers' rights -Protecting other stakeholders -Competing with healthy approach -Developing good relations

Professional behavior

-Driven by outcomes / process / performance /standards/ code of conduct /principles / objectivity /consistency -Obstacles to professional ethical behaviour: sustaining commitment, unbridled self interest, right v/s right conflict, right v/s wrong, right v/s almost wrong

OECD Principles on Corporate Governance

-Effective Corporate Governance Framework -The Rights of Shareholders and Key Ownership Functions -The Equitable Treatment of Shareholders -The Role of Stakeholders in Corporate Governance -Disclosure and Transparency -The Responsibilities of the Board-Monitoring Management and Accountability to Shareholders

Intent of OECD

-Ensure integrity of accounting and financial reporting - Include independent audit - Ensure appropriate controls over •Financials •Monitoring risks •Compliance with laws and regulations

Values

-Ethical values are those beliefs & principles that impartially promote human well being -Values are deep-seated beliefs of a person or social group or a set of rules that people adopt to take right decisions. -These are key factors that drive the behaviour of an individual -A company's core values are those beliefs and principles that provide the ultimate guide to its decision making to achieve business goals & objectives successfully. -Organizational values include trust, teamwork, stewardship, safety, responsiveness, quality of life, innovation, fairness, integrity, commitment, transparency, respect, accountability etc

Corporate Governance as a Systemic Process

-creates the basic infrastructure of an organization -decides how businesses are directed, controlled & supervised -As large organisations use a substantial number of societal resources, corporate governance must ensure the proper utilization of these resources in order to meet the requirements and expectations of their stakeholders. -The systemic process of corporate governance must have the structured and well-defined roles of the organisation, which also includes the role of every individual associated with the organisation, especially at middle, senior and higher level of management. -Well-defined roles based on core principles further elucidate the philosophy of an organization.

advantages of Enterprise Risk Management

-helps the management to tackle uncertainties and associated risks in the organisation. -guides the organisation to get to where it wants to go, and avoid pitfalls and surprises along the way

ownership concentration

-occurs when the power to control the activities lies in the hands of a few shareholders -The degree of ownership concentration determines the distribution of power among shareholders and managers. -The control of shareholders becomes weak when ownership is dispersed, -Between the degree of ownership concentration and profitability of an organisation, an inverted U-shaped relationship exists. -As ownership concentration increases during the initial stage, sufficient funds are raised for the growth and expansion of the organisation.

pride

A healthy self-esteem is a foundation for all organisational achievements and a key component in driving a moral business

Citizenship principle

Act as responsible members of the community

Fiduciary principle

Act in the best interests of the company and its investors

Responsiveness principle

Be responsive to the legitimate claims and concerns of others.

ethics- a discipline of moral values

Business ethics are the guiding values related to the functioning of a business. It is the information through which human behaviour is assessed in a business situation. A business affects society to a large extent, thus has a number of responsibilities to fulfil for the society. Businesses must ensure a regular supply of quality goods and services at reasonable prices to their consumers. Unfair trade practices, such as adulteration, promoting misleading advertisements and black marketing, must be avoided by businesses. They must ensure the payment of fair wages and provide good working conditions for workers. In addition, business firms must pay all their taxes and duties regularly to the government

greater than law

Business ethics cannot be obligatory by law or by force. It must be acknowledged as self-discipline by business organisations. Businessmen should opt for ethical trade practices by themselves and not by the pressure of law. Though the law imparts many social decisions, law cannot be considered greater than ethics. Law is generally related to the bare minimum control of communal customs whereas ethics impart greater significance to individual and social welfare deeds.

interest of society

Business ethics explain the importance of business in society. They lay emphasis on the fact that a business should first do well to the society and then to itself. A business has a social responsibility to guard the interests of all its stakeholders

Transparency principle

Conduct business in a truthful and open manner

Fairness principle

Deal fairly with all parties

Executive Compensation

Designed by BoD-IDs, appropriate balance of fixed vs variable components

Steps of ethical decision making

Determine the facts Identify the ethical issues involved Identify stakeholders and their legitimate rights and interests Consider the available alternatives Compare & weigh the alternatives Make a decision

Ethical standards for consideration

Duties Rights Commitments Best practices

relative term

Ethics is a relative term for morality and immorality. It deviates from one person to another or from one society to another. For example, something that is considered moral in one society may be immoral in another society. Thus, ethics is a broader concept and is not universally applicable in the same sense and in the same situation

Internal environment for corporate governance

Internal stakeholders, Board of directors Company vision, mission, policies, norms

External Business Ecosystem

Is a dynamic environment consisting of varied political, cultural, social and legal aspects & connects market economy and an organisation - a conscious decision by an organisation to innovate and gain commercial success makes a business ecosystem - it has a large number of interconnected participants with different & multiple interactions. - which may be competitive or cooperative

promotion related ethical issues

It is important not to overlook social, ethical and legal aspects of promoting a product or service through mass media. related to: deceptive advertising, sales promotion gimmick

Reliability principle

Keep promises, agreements, contracts, and other commitments.

Remuneration Committee

Main function is to set and check monetary benefits offered by the company to BODs. -Comprises of ID's who are well-informed about compensation trends in similar and other industries & is responsible for setting a clear policy on the remuneration of directors, which is supported by all shareholders. -shareholders have a right to sue the directors in case their pay scale is more than the stated amount or they take a large share of profit instead of distributing it as dividends.

Guidelines for ethical behaviour

Making managers as role models Taking disciplinary actions for unethical behaviour Rewarding ethical behaviour Encouraging & rewarding ethical leadership

Shareholder Control & Protection

Monitor managers & control mechanism through voting rights provided by corporate law & various legislation on issues of executive compensation, transparency & disclosure requirements, legal protection of shareholder rights

Board of Directors & their Fiduciary Responsibilities

Multiple fiduciary responsibilities, managing on behalf of shareholders, create, protect & distribute wealth created, avoid conflict of interest, loyalty

Branches of ethics

Normative Metaethics Applied ethics

patience

Patience can be a great source of ethical power in an organisation

Property principle

Respect property and the rights of those who own it

Dignity principle

Respect the dignity of all people.

Minority Shareholder Rights

The Companies Act 2013 protects the rights of minority shareholder who cannot participate or influence the decisions of an organization

OECD Principles of Corporate Governance

The OECD Principles of Corporate Governance is an international benchmark for policy makers, investors, corporations and other stakeholders worldwide since 1961

Models for corporate governance

The anglo american model the german model the japanese model the indian model

Raymond Baumhart

The ethics of business is the ethics of responsibility. The business man must promise that he will not harm knowingly.

Audit Committee

The members are responsible for reporting financial proceedings of the organisation to the board. -It acts as a critical link between outside auditors and the board. -The committee resolves matters, such as the scope of the audit, issues raised by auditors with regard to management systems and control or any disagreement or conflict of interest related to the published financial statements. -It also gives recommendations on audit fees or reappointment or replacement of auditors.

Nomination Committee

The nomination committee is made up of independent directors. It is headed by the chairman of the company and is a means by which new non-executive directors are brought for the selection to the board.

product related issues

These issues occur when marketers fail to provide its customers with information related to products, such as features, value, usage and associated risks. relates to: packaging and labelling, maintaining quality standards, product safety

speculative risk

These risks are termed as voluntary risks. The outcome of these risks results in either a profit or a loss for the business eg M&A, financial investments, etc. Speculative risks lead to potential losses such as property loss, property damage, strained customer relations and increased overhead expenses.

pure risk

These risks include natural disasters or untimely death and are beyond anyone's control. The extent of loss can also not be estimated

characteristics of ethics

Truthfulness Accuracy Objectivity Accountability

Applying the framework

Understanding the facts Identifying relevant standards Maintaining objectivity while applying: visibility, generality, legacy

Value based Management

Value bases management is an approach to ensure that organisations run their business on values. It ensures that performance targets of organisations are aligned with: •Corporate mission •Corporate strategy •Corporate governance practices •Corporate culture •Corporate communication •Decision process •Performance management & reward processes There are three elements of a V.B.M. system, which are: Creating value, Managing value, Measuring value

Aristotle

We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly.

Whistle-blowing

act of reporting or raising a concern over wrongdoing within an organisation to internal or external parties

sakam karma

actions carried out with selfish, self-centered motives

perspective

being aware of the bigger picture and deciding on what is truly important. It motivates an organisation to focus on its long-term objectives rather than on being myopic.

teachings from scriptures

build strategy form allies show leadership quality maintain team spirit forget individual motives show commitment encourage women empowerment

Andrew Crane says

business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed.

study of objectives and means

business ethics segregates between fair and unfair. Business ethics ensures that objectives and means opted for satisfying objectives are rational and justified. It is essential that goals and means should be based on moral principles.

The Japanese model

business network model. Keiretsu in Japanese, which means system and row. Has financial institutions as an important part of corporate governance.

steps for systematic approach to ethical issues in marketing

clarify objectives evaluate all options decide implement observe and modify

The German model

comprises two boards, supervisory board and management board, adopted in Germany, Holland and France. It adopts a societal orientation and states that the employees of an organisation have a voting right to elect the Board of Directors

Teleological

consequentialism - modern capitalism- most good for most people- larger good

types of ethical relativism

conventionalism subjectivism

ethical dilemmas

defined as complex situations that involve conflict of moral interests while choosing from available alternatives. An individual in an ethical dilemma may have a number of questions in his/her mind.

Types of normative ethics

deontological teleological virtue

Characteristics of business ethics

discipline of moral values relative term study of objectives and means interest of society greater than law

Ownership structure

distribution of voting rights among different equity shareholders of an organisation.

Virtue

focus on individual moral character development and the organization ethical reputation will go up

The Anglo-American model

follows a shareholder-oriented approach in America, Britain, Canada, Australia and other countries following the common wealth law.

The indian model

governed by the Company's Act of 1956 influenced by UK. It also uses recommendations given by the German and Japanese models of corporate governance. The legal corporate governance system of India is based on the recommendations of three committees: Kumar Mangalam Birla Committee, Narayana Murthy Committee and Naresh Chandra Committee.

external environment for corporate governance

government regulations, policies, guidelines corporate sector characteristics and influences, SEBI, external stakeholders

management principles derived from indian management practices

holistic management attaining material and spiritual goals conscious management co-operation rather than competition humanization of organisation meditativeness in decision making intuitive decision making focus on duty

purpose

illustrates the meaning and direction of the operations of an organisation

Internal Environment

includes elements such as current employees, management and especially, corporate culture that defines employee behaviour - they impact the approach & success of various operations within - the key to success depends upon how well the organisation is able to manage the strengths of its internal operations and recognize potential opportunities and threats outside of these operations.

External risk analysis

is data-heavy, and since these risks are outside the control of the organisation, a more systemic approach for analysis is required. Various quantitative techniques like benchmarking, probabilistic modeling, etc., can easily be applied to assess external risks in organizations.

Deontological

moral duties-rules that exist to regulate those duties. Input-Process-output all equally important- social/ethical capitalism- not just profit but how.

major marketing decisions and related ethical issues

product related promotion related price related distribution-related

Types of risk

pure risk speculative risk

principles of ethical power of organisation

purpose pride patience persistence perspective

Sources of ethics

religious belief culture legal system discussions with others ethical philosophers

nishkam karma

selfless or aspiration-less action, is an action performed with no desire of the results as it is not performed for selfish reasons suggests that when work is done with complete devotion and without being attached to the results, it liberates an individual from unnecessary stress and burden expectation of results and the bid to outperform others is a constant source of stress to the workers of an organisation

Business ethics

system of moral principles applied in a business environment. Business is amoral but its ethics is decided by the morals of the leadership group

enterprise risk management

the identification, assessment & prioritization of risk followed by coordinated & economical application of resources to minimize, monitor & control the probability and/or impact of unfortunate events

Peter Drucker

there is only one ethics, one set of rules of morality, one code: that of individual behaviour in which the same rules apply to everyone alike.

persistence

useful for the attainment of organisational goals. It involves maintaining consistency in the principles, values, objectives, activities and behaviour of an organisation.

Beliefs

•Beliefs refer to basic assumptions and feelings of individuals towards other individuals, events or various other aspects. •They help individuals to carry out their actions in a specific way. •The belief system of an individual starts developing early in their life; however, there is only a little understanding regarding beliefs.

Stakeholder Theory

•Developed in 1930s - an organisation should maximize stakeholders' benefits and follow an ethical code of conduct. •It has been drawn on the basis of various theories, including the social contract theory, communitarian ethics and ethics of care. •There are many problems that arise while enforcing the stakeholder theory in an organisation. These problems include identifying genuine stakeholders and determining the shareholders' benefits.

Professional Managerial Values

•Encourage others •Creativity •Intuitiveness •Knowledge •Commitment •Kindness & Versatility

price related ethical issues

•Every customer wants to pay a fair price for the product purchased by him/her. -Price fixing -Bid rigging -Price war -Deceptive pricing

Steps to embedding ethics in organizational culture

•Getting commitment from top management •Setting a code of ethics •Communicating ethics •Providing training on ethics •Designating an ethics officer •Checking response and ensuring enforcement •Performing audits, revisions and refinement

Spiritual Values

•Harmony •Truthfulness •Self-giving •Faith

Agency Theory

•Interests of managers are often divergent from that of the shareholders. •The shareholders (principals/part owners) select the managers / agents (BoD, ID's), for the long-term wealth maximization and smooth functioning of the organisation. •Managers tend to focus on personal benefits and short-term profit maximization rather than long-term wealth maximization of the organisation. •This conflict of interest gives rise to a problem, known as the agency problem. •The role of corporate governance is to address the agency problem by bringing transparency and aligning the objectives of the organisation with its associated parties.

Ethical Leadership

•Lays emphasis on ethical beliefs and values of individuals, like integrity, honesty, fairness and so on. •Known for their honesty, principles and impartial approach to decision making. •Clearly communicate the codes of ethics to their followers and use rewards and punishments to maintain ethical standards

Factors Responsible for the Enhancement and Dilution of Human Values

•Materialistic pleasures at the same time forsaking their values. •Dilution of human values leading to communalism, separatism, biasedness, dishonesty, lack of trust, cruelty, sadism, barbarity and self-centredness. •Self-centered / concerned about their own benefit. •The enhancement of human values is not a job of a single individual rather the government, citizens and various institutions should also contribute towards bringing such change.

Independent Directors

•Nominee directors should not be considered as independent directors. •Stock options should be prohibited. •Performance of the independent directors should be evaluated compulsorily. •Independent directors cannot serve in more than 7 companies or in 3 companies, if serving as whole-time directors. Independent directors cannot serve for more than two terms of 5 years each.

Norms

•Norms are informal guidelines regarding what is righteous and what is erroneous in a particular social group. •They form a control system as they are used as a means to influence the members of a social group. •Norms can be formal or informal. Formal norms are explicitly written down and people who violate these norms face a strict action. All legal, social and religious norms are formal in nature. •Informal norms are not written or mentioned anywhere.

Stewardship Theory

•Nullifies the possible conflicts between the managers and shareholders that have been presumed by the agency theory. It supports the view that the managers are considerate about their personal reputation and value their integrity. •The stewardship theory focuses on the trustworthiness of managers and is based on the following points: -Motivating managers to ensure that they not only look after personal goals, but also align these personal goals with the organisational objectives -Controlling managers with excessive modes can actually demotivate them. So, it is important to ensure that the control measures do not hamper the productivity of the managers.

Characteristics of Ethical leaders

•Promoting development of leadership skills in others •Taking accountability for the accepted roles & responsibilities •Taking into account the interests of organization, people & society •Encouraging & inviting feedback, opinions & suggestions from followers

Standards

•Standards refer to a level or degree of a specific parameter. •Standards may be measurable or immeasurable. May or may not be documented. •In an organisation, standards should be based on ethics. •Ethical standards promote values such as transparency, trust, fairness and honesty. •Generally, business organisations follow a set of globally accepted standards throughout the world. •Ethical standards are usually stated or defined in a way that may be debatable and open for discussion. The degree of specification may also vary.

Functional / Mandatory Committees of the Board

•The BoDs form various committees to divide work among groups for avoiding corporate failures and downfalls and increasing the efficiency of the board. •There are clearly specified set of duties for each director who is a member of any functional committee. The three committees are: Nomination Committee, Audit committee, remuneration committee

Relationship among Values, Norms, Beliefs and Behaviour

•Values possessed by an individual can be determined by behaviour they demonstrate. It means that there exists a direct relation between the values and behaviour of an individual. •The views and beliefs of individuals are very difficult to change or modify. •Personal values are communicated through words, action & behaviour subconsciously •Norms are generally much more specific than values but values can be implemented only if norms are observed. Manifestation of the norms can be seen in an individual's behaviour.

The 4-V Model of Ethical Leadership

•Values: These are the core standards of an organization. Ethical leadership can be developed easily by understanding core values. •Vision: It implies planning actions to achieve organizational objectives. •Voice: Communicating the vision is necessary for its effective implementation. A strong, convincing and motivational approach is required from an ethical leader for articulating the vision to others. •Virtue: An ethical leader can achieve a common goal by identifying what is right and what is wrong. He/she should practice virtuous behaviour that depicts moral excellence.

Spiritual Managerial Values

•Work is worship •Individual potentiality •Excellence at work •Co-operation & teamwork •Self introspection •Decision making in silence

external risk

•originate outside the organisation and include economic trends, government regulation, competition in market and change in consumer taste. •Can be regulatory risks pertaining to laws, regulations, policies and guidance governing organisations. OR Environmental risks due to changes in the environment that have a direct bearing on the working of the organisation.

Board of Directors and its Committees

•should maintain a healthy relationship with the stakeholders •Nomination and remuneration committee should have an independent chairman. •should have at least one women director. •The role of the audit committee should be increased. •should engage in succession planning for the board positions and other key positions.