Corporate Ethics: Contemporary Challenges and Imperatives:

Prologue
Oswald A. J. Mascarenhas S.J., Ph.D.

We are currently witnessing high turbulence in large and small corporations, and in large and small market economies. Bigger companies, in particular, are failing more frequently and with gigantic losses. Of the 20 largest U. S. bankruptcies in the two decades, 1985-2005, ten occurred in 2001-2002. Corporate earnings are more erratic. Even perennially successful companies are finding it more difficult to deliver consistently superior returns. Companies like Disney, Ford, General Motors, Daimler-Chrysler, Hewlett-Packard, Motorola, Nordstrom, and Sony one time built to last companies (Collins and Porras 1997; Collins 2001) are performing just around the Dow Jones Industrial Average (Hamel and Vlikangas 2003). High CEO turnover in large corporations is becoming commonplace (e.g., Delphi, Ford, GM, Hewlett-Packard, Gateway, and K-Mart). With imminent threats of junk bond ratings, leveraged buyouts (LBO) or hostile takeovers, the Wall Street financial analysts and investor sharks are exerting all-time high pressure on corporate executives to perform. Corporate boards and shareholders are increasingly demanding higher financial returns on investment (ROI), equity (ROE), assets (ROA), net worth (NW) and higher earnings per share (EPS) and price-earnings (P/E) ratios. Possibly yielding to such pressures, corporations have been recently indulging in unusual business practices such as creative or aggressive accounting, creative cash flow reporting, earnings management or income smoothing via overstating earnings and understating debts, and, in general, fraudulent accounting and financial reporting. Under whatever name, these unusual activities are a financial numbers game (Mulford and Comiskey 2002) or financial shenanigans (Schilit 2002) with a singular ultimate objective creating an altered impression of the firms business performance. Fortune (2002) featured twenty five such large corporate accounting frauds and security scandals, a research conducted during 2001 in conjunction with the School of Business, University of Chicago. Also, early 2000 marked the beginning of some of the worst corporate security irregularities in history. Rapidly rising stock prices and the market collapse that followed led corporate executives to unusual activities and accounting manipulations that were both morally questionable and reprehensible, or were outright violations of the law. Forbes (2002) listed twenty five massive securities irregularities among top management executives, involving a haul of over $23 billion, averaging to over $923 million per company and in excess of $257 million illgotten gains per top executive. Accountants generally classify most of the corporate accounting irregularities under two heads: a) fake transactions like round-Trip sales, and b) manipulation of debts and assets to overstate the value of the company. The U. S. Federal Energy Regulatory Commission (FERC) defines wash trading, also known as "round trip" or "sell/buyback" trading, as the sale of a product (e.g., electricity, optical fibers) to another company with a simultaneous purchase of the

same product at the same price. Essentially, wash trading is false trading because it boosts the companies' trading volume, or even sets benchmark prices, but shows no gains or losses on the balance sheets. While this kind of trading may not be illegal as per then extant accounting procedures (e.g., Generally Accepted Accounting Practices (GAAP) of USA), it can manipulate the power market, which is illegal. An inflated balance sheet from round-trip trading misleads investors about the true nature and volume of the company's business. Large volumes of "wash" trades raise the revenues but have no effect on earnings. Several multinational and global companies were involved in accounting irregularities. Enron (October 2001) led the gang, followed by Quest Communications (February 2002), Global Crossing (March 2002), World.com (March 2002), Adelphia Communications (April 2002), CMS Energy (May 2002), Dynergy (May 2002), El Paso (May 2002), Halliburton (May 2002), Peregrine Systems (May 2002), AOL Time Warner (July 2002), Bristol-Myers Squibb (July 2002), Duke Energy (July 2002), to name a few. More recent accounting scandals were associated with onetime respectable companies such as Arthur Anderson, Ernst & Young, KPMG, JP Morgan, Merrill Lynch, Morgan Stanley, Citigroup, Salomon Smith Barney, Marsh & McLennan, Credit Suisse First Boston, and even the New York Stock Exchange (NYSE) itself. All these companies represent bad decisions and ethical failures. Most of the top executives involved in such accounting and financial irregularities were business graduates of some of the topmost business schools of the United States. It was a massive failure in managerial ethics, corporate ethics and corporate governance. Some of the largest scams recently uncovered were in the utility business. Several wholesale power traders revealed that they participated in the so called "round trip" or "wash trading." For instance, wash-trading practices among some energy companies created false congestion and generated the perception of an energy shortage in the troubled California energy market in 2001-2002. Some would even argue that this practice contributed to the bankruptcy of the two largest California electric utilities and forced subsequent government support to keep power flowing there. The price of electricity skyrocketed and, in the end, it was the consumer who had to pay the price for corporate accounting and financial irregularities or frauds. In the wake and grip of these scandals and systematic accounting and financial irregularities, a recapture of a strong sense of business and corporate ethics is urgently imperative in every business school curriculum and corporation conduct. The massive consequences of unethical executive behavior and unethical business institutions cannot be ignored. Recent consumer boycotts of hitherto industrial icons such as Levi-Strauss, Gap, Home Depot, McDonalds, Nike, Kmart, Wal-Mart, and Shell Oil are moral wake-up calls for all corporations and their executives to renew their moral commitment to society. In 2002, the U. S. Congress passed the Sarbanes-Oxley Act to address the increasing wave of corporate accounting and financial scandals. Section 406 of this Act mandates that the corporations should have a code of ethics for senior officers that must include standards that promote: a) honest and ethical conduct, especially in handling actual or apparent conflicts of interests between personal and professional relationships; b) that all public financial statements of corporations should be full, fair, accurate, timely and understandable, and authenticated by the CEO and CFO of each firm, who will be held responsible for errors, and c) compliance with applicable government rules and regulations. Despite this Act, corporate scandals have not abated significantly in the USA or in the Western developed world.

What is Corporate Ethics?

Corporate or business ethics is a treatise about ethical and moral corporate deliberations, decisions and actions. Business ethics, in general, and corporate ethics, in particular, should aid ethical reasoning, critical thinking, moral deliberation, ethical judgment, and ethical decision making of business students and business executives. Business ethics should provide tools of ethical and moral reasoning, fortified with relevant theories, models and paradigms of ethical and moral reasoning and values. Every field of business such as accounting, finance, human resources management, business law, marketing, business research, and production management involves ethical issues and challenges. A course in Ethics of Corporate Governance: Contemporary Challenges and Imperatives should empower business executives, management students and other market practitioners readily to identify and effectively to address ethical and moral challenges of every field or discipline in the management of business. We also need a moral awakening, a quick recovery of ethical values of corporate integrity and honesty, and a great sense of corporate citizenship and stewardship. This book targets such audiences and challenges them with ethical reasoning, moral deliberation, moral judgment, and ethical assessment of business decisions and actions. All of us need the right change in the right direction, at the right time, and with the right people. The corporations should lead this ethical and moral change. We have excellent examples of such change as documented by David Bollier (1997), Jim Collins (1998, 2002), Jim Collins and Morten Hansen (2011), Stephen Covey (1989; 1994; 2004), Patrick Lencioni (1998), Thomas Peters and Robert Waterman (1982) and Thomas Peters and Nancy Austin (1985), to name a few. This book is all about the process of generating ethical and moral change and convictions in corporations and their executives.

Current Dynamic of Corporate Ethics

Ethics is a science of moral values and principles. Business ethics is a science of moral values and principles in business exchanges. Corporate ethics is a science of executive moral values and principles relative to strategic exchange processes of corporate deliberations, decisions, choices, and their consequences.

Thus, business ethics and corporate ethics are interdisciplinary fields that entail the domain of at least two distinct disciplines, a) business exchanges and decisions and b) the science of ethics as science of values and principles. It is a dynamic interdisciplinary field, as both disciplines are refining, changing and expanding. The field of business is expanding into new areas such as revenue management, motivation management, sustainability management, social analysis, e-business, e-advertising, Internet marketing, cyber surveys and marketing research, social electronic networking, globalization, social entrepreneurship, greening and global ecology, and contracting from traditional areas such as classic micro and macro economics, international trade theory and abstract quantitative methods, statistical methodologies and high-powered management science. Ethics is currently shrinking from the classical philosophical ethics and absolute values of ancient Greek and Medieval philosophers and dogmatic theologians. While expanding into modern and postmodern ethics of consensual values and moral principles, corporate ethics should enhance critical thinking and moral reasoning, ethics of dynamic business exchanges, rights and duties, moral worth and obligation, executive spiritual development, corporate and social responsibility, distributive and corrective justice, virtue ethics, relational ethics, ethics of trust,

cyber ethics, ethics of cyber safety and privacy, ethics of terrorism and ethics of war on terrorism, ethics of global poverty, disease and inequality, and ethics of global ecology and sustainability. Moreover, the veteran concept of business management, as represented by the 110-year old MBA curriculum and structures, is radically changing from the traditional silos of accounting, finance, marketing, operations research and management, decisions sciences, human resources management, business law, and economics into modern integrated business management that views all fields of business as networked and interdependent, interacting and synergizing business solutions to simple, complex, unstructured and wicked business problems of current markets. Specifically, with a significant majority of domestic, international and global businesses, industries, markets and trade regions floundering or disappearing, there has emerged a new discipline business turnaround and transformation management (BTTM) that researches and applies new integrated business management solutions to problems of underperformance, business downturns and recessions, corporate cash flow crisis, financial distress, financial turbulence, worker apathy, insolvency and imminent bankruptcy. Every part of business (e.g., accounting, finance, marketing, HR, production, and business law) implies ethics. Every stakeholder of business (e.g., customers, producers, employees and employers, suppliers and creditors, distributors and promoters, domestic and international governments, local and global communities) involves moral rights and duties, moral and ethical responsibilities and obligations that, in turn, invoke ethical values and moral principles. A comprehensive and integrated course in corporate or business ethics should include every part of business, as also every stakeholder of business. This book relates to corporate ethics that deals with major moral corporate executive leaders, their specific skills, personality, and critical thinking inputs, their moral reasoning processes, their decisions and choices, their mental models and business models, their strategies and actions, and above all, executive moral obligations regarding their consequences.

The Structure of the Book

Specifically, this book examines ethical imperatives as applicable to the entire integrated and dynamic process of business: ethical inputs, ethical process and ethical outputs. Part One lays the general moral foundations for corporate decisions while Part Two delves into applications of moral foundations established under Part One to major critical problems and challenges of contemporary business. We first introduce the conceptual foundations for a corporate ethic of business management (Prologue; Chapter 01). Next, we assume that all business ethical decisions in general, and corporate ethical decisions in particular, imply at least three constituents:
Business ethical inputs primarily represented by the corporate executive moral agent, Business ethical processes predominantly spearheaded by the corporate executive moral act, and Business ethical outputs mostly represented by the moral consequences of corporate executive decisions.

Under Part I, we analyze the ethics of the corporate moral agent under five heads: ethics of corporate moral human personhood (Chapter 02), ethics of corporate governance (Chapter 03), ethics of corporate critical thinking (Chapter 04), ethics of corporate virtue (Chapter 05), and ethics of corporate trust (Chapter 06). Next, under Part II, we explore the ethics of corporate moral acts and actions under three heads: ethics of corporate moral reasoning (Chapter 07),

ethics of stakeholder rights and duties (Chapter 08), and ethics of corporate moral leadership (Chapter 09). Thirdly, under Part III, we examine the ethics of corporate outputs or consequences under three themes: ethics of consequences represented by the major ethical theories of teleology, deontology, distributive and corrective justice (Chapter 10), ethics of moral responsibility (Chapter 11), and ethics of moral corporate social responsibility (Chapter 12).1 Table A captures the structure of the book succinctly.

Objectives of this Book

The book drills and challenges corporate executives and business students in the understanding, application and exercise of the following concepts, tools and skills:
1. General concepts and foundations of ethical imperatives as applicable to contemporary challenges and imperatives of business management (Prologue and Chapter 01). 2. Understanding corporate human personhood as the cornerstone of corporate ethics (Chapter 02); 3. Defining, Analyzing and explaining corporate governance in its contemporary role and context (Chapter 03); 4. Defining, understanding and applying corporate executive critical thinking skills for moral decisions (Chapter 04); 5. Moral virtue in relation to deliberating, exercising and implementing business decisions (Chapter 05). 6. Fostering Moral trusting relations for enhancing and empowering corporate decisions (Chapter 06). 7. Moral reasoning for ethical decision-making skills in business management based on the theories of moral worth, moral judgment, moral justification, and moral obligation (Chapter 07). 8. Corporate moral virtue of respecting rights and duties of all stakeholders (Chapter 08). 9. Moral and ethical leaderships skills and decisions for corporate executives (Chapter 09) 10. Moral Justice in addressing the social externalities of ones corporate executive decisions and strategies represented by some major ethical theories of teleology, deontology, distributive justice, and corrective justice (Chapter 10) 11. Moral responsibility for corporate decisions and their consequences (Chapter 11). 12. Discerning and exercising corporate moral social responsibility for corporate decisions and outcomes (Chapter 12).

The Target Audience

Organized thus, this Book is uniquely designed for high potential business students, corporate executive leaders, business scholars and business practitioners alike, and especially, to corporate executives and business entrepreneurs who are engaged in corporate-wide decisions and strategies that demand creative, imaginative, intuitive and innovative business management. In the typical MBA program, this book could be useful for courses in business ethics and strategy, particularly at the graduate level. As its title suggests, this Book emphasizes corporate
1

There are other approaches to ethical and moral analysis that are quite laudable. From the viewpoint of ethical and moral leadership, we could divide the content of ethical analysis into 1) The Ethics of the Means what do leaders use to motivate followers to obtain their goals; 2) The Ethics of Person: What are the virtues and personal ethics of the leaders? Are they motivated by self-interest or altruism? 3) The Ethics of the Ends: What is the ethical value of the leaders accomplishments? Did they serve the greater good of the greatest number? [See Ciulla (2004: xvi)]. In this book we follow the suggested framework of Table A, as it better fits the moral analysis of the current business paradigm.

governance and is primarily meant for all corporate executives, boards of directors, and institutional leaders that are engaged in transforming their organizations from being not-so-good to good to great, from questionable to impeccable, ethical, moral and spiritual organizations.

The Uniqueness of This Book

There are several books on ethics, on business ethics, on managerial ethics, on executive ethics, but hardly any on corporate ethics. A significant percentage of current MBA or PGDBM students from prestigious schools will one day be corporate executives who will make decisions that will impact the whole company and its stakeholders, its divisions, peoples, products, brands and services. Such corporate-wide decisions need to be preceded by proper moral reasoning and rationalization, ethical understanding and explanation, moral deliberation and choices, such that the corporate decision makers can foresee the consequences, and assume responsibility for the consequences, even those that were unintended. Corporate ethics empowers corporate executives to execute this choice-decision-strategy process with assurance and clarity. The content and structure of this Book (see Table A) is geared to realize this corporate objective. As in our other recent books (Mascarenhas 2008; 2011), we safeguard some critical features of modern integrated business management such as:
Each chapter provides critical thinking and ethical principles that can enable and empower readers to address current ethical and moral challenges of a given corporate strategy. Each chapter integrates into one interactive unit the traditionally compartmentalized silos of management education such as economics, accounting, finance, marketing, personnel (HRD), business law, production, and operations management. Each chapter is built on solid moral and ethical foundations laid by eminent ancient, medieval and modern scholars, philosophers and theologians, and from recent journal articles from top tier journals such as Theological Studies; Business Ethics Quarterly, Harvard Business Review, Sloan Management Review, California Management Review, and the like. Thus, the material covered represents the mind and works of the best scholars in the field. Each chapter is appended with Business Executive Exercises (BEE) where the more challenging concepts, theories, paradigms, models and strategies of Ethics of Corporate Governance are translated to ready critical review, applications and implementation.

The content of each chapter is best learnt and internalized against real-time live cases of current market problems, episodes, disruptive changes (Christensen et al. 2000; 2002; Collins 1999) and market busting strategies (Gunther and MacMillan 2005) as they unfold during the academic semester of learning. This is best done by challenging students with take-home, structured and unstructured, linear and circular, problem-centered exams that invite team learning of three to four weeks in ethical or moral problem identification, formulation, specification, alternatives exploration and the final choice assessment in the actual real-time field of contemporary business and market reactions. There is no closure to this book. The content of each chapter is continuously evolving and emerging. Hence, a book that captures the real-time ethical and moral process of forming strategic leaders of corporate transformation experience and accomplishment must be a work in progress that needs constant updates, upgrades, revisions and restatements. In other words, this book is not about immutable and frozen conceptualizations and theories, paradigms, models and strategies. It feeds and expands on the real, day-to-day corporate world of ethical and moral business management. The real world of corporate strategy problems is rarely simple, structured

and linear in their content and solutions. They are complex, unstructured, non-linear (i.e., often circular and spiral) and wicked (Rittel and Webber 1973) problems that need creative, imaginative, innovative, resilient (Hamel and Vlikangas 2003), analogical (Garvin and Rivkin 2005), experimental and entrepreneurial resolutions. We hope this book will challenge students and readers, teachers and executives to this great world of strategic ethical and moral leadership and organization learning (Senge 1990; 2006) of business transformation management (Hammer 2004).

Acknowledgements and Dedication

My academic background is philosophy, theology, marketing, e-business and Internet marketing, and currently, business turnaround and transformation management with over 35 years of teaching and research experience. Several professors have molded me during my management studies. I am especially indebted to Russell Ackoff, Paul Green, Len Lodish and Howard Perlmutter of the Wharton School of Business, Philadelphia, Pennsylvania, where I obtained MBA and Ph.D. This book represents my latest research and thinking in the critical domain of corporate governance and business ethics and morals for business transformation management. This work has taken several years from conception to execution. The plan and contents of this book have been presented and discussed at several graduate courses in Corporate Ethics at various Colleges of Business Administration such as University of Detroit Mercy, Detroit, Michigan, USA, T. A. Pai Management Institute (TAPMI), Manipal, South Kanara, St. Aloysius (Autonomous) College, School of Business, Beeri, Mangalore, and currently, at XLRI, Xavier School of Management, Jamshedpur, Jharkhand, India. I am grateful for the incisive comments of these students. This Book is dedicated to my oldest sister Agnes who still continues to be the ethical and moral force that guides and empowers my life. Ozzie Mascarenhas S. J., Ph. D. Chairman: St. Aloysius (Autonomous) College, AIMIT: MBA Programs, Beeri, Mangalore, India. June 10, 2013.

References
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Mascarenhas, Oswald A. J. (2011), Business Transformation Strategies: The Role of the CEO as a Strategic Leader of Innovative Transformation, New Delhi, India: Sage Books. Mulford, Charles W. and Eugene E. Comiskey (2005), Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance, John Wiley & Sons, Inc. Peters, Thomas J. and Robert H. Waterman, Jr. (1982), In Search of Excellence, New York, NY: Harper and Row. ____ and Nancy Austin (1985), A Passion for Excellence, New York, NY: Random House. Rittel, H. and M. Webber (1973), Dilemmas in a general theory of planning, Policy Sciences 4 (1973), 155169. Schilit, Howard M. (2002), Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports, 2nd edition, McGraw-Hill ($22.36) (ISBN: 0071386262). Senge, Peter (1990), The Fifth Discipline: The Art and Practice of Learning Organizations , Doubleday: New York. Senge, Peter M. (2006), The Fifth Discipline: The Art and Practice of the Learning Organization, Revised edition, New York, Currency: Doubleday. .

Corporate Ethics: Contemporary Challenges and Imperatives

Part Corporate Chapter Focus: #
Prologue

Table A: The Structure of the Book

Chapter Title

In General 1 PART ONE: Ethics of Corporate Business Inputs 2 The Corporate Moral Agent 3 4 5 6 PART TWO: Ethics of Corporate Business Process PART THREE: Ethics of Corporate Business Outputs Corporate Decisions Dilemmas, Acts and Actions Executive DecisionOutcomes & Social Externalities 7 8 9 10 11 12

Preface: Ethical Imperatives for Business Executives Executive Ethics for Business Management Decisions: Conceptual Foundations The Foundation of Corporate Ethics: The Human Person The Context of Corporate Ethics: Concepts, Theories and Models of Corporate Governance The Cornerstone of Corporate Ethics: Executive Critical Thinking The Bastian of Corporate Ethics: Executive Virtue Ethics The Moral Fiber of Corporate Ethics: Executive Ethics of Trust Ethical Theories of Moral Reasoning, Moral Judgment, Moral Worth, and Moral Obligation Ethical Theories of Moral Rights and Duties of all Stakeholders Ethical and Moral Leadership for Corporate Strategies Ethical Theories of Deontology, Teleology, Distributive Justice, Corrective Justice and their Sub-Theories Ethical Theories of Moral Executive Responsibility and Moral Executive Obligation Ethics of Corporate Moral Social Responsibility for Executive Decisions and Outcomes

10