B Ethics Final
- 1. Executive Summery Business and society have been coeval since time immemorial and also have been inter-dependant. This relationship between business and society is appreciated in Rigveda also : “Corporates should work like a honeybee, which takes the nectar of a flower without the flower being losing its shape and fragrance and provides honey for the wellbeing of the society.” It means that both have to work on a symbiosis manner for each one’s survival and success. The business history is replete with evidences to believe that business flourishes only where society thrives. On the contrary, business dies when society condemns and rejects it. No business can survive without societal approval and sanction. The inter-dependant nature of relationship between the business and the society is best illustrated by the management guru Peter Drucker (1954) by the example of a ship and sea. He states that the relationship between business and society is “like the relationship between a ship and the sea which engirds it and carries it, which threatens it with storm and shipwreck, which has to be crossed but which is yet alien and distant.” No doubt, business has been conducted primarily to earn profit and / or create wealth. However, there are reasons and evidences to believe that the mindless obsession with profit maximization at any cost carried to any extreme has led to spurt in sordid activities in business causing harm to both the business and society and ultimately leading business to flounder and fizzle out. Enrons Parmalats, Union Carbide, and World.com are to name a few representing examples of such business collapses. Business history is also replete with examples that only the businesses that are conducted through good or right practices enjoy societal sanction and survive and last for long. Johnson & Johnson, Maruti Limited, Reliance Industries Limited, and Tata Iron and Steel Company are such examples that indicate that being good in conducting business activities proves good for businesses also. Hence, there has been increasing concern for conducting business in a good or ethical manner. Though there has been a spurt in research activities on business ethics or ethics in business, not much research has so far been conducted on what actually makes business ethics and how being ethical or good is good for business also. Every business has an ethical duty to each of its associates namely, owners or stockholders, employees, customers, suppliers and the community at large. Each of these affect organization and is affected by it. Each is a stakeholder in the enterprise with certain expectations as to what the enterprise should do and how it should do it. Business ethics is applied ethics. It is the application of our understanding of what is good and right to that assortments of institutions, technologies, transactions, activities and pursuits that we call business. Ethical behavior is the best long term business strategy for company , however this does 1
- 2. not mean that occasions may never arise when doing what is ethical will prove costly to a company nor does it mean that ethical behavior is always rewarded or that unethical behavior is always punished. On the contrary, unethical behavior sometimes pays off and the good sometimes lose. Strategy means merely that over the long run and for most of the part, ethical behavior can give a company significant competitive advantages over companies that are not ethical. In an age of liberalization and globalisation corporations can grow, survive and prosper in the long run only if they adopt policies and programmes, which can be considered ethically, economically, socially and environmentally good to vast sections of society with whom they are intricately linked. In the wake of revelations of serious scandals, irregularities, malpractices perpetrated by corporate entities anywhere and everywhere in the world, the need for good corporate governance and application of ethical values and principles in the conduct of business operations at every level of a corporate organisation right from top level is felt more relevant now than before to serve the varied needs, aspirations and expectations of different segments of stakeholders who have a stake in the healthy functioning of a corporate entity as a socially responsible member of the civil society. Three Pillars of Modern Business “Business ethics, Professionalism and Corporate Governance” 2|Page
- 3. Business ethics, Professionalism and Corporate Governance are the important imperatives for survival and growth of a modern business organization confronted with multiple challenges including financial scams, dying sentiments of investors, fixing accountability, transparency, independence in decision making, rule of law, fairness in deals, etc. from the different stakeholders, i.e., investors, creditors, industry, government and society, in the present knowledge based, global and competitive environment. In the years to come, not only corporate governance is going to be the major concern of management but also the basic ingredient of corporate governance is going to change. In addition to full disclosure of the workings of the company, a professional and good management has to identify and quantify the risk being undertaken by various stakeholders. And then the management has to apply all its innovative qualities to ensure that the risk for each stakeholder is reduced to an accepted level and that each stakeholder is rewarded properly for the risk undertaken by him. The success of any company would largely depend on maintaining a business model wherein all the stakeholders are made comfortable. Being transparent in all the dealings/workings can further enhance the comfort level of the stakeholders. A key element of good governance—corporate or otherwise—is transparency projected through a code of good governance which incorporates a system of checks and balances between key players—boards, management, auditors and shareholders. Transparency in turn requires the enforcement of the right to information and the nature, timeliness and the integrity of the information produced at each level of interface defines the real issue. All of this can only succeeds if the responsibilities of each entity and their interface is defined with great clarity and understood by all. For effective corporate governance, a company must symbolize harmonious alignment of various interests of individual, corporation and society. In yet another perspective, corporate reputation, competitive credibility and governance have become increasingly inter-oven. Therefore, corporate governance must be driven by ethical and philosophical concerns as well as legal structural imperative. In short, promoting corporate fairness, transparency and accountability are the hallmark for corporate governance. Profit : Measure of Success No doubt profit is the yardstick to measure the success of every business enterprise whether it is run by the Government or a private organisation. Nevertheless a modern business corporation cannot run its business operations solely with a profit motive, but as an enlightened corporate citizen to serve 3
- 4. the varying needs and aspirations of different segments of society. This is reflected by the brilliant statement made by Henry Ford at the time of Dodge v. Ford trial about his company’s philosophy - “I do not believe that we should make such as an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to the users and the labourers (meaning workers) with surprisingly enormous profits to ourselves”. What Mr. Ryuzaburu Kaku, the dynamic and social oriented President of Cannon said severally years ago is valid forever under whose visionary leadership that company had made great strides and progress in every area of its operations. He said “If corporations run their business with the sole aim of gaining more market share or earning more profits, they may lead the world with economic, environmental and social ruin. If they work together for the common good they can bring food to the poor, peace to war torn areas and renewal to the natural world. It is our obligation as business leaders to join together to build a foundation for world peace and prosperity”. Profitability & Morality Frequently the impression of most people is that ethics and profits are mutual, opposed to one another and that if a company is ethical, it may forget about making profits. People also frequently seem to believe that a profitable company must necessarily be unethical. This is like saying that a company can make profits only through unethical means. Nothing can be more have ethical companies made profits, but more importantly it is, only ethical companies which discharged its 4|Page
- 5. social responsibilities, that have survived competition and turbulent changes through the years and have contributed to social welfare and have contributed to flourished undiminished. In fact, considered from all angles, it is unethical, NOT to make profit. It is unethical, for a company, to make losses. Because, a company which can not make profits and makes losses, misutilises scarce national resources can not pay back creditors, does not make wealth for its shareholders, make huge liabilities, upsets the economy, promotes inefficiency and most importantly, can not, at any cost discharge its social responsibility, meet its welfare commitments and jeopardises the future of its employees. Such a loss- making company becomes a nuisance and a burden to the economy and has not right to exist in the market place. Moreover, it has no business to force its employees into economic insecurity, which is highly unethical. Thus instead of profits being contradictory to ethics, business ethics dictates that the first responsibility of business is to remain profitable and generate revenue from the shareholders and the society. Rather, it is unethical, not to make profits. Hence, the first and foremost ethical obligation of every business is to make profits for its shareholders, for its employees, for its creditors and most importantly, for itself, so that it can discharge its social responsibilities and welfare commitments. But how much profits to make, the means and methods of making it, and at what cost- that is the ethical question. No business, however great or strong or wealthy it may be at present, can exist on unethical means, or in total disregards to its social concern, for very long. Resorting to unethical behaviour or disregarding social welfare is like calling for its own doom. Thus business needs, in its own interest, to remain ethical and socially responsible. As V.B. Dys in "The Social Relevance of Business " had stated- "As a Statement of purpose, maximising of profit is not only unsatisfying, it is not even accurate. A more realistic statement has to be more complicated. The corporation is a creation of society whose purpose is the production and distribution of needed if the whole is to be accurate: you cannot drop one element without doing violence to facts." Business needs to remain ethical for its own good. Unethical actions and decisions may yield results only in the very short run. For the long existence and sustained profitability of the firm, business is required to conduct itself ethically and to run activities on ethical lines. Doing so would lay a strong foundation for the business for continued and sustained existence. All over the world, again and again, it has been demonstrated that it is only ethical organisations that have continued to survive and grow, whereas unethical ones have shown results only as flash in the pan, quickly growing and even more quickly dying and forgotten. 5
- 6. Business needs to function as responsible corporate citizens of the country. It is that organ of the society that creates wealth for the country. Hence, business can play a very significant role in the modernisation and development of the country, if it chooses to do so. But this will first require it to come out from its narrow mentality and even narrower goals and motives. Profit maximization: A social objective The obsession with profits has led to several undesirable and unethical business practices, which in a course of time will lead to a company's doom. Business and Society have been interdependent for ages. There is no doubt that for a business to survive in the society it has to make ‘profits’. Without ‘profits’, a business would slowly crumble and die an unnatural death, no matter what the objectives of the business be. ‘Profit’ is like oxygen to the business and a lifeline to all. Profit, in simple layman’s parlance refers to excess of Income over Expenditure or Excess of Revenue over Costs. An accountant’s version of profit would be different from an economists definition of profit. As they say, 10 different accountants would arrive at 20 different profit figures for the same accounts, at the same time. Similarly, a businessman’s definition of profit would be significantly different from the taxman’s definition of profits. Even the businessman would wary his definition of profit for various purposes, at different times. For example if the business man wants to apply for a loan, or avail an overdraft facility or financing facility from a bank or a financial institution, he would want to show a relatively higher profit and would go to any extent to do so. The same businessman would be very conservative in his methods of computing his profits when it comes to preparing and filing his tax returns, the reasons being obvious. ‘Window dressing’ has been extensively used by corporations which need to report the results of their operations to their shareholders. The Balance sheet is shown to be healthier than it is. The Profit and Loss account or the Income Statement is “adjusted” to reflect a better operational result. The auditor of the corporation is invariably a party to these ‘adjustment’ and he lends his professional skills and expertise to finalize a ‘profit’ figure which would best describe the results of the operations in a manner which he reports to be a ‘true and fair’ view of the ‘profit’ or ‘loss’ of the corporation for a particular period. Even the most private of the private enterprise is an organ of society and serves a social function It is not a rocket science to ‘adjust’ profits to meet the requirements of the business. Time tested methods have been discovered, created or invented to alter the profits. Under/over valuation of inventory, excess/under provision of expenses, charging capital to revenue, revenue to capital etc are 6|Page
- 7. methods which result in under/over statement of ‘profit’, as may be. Of course this is a subjective matter and the treatment of these items would entirely depend on the person responsible for the same. However, a deliberate attempt to maneuver the ‘profit’ and make it show a different figure from what is actually the case is not only unethical, but also detrimental to the stakeholders and society at large, as it has tremendous implications. Though the dominant objective of business has been ‘earning profits’, the obsession with profits must not be overwhelming and be the sole objective. An extremely high obsession with profits could jeopardize the balance with corporate governance, which is the mantra of most socially responsible companies. Also this motive could cause a tremendous imbalance with society at large, which could result in the business perishing sooner than later. It should thus be the focus of every legitimate business owner to keep the society alive through following ethical and acceptable business principles and adopt CSR through corporate governance or otherwise. Business history is replete with instances of the mindless obsession with profit maximization has led to the collapse of corporations like Enron, WorldCom, Union Carbide etc. On the other hand corporations demonstrating social concerns have stayed, survived, and thrived in the long run. Corporate history has witnessed that business flourishes only where society thrives. Hence business corporations need to show and exhibit their concern for the well being of the society within which these operate. Corporate Social responsibility earns social capital or social patronage. That’s why there has been a paradigm shift beyond profit maximization to social and humane concern. Further, the focus of most corporations today has been to define and follow the corporate governance by adopting CSR. However “profit maximization with a social objective” is not without its share of criticism or opposing views. Adam Smith, the noted economist of the 18th century favored ‘profit maximization’ as the only objective of business. Further according to him, what is good for an individual is also good for the society. Later Alfred Marshall and other classical economists further enlarged and refined Smith’s view into a separate economic theory which state that especially under competitive market conditions, profit maximization by firms leads to the most efficient allocation of resources, lower prices and larger aggregate output than under monopoly. The obsession with profits must not be overwhelming and the sole objective The later theories have all advocated the view that corporate social responsibility is an important factor and profit is not an end itself, but rather a means. Thus, while it is important to be profitable to survive the modern day competitive business, treating the objective of profit maximization as the sole objective, could prove fatal to the fortunes of a corporation in particular and society in general. Organizations should rather spend money on CSR by investing well in intellectual capital, 7
- 8. generation of goodwill, social infrastructure, knowledge enhancement, research and development, civil amenities, community development, ancillary industry development, upliftment of the poor and needy and a whole lot of other social responsibilities. Therefore, there is an urgent need to mould the motive of businessmen towards profit maximization with social concern. Corporations should understand this and imbibe this in all its top management and other employees and create awareness in one and all. Workshops, trainings, seminars etc will help a long way in ensuring that all individuals who matter understand this very simple concept and give it their very best to ensure that the results of their business are better arrived at but with some social concerns The Changing Business Paradigm and Ethical Dilemmas Most of the big corporate houses operate globally and maintain manufacturing, marketing, service or administrative operations in many different host countries. With a worldwide presence, these corporations draw capital, raw materials and human labour from wherever in the world they are cheap, skilled and available, and assemble and market their products in whatever nations offer manufacturing advantages and open markets. The fact that these corporations operate in more than one country produces ethical dilemmas for their managers than the managers of firms limited to a single country. The reason to this is that the corporations have operations in more than one country, and the ability to shift their operations out of any country that becomes inhospitable and relocate in another country 8|Page
- 9. that offers it cheaper labour, less stringent laws or more favourable treatment. This ability to shift the operations sometimes enables the multinationals to escape the social controls that a single nation might attempt to impose on the multinational and can allow the corporation to play one country against another. Environmental laws for example which can ensure that domestic companies operate in responsible manner that a country deems right for its people, may not be effective constraints on a corporation that can simply move or threaten to move to a country without such laws. The managers therefore are confronted with the dilemma of choosing between the economic needs and interests of their business, on the one hand and the local needs and interests of their host country on the other hand. Another set of dilemmas is created since corporations operate plants in several countries, it can sometimes transfer raw materials, goods and capital among its plants in different countries at terms that enable it to escape taxes and fiscal obligations that companies limited to a single nation must bear. Yet another group of dilemmas is faced by multinationals – because they operate in several countries they often have the opportunity to transfer a new technology or set of products from a developed country into nations that are less developed. The multinational wants to carry out the transfer of course because it perceives an opportunity for profit and the host country wants and allows the transfer because it perceives these technologies and products as key to its own development. However, the transfer of technologies and products into a developing country can create risks when the country is not ready to assimilate them. Ethics at Market Place Free markets are justified because they allocate resources and distribute commodities in ways that are just, that maximize the economic utility of society’s members and that respect the freedom of choice of both buyers and sellers. These moral aspects of a market system depend crucially on the competitive nature of the system. If firms join together and use their combined power to fix prices, drive out competitors with unfair practices or earn monopolistic profits at the expense of consumers, the market ceases to be competitive and the results are injustice, a decline in social utility and a restriction of people’s freedom of choice. In a perfectly competitive free market conditions forces drive buyers and sellers towards the so called point of equilibrium. In doing so they achieve three major moral values: i) They lead buyers and sellers to exchange their goods in a way that is just, 9
- 10. ii) They maximize the utility of buyers and sellers by leading them to allocate, use and distribute their goods with perfect efficiency, and iii) They bring about these achievements in a way that respects buyers’ and sellers’ right of consent. Fairness is getting paid fully in return for what one contributes and it is this form of justice that is achieved in perfectly competitive free markets. Perfectly competitive markets embody capitalist justice because such markets necessarily converge on equilibrium point and the equilibrium point is the one point at which buyers and sellers on an average receive the value of what they contribute. In a monopoly market situation, however conditions change as compared to perfectly competitive market conditions particularly with respect to the number of buyers and sellers and also the entry is not so easy. Unregulated monopoly markets fall short of the values of capitalist justice and economic efficiency. The high prices the seller forces on a buyer in a monopoly situation are unjust and these unjustly high prices are the source of the sellers, excess profits. The high profits in a monopoly market indicate a shortage of goods. Other firms are blocked entering the market, their resources cannot be used to make up the shortages indicated by the high profits. Thus monopoly market results in a decline in the efficiency with which it allocates and distributes goods. Oligopoly markets which are dominated by a few large firms are said to be highly concentrated i.e. there are relatively small number of firms. It is relatively easy for the managers of these firms to join forces and act as a unit. By explicitly or implicitly agreeing to set their prices at the same levels and to restrict their output accordingly , the oligopolist can function like a single giant firm. This uniting of force together can create barriers to entry and result in the same high prices and low supply levels that are characteristics of a monopoly markets. As a consequence oligopoly market, like monopolies can generate a decline in social utility and can fail to respect basic economic freedom. What do you do when you find yourself confronted with an opportunity to learn exactly what a competitor is doing or is about to do. What Mr. John E. Pepper, the Former Chairman and Chief Executive of The Procter & Gamble Co. (P&G) narrated in his talk on 30th January, 1997 at the Florida University about the philosophy of business ethics practiced by P&G by two live cases will be of great interest and relevance for our discussion. Case No.1 : An individual made a call from Europe to a Senior Manager of P&G informing him that he had in his possession very sensitive and useful documents about the future plans of its competitor – a Lever brand– which he was willing to sell to P&G. The Senior Manager of P&G immediately passed on the information to the Head of Security at Unilever, who in turn alerted the police. The police swung into action and arrested the culprit. Case No. 2 : A Senior Executive of one of the advertising agencies of P&G while travelling in a cab in New York found lying on the floorboard, a computer disk that included the marketing plans of the 10 | P a g e
- 11. P&G’s main competitor who was giving serious headache to one of P&G’s flagship brand in the market place. The Senior Executive immediately sent back the disk to the Chairman of the competitive company and assured him that neither the agency nor anyone at P&G had looked at the contents of the disk. In his letter he said “We will always compete with commitment and intensity but will never compromise our ethics to win”. Business Ethics & External Environment The process of producing goods forces businesses to engage in exchanges and interactions with two main external environments – the natural environment and a consumer environment. Here you will understand the ethical issues raised by these exchanges and interactions. The two basic problems related to the natural environment are – pollution and resource depleting. Several consumer issues, including product quality and advertising are the probable related to consumer environment. The External Environment For centuries, business institutions were able to ignore their impact on the natural environment, an indulgence created by a number of causes. First business was able to treat air and water as free goods. However in today’s context unless business recognize the interrelationships and interdependencies of the ecological systems within which they operate and unless they ensure that their activities will not seriously injure these systems we can not hope to deal with the problem of pollution. 11
- 12. Environmental issues raise large and complicated ethical and technological questions for our business society. What is the extent of the environmental damage produced by present and projected industrial technology? How large a threat does this damage pose to our welfare? What values we must give up to halt or slow such damage? Whose rights are violated by pollution and who should be responsible of paying for the costs of polluting the environment? How long will our natural resources last ? What obligations do firms have to future generations to preserve the environment and conserve our resources? Economists often distinguish between what it costs a manufacturer to make a product and what the manufacturer of that product costs as a whole when a firm pollutes its environment in any way, the firm’s private costs are always less than the total social costs involved. This is a problem because when the private costs diverge from the social costs involved in its manufacture, markets no longer price commodities accurately. Consequently they no longer allocate resources efficiently. As a result the welfare of society declines. The remedy for the external costs is to ensure that the costs of pollution are internalized – that is they are absorbed by the producer and take into account when determining the price of goods. In this way goods will be accurately priced, market forces will provide the incentives that will encourage producers to minimize external costs and some consumers will no longer end up paying more than others for the same commodities. Ethics of Consumer Production and Marketing People are exposed daily to astonishingly high levels of risk from the use of consumer products. Each year people suffer serious accidental injuries and few others are killed due to accidents involving consumer products. Examples are often reported of injuries requiring hospital treatment inflicted on youngsters and adults using toys, nursery equipment and playground equipment, people using home, workshop equipment, people requiring treatment for injuries involving home construction materials. Now the dilemma which arises is where does the consumer’s duty to protect his or her own interests end and where does the manufacturer’s duty to protect consumers’ interest begin? Three different theories on the ethical duties of manufacturers have been developed, each one of which strikes a different balance between the consumer’s duty to himself or herself and the manufacturer’s duty to the consumer – the contract view, the ‘ due care’ view, and the social cost view. The contract view would place the greater responsibility on the consumer, whereas the due care and social costs views place the larger measure of responsibility on the manufacturer. Consumers are also bombarded daily by an endless series of advertisements urging them to buy certain products. Although sometimes 12 | P a g e
- 13. defended as sources of information, advertisements are also criticized on the grounds that they rarely impart additional information and only give the barest indications of the basic function a product is meant to serve and sometimes misrepresent and exaggerate its virtues. Economists argue that advertising expenditure is a waste of resources while sociologists bemoan the cultural effects of advertising. The advertising business is a massive business. The question however is who pays for these advertising expenditures? In the end, the prices consumers pay for the goods they buy must cover advertising costs–the consumer pays. What does the consumer get for his or her advertising rupee? According to most consumers, they get very little. However, the advertising industry sees things differently. Advertising, they claim is before all else communication. Its basic function is to provide consumers with information about the products available to them – a beneficial service. The question to be discussed therefore is whether advertising is a waste or a benefit? Does it harm consumers or help them? Discussion of the ethical aspects of advertising can be organized around the various features like its social effects, its creation of consumer desires and its effects on consumer beliefs. Studies have shown that advertising frequently fails to stimulate consumption of a product and consumption in many industries has increased despite minimal advertising expenditures. Thus advertising appears to be effective for individual companies not because it expands consumption but only because it shifts consumption away from one product to another. If this is true then economists are correct when they claim that beyond the level needed to impart information , advertising becomes a waste of resources because it does nothing more than shift demand from one firm to another. The moral issues raised by advertising are complex and involve several still unresolved problems. However there are few factors like its social effects, its effect on desire, effects on belief that should be taken into consideration when determining the ethical nature of a given advertisement. Advances in computer processing power, database software and communication technologies have given us the power to collect, manipulate and disseminate personal information about consumers on a scale unprecedented in the history of the human race. This new power over the collection, manipulation and dissemination of personal information has enabled mass invasions in the privacy of consumers and has created the potential for significant harms arising from mistaken or false information. The purpose of rights is to enable the individual to pursue his or her significant interests and to protect these interests from the intrusion of other individuals. It is also important because it has several enabling functions. Privacy enables certain professional relationships to exist. In so far as the relationships between doctor and patient, lawyer and client, and psychiatrist and patient all require trust and confidentiality, they could not exist without privacy. It is clear then that our interest in privacy is important enough to recognize it as a right that all people have, including consumers. 13
- 14. However this right must be balanced against the rights and legitimate needs of others. For example, consumers benefit from having life insurance available to them. However there are significant consumer benefits that businesses can provide but they can provide only if there exists agencies that can collect information about individuals and make that information available to businesses. Thus consumers’ rights to privacy have to be balanced with these legitimate needs of businesses. Business Ethics And Internal Environment The Internal Environment The process of producing goods forces businesses not only to engage in external exchanges, but also to coordinate the activities of the various internal constituencies that must be brought together and organized into the processes of production. Employees must be hired and organized, stockholders and creditors must be solicited and managerial talent must be tapped. Inevitably conflicts arise within and between these internal constituencies as they interact with each other and as they seek to distribute benefits among themselves. The ethical issues raised by these internal conflicts fall into two broad areas of job discrimination and the issue of conflicts between the individual and the organization. Although many more women and minorities are entering formerly male-dominated jobs, they still face problems that they would characterize as forms of discrimination. Experiences suggest that sexual discrimination and racial discrimination are alive and they do create flutters in the society. Regardless of the problems inherent in some of the arguments against discrimination, it is clear that there are strong reasons for holding that discrimination is wrong. It is consequently understandable that the law has gradually been changed to conform to these moral requirements and that there has been a growing recognition of the various ways in which discrimination in employment occurs. Among the practices now widely recognized as discriminatory, few of them are recruitment practices, screening practices, promotion practices and conditions of employment. Women as noted earlier are victims of a particularly troublesome kind of discrimination that is both overt and coercive. They are subject to sexual harassment. 14 | P a g e
- 15. Many businesses are aware of these trends and have undertaken programmes now torespond to the special needs of women and minorities. However it should be clear in view of the future demographic trends that enlightened self interest should also prompt business to give women and minorities a special hand. It is for these reasons that companies have instituted aggressive affirmative programmes aimed at integrating large groups of minorities into their firms where they are provided with education, job training, skills, counseling and other assistance designed to enable them to assimilate into workforce. The employee’s main moral duty is to work toward the goals of the firm and avoid any activities that might harm those goals. To be unethical, basically is to deviate from these goals to serve one’s own interest in ways that if illegal are counted as form of ‘white collar crime’. There are several ways in which the employee might fail to live up to the duty to pursue the goals of the firm. The employee might act on a “ conflict of interest”, the employee might steal from the firm or the employee might use his or her position as a leverage to force illicit benefits out of others through extortion or commercial bribery. The ethical issue of misusing proprietary information has become much more prominent in the last decade as new ‘information technologies’ have increasingly turned information into a valuable asset to which employees have regular access. As information technologies continue to develop, this issue will continue to grow in importance. Insider trading is also unethical – not merely because it is illegal but because it is claimed, the person who trades or insider information in effect ‘steals’ this information and thereby gains as unjust or unfair advantage over the member of the general public. In the course of performing a job an employee may discover that a corporation is doing something that he or she believes is injurious to society. Indeed individuals inside a corporation are usually the first to learn that the corporation is marketing unsafe products, polluting the environment , suppressing health information or violating the law. Employees with a sense of moral responsibility who find their company is injuring society in some way will normally feel an obligation to get the company to stop its harmful activities and consequently will often bring the matter to the attention of their superiors. Unfortunately if the internal management of the company refuses to do anything about the matter , the employee today has few other legal option available. In the absence of legal protections of the employee’s right to freedom of conscience the practice of whistle blowing is discussed and debated. Whistle blowing is an attempt by a member or former member of an organization to disclose wrongdoing in or by the organization. It can be internal or external. If the wrongdoing is reported only to those higher in the organization it is internal whistle blowing. When the wrongdoing is reported to external individuals or bodies such as government agencies, newspapers or public interest groups, the whistle blowing is said to be external. However it is for the 15
- 16. ethical judgment to decide whether external whistle blowing is wrong because employees have a contractual duty to be loyal to their employer and to keep all aspects of the business confidential. When an employee accepts a job, the argument goes, the employee implicitly agrees to keep all aspects of the business confidential and to single mindedly pursue the best interests of the employer. The whistleblower violates this agreement and thereby violates the rights of his or her employer. The last point to be mentioned here is the ethics of political tactics in organizations. Political behaviour in an organization can easily become abusive. Political tactics can be used to advance private interests at the expense of organizational and group interests, they can be manipulative and deceptive and they can seriously injure those who have little or no political power or expertise. However political tactics can also put at the service of organizational and social goals, they may sometimes be necessary to protect the powerless and they are sometimes the only defense a person has against the manipulative and deceptive tactics of others. The dilemma for the individual in an organization is knowing where the line lies that separates morally legitimate and necessary political tactics from those that are unethical. Corporate Objectives To achieve a planned, orderly and consistent growth in a competitive environment and a free market economy, a company must try to improve its methods of production, processes and systems by using updated and relevant technologies using its vast financial and human resources judiciously. Naturally every company must conduct its affairs economically, efficiently and progressively on ethical lines to serve the public interest, with probity, accountability and transparency of company finances in a socially responsible manner. A company incorporated in a particular country has the nationality of that country though like a natural person it cannot change its nationality. The era of corporate autocracy is coming to an end. In simple terms the success or failure of a corporation in the long run will be based on cherished values and ideals acceptable to society as an enlightened corporate citizen and which understands, appreciates and recognizes its pivotal role to look after the rights and interests of various segments of society such as shareholders, employees, consumers, local community and society at large. Spiritual health of an organisation is based on internal and external connectivity. Level of cohesion, co-operation, partnership, community involvement and social responsibility are important indicators to measure the spiritual health of a company. In order to enable everyone dealing with a company to understand its basic objectives and aims, a company must define its vision, mission and value statements in a clear cut manner for the benefit of various segments of society and also frame a business code of conduct based on ethical values and 16 | P a g e
- 17. principles analysed above. These should be integrated into the organization’s systems, procedures and practices. Let us briefly discuss and understand the relevance and purpose of these statements. Vision statement : Essentially every vision statement brings to the notice of everyone dealing with the company what is its intention with regard to the future it desires to create by using all its resources at its command more so by its motivated and inspiring human resources. It will assure the society that the company will take up of social issues and make its contribution for a meaningful living of mankind. Mission statement : Every mission statement is meant to keep the energies of the company rightly focused around its core business areas, which can ensure robust growth and sustainable profits. Often every mission statement is very concise, inclusive and easily memorized. Every mission statement is addressed to various segments of society such as shareholders, employees, customers and society at large. Tom Chappell, co-partner and CEO of Tom’s of Maine present values in the form of credo about his organisational goals and beliefs as under which cover the best one can think of in every organization:- “We believe that both human beings and nature have inherent worth and deserve our respect. We believe in products that are safe, effective and made of natural ingredients. We believe that our company and our products are unique and worthwhile and that we can sustain these genuine qualities with an ongoing commitment to innovation and creativity. We believe that we have a responsibility to cultivate the best relationships possible with our co- workers, customers, owners, agents, suppliers and our community. We believe in providing employees with a safe and fulfilling work environment and an opportunity to grow and learn. We believe that our company can be financially successful while behaving in a socially responsible and environmentally sensitive manner”. Corporate Scandals & Corporate Malpractices There are a number of scandals rocking the corporate world day in and day out anywhere and everywhere in USA, France, Germany, Japan, South Korea and in our own country relating to various types of corporate crimes such as falsification of accounts by showing inflated profits, embezzlement of company funds by dubious ways, siphoning of company’s funds by entering into fictitious transactions, making fraudulent investments, financial irregularities, breach of fiduciary duty, breach of trust, breach of confidential information, dishonesty, non-disclosure of material facts, insider trading, misfeasance, misappropriation, mal-administration, corruption and bribery and 17
- 18. milking the company by fat salaries, amenities, facilities, stock option schemes, severance benefits without any regard to company’s performance or profitability to Board Members, CEO’s and other key executives harming the rights and interests of various segments of society. The World Bank has identified corruption as “the single greatest obstacle to economic and social development” of the universe hitting the poor and vulnerable section of the world population. John T. Noonan, a Judge of the United States Court of Appeals in his book “Bribes” which is considered one of the most comprehensive book on bribery ever written provides various reasons as to why bribery has to be morally condemned. A company, which pays bribes to clinch a business deal will get itself sucked into more murkier deals in future as it will turn into a regular practice. In reality it is often found that many multinational corporations in the business of arms sale, ships, aircrafts, sophisticated plant and machinery which involves staggering amount of business deals are the real culprits for payment of bribes to people in power through middlemen. In the circumstances many international business corporations which attach significant importance to ethical values and principles have prescribed a corporate code on bribery, which says – “The offer, payment, demand or acceptance of bribes in any shape or form, in any circumstances is totally unacceptable to this organisation, discovery will be followed by severe disciplinary and possibly legal action”. Besides there are a number of misdemeanors exist in our corporate working such as sexual harassment of women by other employees, employment and exploitation of child labour, discrimination in employment and pay based on colour, sex, race etc. and wanton destruction of precious natural resources thereby affecting ecological balance and biodiversity of the universe. Many of our corporate entities use share buy back by using the funds of such companies as a device to strengthen the control by the promoter groups or foreign companies on them (which can otherwise be used for new projects, modernisation or expansion of their activities) and later go for de-listing in stock exchanges totally disregarding the interest of small investors. Similarly many companies in India make preferential allotments to promoter groups or others primarily intended to achieve the same objective. In the US 2002 can be considered as the year of “whistle blowers” in as much as Sherron Watkins of Enron and Cynthia Cooper of Worldcom two insiders were responsible to bring in the open the serious accounting irregularities committed by the said companies. Another serious impact of the scandals in USA is the exposure of auditing profession to strong criticism by all about its dubious role in not disclosing vital financial information for public scrutiny and blindly providing support and assistance to scam related corporate entities. The Sarbanes-Oxley Act, 2002 which is the outcome of the demise of Enron and the scale of misreporting of vital financial information at Worldcom is the most sweeping reform of corporate governance in USA since the Great Depression 18 | P a g e
- 19. in 1930s. It is becoming the global benchmark for all corporate entities for setting up proper internal control systems, framing of tighter disclosure norms for due compliance, establishment of tough financial reporting standards and requiring certification by people at the helm of management about the correctness and accuracy of financial information, appointment of independent audit committee, disclosure of off–the-books transactions that would have big effect on their financial position and putting in place a proper ethical code of conduct to reassure all stakeholders that corporate organisations will carry on their business activities for common good. The Public Company Accounting Oversight Board (PCAOB), which was created by the aforesaid Act, to replace self- regulation of US audit profession has already prohibited auditors doing non audit work to their corporate clients. Corporate Roles “The next wave of enduring great companies will be built not by technical or product visionaries but by social visionaries – those who see their company and how it operates as their ultimate creation and who invent entirely new ways of organizing human effort and creativity” – Jim Collins A socially oriented corporate entity can serve the needs, expectations and aspirations of various segments of society in many ways. However it is thought it fit to cover three important segments of society as under with which every company will be more interlinked than with others. Shareholders: Every Company should provide all required information under the statute to the shareholders from time to time to enable them to understand the financial working of the Company, present and future prospects, level of business competition etc. Similarly every company should organise, call and conduct general meetings according to the provisions of the Articles of Association and mandatory legal requirements. Every corporate entity should reward their shareholders by paying a decent dividend regularly and offer bonus and rights shares at frequent intervals. It should be the responsibility of every corporate entity to provide good investor services. Incidentally a recent report of Organization for Economic Co-operation and Development (OECD) urges Asian Governments to ensure minority shareholders are adequately protected by strengthening disclosure requirements, ensuring regulators have real powers and resources to monitor companies and impose substantial sanctions for any wrong doing, strengthening the fiduciary duty of directors to act in the interest of all shareholders and provide shareholders who suffer financial losses with private and collective rights to sue controlling shareholders and directors. Employees : Since people are the most critical component of every business for its sustenance, survival, continued growth and success companies are paying more attention how to attract and 19
- 20. retain good talent especially of persons with critical skills and knowledge. Realising the importance of labour a modern company gives enough importance to human resources development function to frame a realistic salary structure with good benefits and facilities to their work force but also focuses greater attention for their personal development and career prospects for future advancement by intensive in house and outside training. Every company should create a healthy environment for individual development, teamwork, job satisfaction and a distinct corporate culture by trying to tap and unearth an employee’s hidden creative energy and innovation to achieve its organisational goals. Employees need to feel a sense of fairness, commitment, right of privacy, right of meaningful work, equality, recognition, responsibility and pride in their work. Too much control, use of excessive authority, exploitation, poor working relationships between employees are sure signs of poor emotional health of an organisation. Every organisation should encourage its employees to grow both in their personal and professional lives. Personal growth builds emotional intelligence and professional growth builds skills and intellect. When employees have a common identity, common vision and shared values they work for the common good and develop a strong sense of loyalty to the company. It should be appreciated that true power lies not in the ability to control staff but in the ability to trust. People like organizations which encourage them to explore their own creativity because in doing so the company gives them the meaning of their very existence. Creativity will not blossom in a rigid over controlled bureaucratic setup and punishes employees severely even for minor failures. Unfortunately there is a wrong mind set in many organizations to the effect that a worker’s job is to execute a work in the way the management wants and he cannot use his intuition and latent talent power to make improvement on it. However if employees are allowed to use their knowledge and creativity there will be shared feelings for good of the organisation. Every transnational organisation is uniting people under a single corporate culture with shared values that transcends cultural, racial and national boundaries. Employees should have adequate authority, enough independence in their functional area of work and they must be made accountable for their action. The second preferred employer in India Procter & Gamble Group spends a lot of money on training and career development opportunities right from entry level recruitments to develop their trainees as future leaders. In a booklet titled “A Business and its beliefs” Thomas J. Watson, a former IBM Executive succinctly states that “the real difference between success and failure in a corporation can be very often traced to the question of how well the organization brings out the great energies and talents of its people” . Consumers : The old rule of caveat emptor is no more valid for sale or provision of services. A company is required to provide adequate and reliable information to enable a consumer to make his 20 | P a g e
- 21. own decision to purchase or avail of a service or not. Naturally a company must produce goods or offer a service of an acceptable standard to suit the needs and purchasing power of the consumers giving due regard to their safety and quality aspects and price its products or services on a fair basis with a reasonable profit margin with full back up facilities for after sale service and maintenance through out the working life of a product. The company should not try to increase the cost of a product by mere change in style without adding value to the product to benefit its user. Since a customer relies on the reputation and integrity of the supplier to provide a good quality product or service, it is the responsibility of a company to make product improvement on a continuous basis, or introduce new products or services to match the changing consumer preferences, emerging needs, aspirations and expectations of the community. Realising the importance of customer goodwill every company should set up a grievance cell to monitor and understand the feed back and reaction of its customers with a view to ensure that every product manufactured or service provided shall be within the accepted norms and standards set out by the company. A company should not indulge in false publicity, misrepresentation of facts, give false guarantee and workmanship or tempt to offer substandard goods or services to raise revenues. A company should provide products or services of high quality and value that improve the life style of world’s consumers. Companies with a genuine consumer commitment earn the respect and support of the local community and local governments. A growing numbers of consumers are choosing products manufactured and or services provided by socially responsible companies. In France a recent survey conclusively revealed that companies, which produce and market fair trade products even if they are costing a little more are having ready market demand and good acceptability from the discernable consumers. In other words consumers are reluctant to lend support to companies for sale of products produced by exploitation of child labour or by not providing good working condition according to accepted international labour norms. Society accepts and rewards companies, which follow strict environmental and ethical standards in the manufacture and marketing of consumer products. Profession & Role Of Professionals In a changing society it is very difficult to define the term “Profession” or for that matter any particular occupation which can be properly described as a profession. There are professions to day, which nobody would have considered to be a profession in the past. While a businessman pays more attention to maximization of his profit, a professional is more concerned to provide an unmatched quality of service to his clients. Furthermore every professional is required to have certain special 21
- 22. characteristics compared to other sections of society, which give him a good status and image in the community. The ever changing business environment, complexity in our legislative framework and emerging new regulatory norms require business enterprises to seek the assistance, advice and support of competent professionals in different spheres of activities. An enduring image of reliability and trust based on his knowledge, competence, experience and expertise, thorough honesty, integrity, good health, sharp memory line, constructive attitude, right approach, good temperament and behaviour, quick ability to grasp the essence of a problem from mass data of information, analytical skill and persuasive character are some of the ingredients that make an individual a respected professional in his own right. More than anything a professional should have a strong character, ethical values and professional commitment to serve the needs and aspirations of various segments of society. In simple terms if a corporate entity does not follow the prescribed legal requirements, the professional who is involved should have the courage and conviction to make his comments and observations on any matter for the benefit of company’s shareholders and creditors which have any adverse effect on the functioning of the company in clear cut terms rather than keeping quiet. Company Secretaries both in employment and in practice have a pivotal role to play by counselling corporate bodies against improper, unethical, unfair, unlawful or questionable business practices. In reality it is established that professionals are often found to be playing a supportive role to many company managements to hide facts about non-compliance of legal requirements or for window dressing of vital financial information. Needless to say every professional whether he is in service or in practice should uphold ethical values and principles in the working of corporate enterprises for the good of the society. Ethical Issues – New Problem Areas No doubt corporate houses are going to face a number of challenges and problems in several new areas of technology such as computers, biotechnology, medical research and intellectual property and patent rights on ethical and moral grounds at the global level. Interception of internet messages or use of electronic surveillance or devices will affect privacy of individual freedom. On the other hand wicked people can use internet system anonymously to avoid responsibility and detection in 22 | P a g e
- 23. respect of illegal and unethical activities. In the area of biotech one may face resistance in the use of hybrid technology because there is a lurking fear that it may affect soil fertility of a region adversely. The ongoing medical research tests on living organisms and creation of new genes and cloning may hurt religious feelings and animal lovers and companies involved in such research activities are likely to face serious problems in their working in many countries. In the case of patenting already many companies in the western world are acting smart and are trying to obtain patent rights on popular brand names of agricultural and medicinal products in use in the developing countries to have total monopoly in world trade in such products of mass consumption and eliminate competition. One can cite the recent attempt of a western company to get registration of the trade name “Basmati” which is a quality rice produced in the Indian subcontinent with sizeable export potential. Ethics And Business: Objections People taking objections to bringing ethics into business argue that persons involved in business should single mindedly pursue the financial interests of their firm and not side track their energies or their firm’s resources into doing good works. Some argue that in perfectly competitive free markets the pursuit of profit will by itself ensure that the members of society are served in the most socially beneficial ways. However what experts like Manuel G Velasquez argue is that often assumptions behind this argument like perfectly competitive market situation do not exist. Another argument is that business managers should single-mindedly pursue the interests of their firms and should ignore ethical considerations. This argument finds its basis in ‘loyal agent’s argument’, which suggests that a manager engaged in certain illegal or unethical conduct be excused because he did it not for himself but to protect the interests of his company. However again the assumptions behind this argument can be questioned on several grounds. The third kind of objection is that to be ethical it is enough for business people merely to obey the law. Business ethics is essentially obeying law. It is wrong however to see law and ethics as identical. It is true that some laws require behaviour that is same as the behaviour required by our moral standards. However law and morality do not always coincide. Some laws have nothing to do with morality because they do not involve serious matters. These include dress codes, parking laws and other laws covering similar matters. Beyond these arguments for and against the role of ethics in business, discussions happen whether ethical companies are more profitable than unethical ones. There are many different ways of defining ethical, many different ways of measuring profits and the findings of different studies remain inconclusive. However studies do suggest that by and large ethics do not detract from profit and seems to contribute to profits. 23
- 24. Conclusion Change is the only constant factor in everyday life. It is witnessed from the Stone Age to civilized age. When change affects life it also affects the environment and business. The business environment becomes extremely complex as change inflicts variety and diversity leading to deep and fundamental ways. Change in the values, environments of business based on the expectation of society has alerted business houses to realign its priorities. The changing economic, political, legal and social environment has also made the business and businessmen to consider the ethical approach to business. Therefore, there is paradigm shift from the goal of maximization of profit or wealth to ethical means to achieve them. The last 150 years have been marked the world over for rapidity of 24 | P a g e
- 25. change ushered in by the advent of technology and industrial revolution. This period has also been marked for its attempt to generate unquestioning faith in human reason and intellect. The last century has witnessed that the intellect are becoming the cornerstones of the society. The rapid changes have improved the standard of living, also establishing a lot of sensible relationships in and around the society. There is a growing realization all over the world that ethics is virtually important for any business and for the progress of any society. Ethics makes for an efficient economy. Ethics is good in itself, ethics and profit go together in the long run and ethics alone can protect the society. An ethically responsible organization is one, which has developed a culture for caring for the people and for the betterment of society as a whole. Ethics has a considerable influence on the economy for efficient and smooth functioning. The government, the laws cannot always resolve certain key problems of the society and business. Ethical behavior enhances the quality of life. An ethically based economy can do wonders in the way of creating wealth or society. The task of business is to optimize the outcome of economic activity. It is the economic environment of business, which is the primary consideration in evaluating the business tactics. The present day economic environment of business is a complex phenomenon. The economic relations with the government, public, society and community influence the trend and structure of economy. People and society are part and parcel of an organization. People want and need to be ethical not only in their private life but also in public. The people are the ultimate sufferers if the affairs of the organization were conducted unethically which are detrimental to the society. Therefore, they have a concern over this. Over the last two decades, there has been a shift in the attitudes of corporate and their executives towards ethics. A silent revolution is in under way in business ethics today. The ideas, beliefs and attitudes associated with the profit ethic are being challenged as never before. The historical idea of the divine right of capital no longer applies. The changes in the values, cultures and customs lead to change, which in turn lead to re-engineering of ethics. The world of business ethics is quite broad and its tentacles spread into a number of areas in the larger sphere of business society relationship. The social responsibilities of businessmen, for instance, clearly involve ethics and morality. There is always a doubt in the mind of the businessmen about what is and what is not ethical. It is difficult to understand business or business society relationships, without knowledge of the ethics. Business ethics is what society expects from business. Mark Twain once said: “ To be good is noble. To tell people how to be good is even nobler”. In short “Corporate Houses can earn Profit with Morality” 25
- 26. Annexure I A Case Study : Profitability with Morality Mr. Suresh B. Hundre (65), Chairman and Managing Director of Polyhydron Private Limited (PPL), Belgaum, an entrepreneur running his business for more than 25 years, who has given his people operational freedom and liberated them in a "Business Ashram". When Hundre took over the executive responsibility of PPL, managing the organisation was not easy. There was continuous problem of cash flow due to long pending payments from the customers; also the inventory was very high leading to high pressure on working capital management. Hundre 26 | P a g e
- 27. analyzed the problems and found the cash flow problem also resulted in non-compliance of the statutory and regulatory requirements. He decided to change the system radically. He is stongly influenced by a diverse set of teachings and the books he has read which incude the scriptures and spirituality, The Gita, Ricardo Semler's Maverick, Swami Vivekananda and also Japanese Management techniques. He has picked up the best from all this and runs his organisation like a ‘business ashrama' as he calls it, where "Honesty is not the best policy, it is the only policy! We are honest. We are transparent." Management of Quality, Leadership, Vision & Core Values "We do not pay bribes" He first decided to comply with all the laws and pay the taxes on time. Hundre also decided that he would not pay any bribe, as he is not a willful defaulter. The customers were not given any credit, and the business was to be done only on payment, He scrapped the material store and established a transparent supplier management system. He took a policy decision that he would not entertain any price bargain with the customer and started following a transparent discount policy, known to all. Quality in PPL is a matter of character building rather than adherence to product or process specifications. The Vision statement of PPL is "To create an island of excellence through focus on customer, employee empowerment and continuous improvement". Hundre explains that excellence is about feeling happy about ones work and doing something impossible according to own standards. The Mission statement reads as "To nurture an ethically managed organisation and not to exploit Customers, Employees, Suppliers, Government, Society, and Nature". The Mission is implemented at every facet of the Company.Workmen are not asked to work in back shifts as working in odd hours creates unnecessary stress and may adversely affect health and overall performance, suppliers are also treated with respect. He does not like pushing people to perform their duties, on the contrary he believes in creating an enabling environment where people work without compromising ethics and morality. He has created an ethically managed organisation. He feels that transparency and ethical behavior go hand in hand. These are the basic foundations of quality. In PPL transparency is maintained in all types of data sharing. Hundre does not object to employees looking into the balance sheets. Information like cost per employee, productivity, profit, growth rate and many such data are shared among all through displays on the notice board. Any one can question a financial transaction of the Company. 27
- 28. Hundre strongly opposes debt based business dealings. He believes that businesses should build their own financial strength then only sustained growth can be achieved. He feels that the fundamental reason for premature collapse of a company is debt trap. The Company strongly condemns consumption of any type of intoxicant. People with weak personalities indulge in intoxication to create an artificial sense of well-being. One should acquire strength - physical and mental through conscious efforts and not by artificial means. Consumption of tobacco or cigarette is prohibited within the Company premises. He believes that trust is an inseparable part of PPL's organizational process. PPL does not employ watchman at the Company gate as the honesty of people is not to be questioned. Watchman is there only during night hours when no one is working in the factory. Suppliers and employees are trusted. No further inspection is carried out once the product quality is certified by the person concerned. Organisation Structure , Work Practices & People PPL follows a lean structure. Only one level exists between CMD and the workmen/operators. This level is of Shop Floor Co-coordinators who are expected to be facilitators; they coordinate various activities of the departments/functions. There is no supervision, the supervisors work as mentors and facilitators. The workmen are empowered to stop production at any stage in case they notice any product which will not be accepted by the customer. The suppliers are also made aware about this practice. The employees follow a common code of ethics "Each of the employees is responsible for both the integrity and consequences of one's own actions." The employees enjoy operational freedom. But they can not take reckless decisions which can affect many others and can be questioned. But this does not create a fearful atmosphere; rather the ownership of decisions and the results there of makes every one to take a responsible decision. In the monthly meeting all issues related to the Company are discussed. Day-to-day information is shared through notice board displays. Suppliers & Purchases: There is no store provided for raw materials and incoming products. They deliver materials directly at the work stations. No inspection is carried out the quantity is also not formally counted. PPL has developed trust and respect from the suppliers. In case the workmen find any problems with the material or component, they directly communicate with the concerned supplier as it is believed that the workmen knows the problem best. The dates of payments are decided by PPL as per the preference of the supplier. They collect their cheques directly from their pigeon holes. 28 | P a g e
- 29. Growth plans: "Business should create wealth," firmly believes Hundre. But he feels that quality of wealth is equally important and should not be collected by exploitation. According to him, consistent, sustainable and considerable growth is important. Size or rate of growth is not important. Hundre says, "Taste of the fruit is the core issue not the size." Annexure II Ethics Drives Business Excellence Does a moral compass help an enterprise become more competitive? An interview with Dr. Adam GalinskyKaplan Professor of Ethics and Decision in Management at Northwestern University's Kellogg School of Management. Q: What are the key components of business ethics? Galinsky: When we talk about business ethics, usually we're speaking about standards of behavior in the workplace as well as with customers and partners. Companies known for high ethical standards usually have an ethical code stating that they treat everyone with dignity, don't present misleading information, and scrupulously follow rules and regulations. Q: Why should a company be concerned about business ethics? Galinsky: Having a moral compass leads to more effective business practices — whether in building sales, retaining employees, or reducing litigation and regulation costs. For example, people are usually willing to pay premium prices to feel good about the products they buy. Also, companies that follow certain moral codes attract better people — and these people often are willing to work harder 29
- 30. with less compensation. It goes without saying that ethical companies are less likely to undergo the costly scrutiny of courts and regulators. Q: Why do some people and companies engage in unethical behavior? Galinsky: It's important to understand that people don't engage in unethical behavior when the incentives are small. They tend to engage in unethical behavior when the incentives are large. Keep in mind also that unethical behavior usually breeds more unethical behavior — because hiding that first misdeed usually requires more misdeeds — and for some businesses, like Enron, this can lead down a path that ends in destruction. Q: How do you get people to adhere to ethical standards in business? Galinsky: Moral behavior needs to be embedded in a supportive social infrastructure that promotes consistent behavior. For starters, company management can lead by example. A formal incentive structure for adhering to standards also goes a long way in establishing moral behavior. Communicating these standards with all stakeholders is critical, because an organization needs to show its stakeholders that moral behavior is a serious matter, further reinforcing these norms reinforcing these norms. Q: Can incentives for certain kinds of behavior create ethical problems? Galinsky: Incentive systems can both create and diminish unethical behavior. Large incentives can invite unethical behavior. And then there are weak sanction systems — those with low detection probabilities or small penalties — which are tragically ineffective and can corrupt normal behavioral regulators, such as guilt. In fact, one study found that when small fines were introduced to reduce a negative behavior (like being late), that behavior actually increased. Small fines and the low probability of detection can alter decisions from being based on ethical considerations to crass considerations simply based on economic concerns. This is why norms and culture matter so much. Q: What's the importance of business ethics for executive leadership? 30 | P a g e
- 31. Galinsky: I'm afraid to say that much of my research shows that people in positions of power tend to become more egocentric and self-focused. This limits their capacity to understand the viewpoints of other people, which may provide needed insight. However, an ethical company that values the contributions of its employees is more likely to be innovative in the marketplace. Q: How should business ethics affect employee behavior? Galinsky: Milton Friedman once stated that the employees of a firm have the moral obligation to maximize shareholder value. Deviating from this directive, he believed, is like a form of taxation without representation, because shareholder money gets spent in ways that does not maximize returns. This, I think, needs to be tempered with a stakeholder theory of the firm, which deals with how employees interact with suppliers, partners, customers, and their co-workers - and these are all interactions that should be encapsulated in a company's code of ethics. Q: What's the importance of business ethics in the boardroom? Galinsky: Business ethics are critical for members of company boards, as these people should provide a great deal of moral leadership. But in some cases, board members turn a blind eye to developing problems, and this can make bad situations worse. Still, board members often find it difficult to fulfill their ethical duties, as recent research by my colleagues Ithai Stern and Jim Westphal shows. Board members who are zealous about fulfilling their duties often get punished by not being selected for boards at other companies. Q: What role should legislation play in regulating business ethics? Galinsky: Legislating some ethical behavior can help keep the marketplace free of monopolistic behavior and safeguard stakeholders such as partners, customers, and investors. What's more, a transaction between two organizations can affect other parties — and these externalities, as economists call them, are sometimes best addressed by regulation. Q: Does the global economy change the rules of business ethics? Galinsky: A company's core values should be put into practice regardless of where business is being transacted. That said, cultural differences and different business practices around the world can present ethical challenges. But in some areas, forward-looking companies have actually been able to improve conditions while still being competitive. 31
- 32. Q: How does the increased use of technology affect business ethics? Galinsky: Some of the biggest issues with ethics and technology can be found in security and privacy concerns. Ethical companies do their best to protect company assets without making people feel stifled — and this balance is increasingly important for innovation and creativity. 32 | P a g e
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