Unit 2 syllabus

Managing Ethics - Frame work of

organizational ethic theories and sources,
ethics across cultures, factors influencing
business ethics, ethical decision making,
ethical values and stakeholders, ethics
and profit, Corporate governance
Structure of boards, reforms in boards,
compensation issues, ethical leadership
for improved Corporate governance and
better business education

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 Ethics in Organisations
• Business Ethics -The application of general ethical concepts to the
unique situations confronted in business. It asks what is right or
wrong behavior in business and what principles or rules can be
used as guidance in business situations.

• Business Ethics are moral principles that define right and wrong
behaviour in the world. What is right/wrong is determined by public
interest groups, organisations and individual values

• Individual values Vs Organisational Values (Absolute values and

Masquerading values

• Three terms used to define Ethics: RIGHT, PROPER AND JUST

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 Ethics in Organisations
Ethics in Business:

• Ethics alone can determine company’s success in the longrun

• Balancing of conflicting interests. (personal and professional ethics)
• All societies approve honesty, keeping promises, helping others,
respecting others’ rights
• All societies disapprove/forbid lying, stealing, deceiving and harming
others

Questionable acts!
Kickbacks, Bribery, Corruption Theft, Collusion, Money
laundering(diverting without regulator’s knowledge)—drug sales,
terrorism, gambling and smuggling
Individual making profits at other’s cost

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Sources & Development of Business Ethics
• Genetic Inheritance: Evolutionary forces of natural selection
influence the development of traits

• Religion: Belief that religion provides ethical principles and

standards (example:Ten commandments in Christianity)

• Philosophical Systems: Pleasure principle Versus Indifference

to pleasure or pain

• The legal system: Law tries to educate the people

• Codes of Conduct: Company code, company operating

policies, Code of Ethics

• Cultural Experiences

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 Arguments favouring Business Ethics
• Ethics govern all voluntary human activities. Business is a voluntary
activity.

• No business exists when we think it is moral to break agreements or

steal competitors’ secrets or cut throats of others. Minimal
adherence to ethics is therefore necessary

• Companies that combined good history of profits with exemplary

ethical standards survive for hundreds of years. Perpetuity being
one of the principles of business, business does not exist without
ethics (Examples of such companies: HP, Intel, Cisco, Procter &
Gamble to name a few

• Mutual co-operation always help

• Just (ethical) organisations will have always have loyal customers—

internal and external
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 Business Ethics
Corporates to tackle four types of social issues to constitute total
corporate social responsibility:--Economic issues; Legal issues,
Ethical issues and Philanthropic issues:

• Economic Issues: Profit Versus acceptable profit producing required

goods and services to the society. Maximisation of profits and
optimisation of profits with social concerns.

• Legal Issues: Business houses to comply with legal requirements of

the country in which they operate. Economic missions should be
within the framework of law. Legal and economic issues exist
together.

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 Business Ethics
• Ethical Issues: Sometimes business houses need to respect
standards set by society even though law may be silent on the
issue. Examples are standards, norms, interest of stakeholders—
(consumers, employees, shareholders and the community).
Environment protection, civil rights, consumer movements.
Corporates to show higher level of performance than currently
required by law. Coporates should recognise Justice,. Rights and
utilitarianism.

• Philanthropic Issues: Business houses shoud be good corporate

citizens, which implies that they should involve themselves in
activities desirable to promote human welfare or goodwill. Examples
are contributions (direct or indirect) to art, education, community
work, rehabilitation of identified targetted population. Humanity is the
catchword.

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 Imp Terminologies in Business Ethics
Teleology:
• Look at the consequences of actions/decisions (the ends); It is the
doctrine of final causes

Deontology:
• Approach to determine the ethics by looking at the process of
decision (the means). It is the science of duty

Ethical Reasoning
• Identifying the nature of ethical problem and then deciding the
course of action which gives the best ethical result

Utilitarian Ethics
• It is a teleological approach which aims at greatest good for the
greatest number (cost benefit analysis which gives overall gain)

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 Imp Terminologies in Business Ethics
Moral Reasoning:
• It is a science or moral development. Sometimes the local courts
decide the moral reasoning. It is a study in psychology that overlaps
with moral philosophy. It is also called moral development. Under
conditions of uncertainty, accept the court to decide moral reasoning

Ethical Congruence:
• A state where values, behaviours and perceptions are aligned is
known as ethical congruence

Theory of Ammorality:
• Business need not always work under the full framework of society’s
ethical ideals
• Managers act selfishly because of market mechanisms which gives
maximum benefits to stakeholders
• Justifying some issues unethical at workplace but at personal life
the same issues become unethical.

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 Imp Terminologies in Business Ethics
Distributive Justice:
• It is a teleological approach which leads to equitable distribution of
goods and services
Whistle Blowing:
• Disclosure by present or past employees about any illegal, or
illegitimate practices in the company involving the employees. In
other words, sounding an alarm from within the very organisation in
which people work aiming to spotlight neglect or abuses that
threaten the public interest.
Compensatory Justice and Retributive Justice:
• Both are concerned with rectification of the wrongs. Compensating
justice is the correct way of correcting wrongs in private dealings
(Eg Relief to accident victims/survivors, failure to fulfil the contract.
Retributive Justice is awarding punishment which acts as a
deterrent Eg Punishment of fine/imprisonment/death penalty for
crimes—rape, murder, assault, theft, robbery etc

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 Imp Terminologies in Business Ethics
Corporate Culture
• It is the set of shared values of the people who form an organisation
serving the interests of the public in any manner. It defines the
existential purposes, functions and what is important for them. Every
employee developing a sense of belonging and exhibiting a uniform
behaviour towards internal and external customers

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 The 4 Concepts of Ethics

Relativism Egoism

The 4
Concepts of
Ethics
Utilitarianism Deontologism

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 The 4 Concepts of Ethics
Relativism
• There is no universal standard by which morality can be judged
• What is correct for one society may be wrong for another
• Ethics and morality are relative
• There are no absolutes - murder, slavery, torture, rape OK
• What is meant by a society? Sub-societies
• Leads to conclusion - each person’s opinion is correct
• Nothing that anyone does is morally wrong

Egoism
• One ought to act in his or her own self interest
• Ethical behavior is that which promotes one’s own self interest
• Does not mean should not obey laws - only do so if in self interest
• Problem - Externalities associated with private actions - OK to dump
toxic wastes as long as don’t get caught

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 The 4 Concepts of Ethics
Utilitarianism

• The morality of an action can be determined by its consequences

• An action is ethical if it promotes the greatest good for the greatest
number
• Ends justify the means

Deontologism

• Derived from the Greek word for Duty

• Actions are not justified by their consequences. Factors other than
good outcomes determine the rightness of actions
• Means are important

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 Organisational Ethics

Employees’ obligations to the firm

• Punctuality
• Follow Dress Code
• Work to the best of his/her abilities
• Respect the employer, colleagues and customers
• Take care of the organisation’s property and interests
• Follow reasonable and lawful orders/instructions. (Illegal Orders or
orders that threaten employees’ health and safety may be ignored)
• Obey safety rules
• Ask for help in case of need
• Know employee expectations
• Don’t discriminate or harass others at workplace
• Don’t put yourself or others at a risk of INJURY in the workplace

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 Organisational Ethics
Employees’ rights

• Right of right wages

• Protection from unfair dismissal

• Sick leave, Annual leave, public holidays, familyleave

and long service leave

• Freedom to belong to or not belong to a union

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 Organisational Ethics
Firm’s duties to the Employees:
• Compensation (Wages and benefits)

• Job Satisfaction ( skill development, training, workshops, seminars)

• Working Environment—free of hazards, congenial, avoiding injuries

• Job Profile—Job description

• Health and Safety

• Growth Prospects (career prospects)

• Job rotation ( Task identity, Task significance, Exposure, Autonomy,

Feedback and also internal security reasons)

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 Organisational Ethics
Organisational Ethics Programme
• Company integrates core values(honesty, integrity, trust, fairness
and respect) into its policies, practices and decisions

• Compliance with legal standards and adherence with internal rules

and regulations

• Right kind of behaviour of individuals and groups in the organisation

• Companies need to put ethical codes in writing

• Companies need to impart training program on ethics

• Ethical image of a company brings goodwill and loyalty of internal

and external customers

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 Organisational Ethics
Importance of Ethics to an organisation
• Substantial improvement of society

• Maintains a moral course even in turbulent times

• Cultivates strong team work and productivity as the behaviours are

aligned with the organisational values

• Employee growth is strong and not tilting

• Employee face reality both good and bad which improves their
confidence

• Creates productive work environment which avoids downsizing

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 Organisational Ethics
Importance of Ethics to an organisation (contd..)
• Good public image developed

• Companies and employees become socially more responsible

• Public can understand the company’s values and its existential

purpose

• Diversity can be easily managed in this globalised era

• Inappropriate turnover can be controlled. Companies incur cost on

account of loss of valuable experienced people and also on account
of development of new personnel. Pay is not always the primary
factor

• When a company integrates its values into its culture, it reflects

through employees attitude and conduct.
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 Organisational Ethics
Code of Ethics of a successful company—
Highlights
• National interest supreme—contribution to economic
development, not undertaking any activity detrimental to
the national interest of those nations in which the
company operates

• Financial Reporting and Records: Fair and accurate

conformance to the accounting standards which
represent the generally accepted guidelines, principles,
laws and regulations of the country in which the
company operates. High standards of internal control is
also a must.

• Transparency and good governance

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 Organisational Ethics
Code of Ethics of a successful company—Highlights

• Competition—Successful competition which promote the

progressive and judicious liberalisation of trade and investment of a
country.

• Equal opportunity without regard to race, religion, caste, colour,

ancestry, marital status, sex, age, nationality, disability and veteran
status

• Employee policies and practices in a manner that ensures equal

opportunity to those eligible on merits

• Conduct socially responsible and socially responsive activities

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 Organisational Ethics
• Ethics in an organization refers to rules (standards,
principles & values) governing the conduct of
organizational members and the consequences of
organizational decisions
• Defining appropriate behavior
• Establishing organizational values
• Nurturing individual responsibility
• Providing leadership & oversight
• Relating decisions to stakeholder interests
• Developing accountability
• Relating consequences
• Auditing & improvement
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 Factors influencing standards of behabiour
Three general sets of factors influencing the standards of
behaviour in an organization:

• Individual factors: Level of education; Moral Values;

Value related attitudes, Culture and Integration of
Personal goals & organizational goals

• Social factors: Culture, Interpersonal relationship

• Opportunity: the amount of freedom an organization

gives an employee to behave ethically if he or she
makes that choice. Deviations if monitored/punished
encourage ethical behaviour
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 Principles of Employee Conduct

• 10% : Follow their own beliefs

• 40%: Try to follow company policies and rules

• 40%: Go along with the work group

• 10%: Take advantage if the risk is low

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 Myths about Organisational ethics
• It’s easy to be ethical

• Unethical behavior is part of any organization

• There are no rewards for being ethical

• Ethical behavior will prevent me from being

• Successful

• Work is like a sport, push the rules & try not to get
caught

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Supporting Ethical decision making
• culture, values & programs

• compliance & leadership

• recognition of the role of co-workers & managers

• balancing stakeholder interests

• management of situational pressures

• rewards beyond short-term performance

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 Corporate Governance
• Corporate governance is a process whereby people at
the helm of affairs direct, monitor and lead corporations,
and thereby create, modify or destroy the structures and
system under which they operate
• The structure specifies the allocation of rights and
responsibilities among different participants in the
organisation—Board, Shareholders, and other
stakeholders
• Corporate governance spells out the rules and
procedures for making decisions on corporate affairs
• Corporate governance implies that ethics is as important
as economics, fair play as important as financial
success, morals as vital as market share.
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 Corporate Governance
• Concept of Corporate governance emerged to overcome
the corporate failures and widespread dissatisfaction
among the stakeholders
• It reduces failures and dissatisfaction.
• The three integrated principles of Corporate Governance
are: a) Integrity and Fairness; b) Transparency and
Disclosures and c) Accountability and Responsibility
• Efficiency of corporate governance determines the
health of the capital market and the economy particularly
when FDIs and FIIS are flowing in a globalised economy
• Corporate governance take care of investors with proper
valuation of securities. It ensures that there is no insider
trading
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 Corporate Governance
Accountability:
• Means answerability. Every person in the organisation
should report to his superior how the work has been done
and how authority has been used. Every person thus
becomes answerable to the top management. The top
management is answerable to the stakeholders. However,
the principle is that every employee is answerable to one
superior only.
• It is necessary to protect interest of small investors,
gullible public, and to protect fleecing of rural people and
to ensure maximum value to the firm in the long run
• It is ensured through audit committees.

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 Corporate Governance
Accounting Standards: Institute of Chartered Accountants of India has
prescribed the accounting standards to ensure transparency and
uniformity in accounting practices. Accounting standards are written
statements issued from time to time re: financial measurements and
disclosures used in producing a set of fairly presented financial
statements.
Accounting Disclosures: Means that all financial information regarding
business transactions must be given in full. Financial statements
would be incomplete, unreliable and misleading unless supported by
important facts. Change in accounting policies, methods and
procedures should be recorded and presented
Whistle Blowing is allowed. It is a mechanism for employees to report
to the management about unethical behaviour, fraud and violation of
company’s code of conduct etc

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 Corporate Governance
Need for corporate Governance:
• Ever increasing number of operational players on account of LPG
• Competition is successful when standards are met
• Complex market conditions (Intl institutions like WTO etc)
• Preventing corporate failures

Constituents of Corporate Governance:

• Board of directors: stewarding the company and giving directions
and controlling the management
• Shareholders: appointing the directors and auditors and to hold the
BOD accountable for getting proper information in a transparent
fashion.
• Management: Running the company by putting in place adequate
control systems, ensuring their operations and to provide
transparent information correct and timely. 32
 Corporate Governance
Requirements for good corporate governance

• Board and its powers: Role, Responsibilities, Powers, and the

accountability of the Board, CEO and the Chairman
• Legislation: Legislative and regulatory framework
• Code of Conduct: Communication of code of conduct to all
stakeholders and ensuring that they are properly understood
• Board of Independence: Some members of the board should be
independent not having any commercial dealings with the company.
They shall have independent powers as well
• Board Skills: Board members shall have a combination of skills and
expertise--operational, technical, financial, legal and also
government/regulatory
• Management Environment: Setting up of clear objectives and ethical
framework, good planning, having right people etc
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 Corporate Governance
Requirements for good corporate governance (contd..)

• Board appointments and reappointments: through extensive

research
• Board Induction and Training:
• Board Meetings: forum for board decision making—well planned
agendas with papers ready for decision
• Strategy setting:
• Business and Community Obligations
• Financial and Operational reporting
• Monitoring the board performance
• Audit committee
• Risk Management

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 Corporate Governance
Objectives of corporate governance:

• Adequate disclosures and effective decision making to

achieve corporate objectives
• Transparency in business transactions
• Statutory and legal compliances
• Protection of shareholder values
• Commitment to values and ethical conduct of business

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 Corporate Governance
Functions of the Board;
• Strategy formulation, budgets, business plans
• Monitoring the effectiveness of implementation
• Selecting, Compensating, monitoring key executives and
overseeing succession planning
• Executive and board remuneration
• Proper process of nomination and selection of board members
• Monitoring and managing conflicting interests of management,
board members and shareholders and preventing abuse of inter
related party transactions
• Ensuring integrity of the corporations accoutning and financial
reporting (including audit)
• Overseeing the process of disclosure and communications.

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 Corporate Governance
Composition of the Board of Directors:
• Not less than 50% to be non-executive directors
• If the chairman is executive: minimum 50% to be
independent directors
• If the Chairman is non-executive: independent directors
could be one third
• Types of directors: a) Full time executive director who is
normally a paid employee of the company; b) Non-
executive but non independent director who is normally a
promoter or having high stakeholder; and c) Independent
directors known as nominee directors representing some
institutions like lenders or the government

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