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Chapter 1: Moral Reasoning and Ethical Theory

Lets Understand:
1. Definitions of Ethics, Business Ethics, Professional Ethics 2. Five (5) Factors that Form Individual Ethics 3. Normative Philosophy and Ethical Relativism 4. Five (5) Major Ethical Systems that Relevance to Managerial Decisions 5. Two (2) Ethical Perspectives: Golden Rule and Kantian Rights

1.0 Introduction Ethical problems are complex because of its characteristics (will be discussed further in Topic 3): Extended consequences Multiple alternatives Mixed outcomes Uncertain consequences Personal implications

Ethical problems are pervasive because when managers make a decision or take an action, it will affect other people such as employees, customers, shareholders, local communities and other stakeholders directly or indirectly.

1.1 Definition of Ethics Two definitions of ethics: a) Principles of morally acceptable conducts of individuals

b) Individuals personal beliefs about wrong or right behaviors Three keys additional considerations to define ethics: Ethics is individually defined. Perspectives of ethical behaviors vary from one person to another. Ethics is relative, not absolute. The relativism of ethics implies that ethical behaviors are in the eye of beholder and must be generally acceptable social norms by the specific communities.

Business ethics is defined as an application of ethical values and ideas on issues that related with business context (Lawrence& Weber, 2011). It is the application of general ethics. For example, lying is considers as an unethical behavior, for instance when a financial manager is l ying about the organizations performances to the shareholder, therefore he is acting unethically. Reasons for a business to be ethical: It has significance influences on environmental and stakeholders Enhancing business performance Professional ethics is defined as moral values of a group of similarly trained people to control their task performance or use of resources. Professional ethics is usually constructed by people who internalize the rules and values it as a professional culture. It helps a professional choose what to do when faced with a problem at work that raises a moral issue. You are not a professional until you are a member of a group of colleagues who have articulated a set of standards and values and can enforce them. The examples of professional employees are lawyers, nurses, doctors and accountants. Benefits of professional ethics: Shape the organizations culture Determine the value of its members in dealing with other stakeholders

1.2 Five Factors that Form Individual Ethics There are five major factors that form individual ethics which are: Family influences: The earliest, yet the strongest ethical influences are coming from our family that includes parents and siblings and it starts as early as at our childhood stage. The daily observations on our family tend to shape a childs behaviors; positively or negatively. A child who experienced a high standard of moral values through his family tends to act ethically and he will be punished by his parents whenever he failed to follow their taught. Peer influences: Interactions between our peers can influence us to conduct our behaviors in a good or a bad manner. Our friends might lead us to be a better person such as forming a group study to be successful in academic. But, there are friends that might be a negative influence for us and teach us many unethical behaviors such as vandalism and absenteeism. Life experience: Most important events that happened in our life, whether positive or negative will shape our behaviors and ethical beliefs. It is part of growing up and maturing ourselves by learns from the past experiences

to guide our life. A thief who caught by the police and had been punished for his mistakes might think to change his life as a way to repent, but if the thief are failed to be captured by the police and still doing his activities, he will never felt guilty to steal peoples belongings. Personal values and morals: Our own values and morals also influence our ethical standards. For example, if we value family as the main priority among the other things, we will protect, improve their life and always feeling responsible to make them happy. Besides that, if we value monetary more than anything else, we will work for it and sometimes we do something that breach our belief and moral just to achieve the success and gain the money.

1.3 Normative Philosophy and Ethical Relativism Normative philosophy: Study of proper conduct and thought on how we should behave. Normally, people will determine something according to these principles: a) Right or wrong

b) Good or evil c) Fair or unfair

Ethical relativism: According to the ethical relativist, moral standards of behavior are different between groups, within a single culture, or between times. For example: it is right to say that modern American women have the right to fight for their workplace inequality. But, in the early 19s, the American women could not stand their right because it is not their culture, particularly at that time. 1.4 Five Major Ethical Systems that Relevance to Managerial Decisions Eternal Law (Natural Law) Usually, it is interpreted by the religious leaders or normative philosophers. Based on wide perspectives, each religion provides different moral standards for their members. For example, according to Christian theology through the Golden Rule stated that, do unto others as you would have others do unto you. Classical Teleological Ethical theory (Utilitarianism) Teleological= outcome/result It focuses on the consequences rather than individual intentions. From Utilitarianism theory, the term refers to our perception of the net benefits and costs associated with a given act. The act or decision is right if it benefits people. Objective of the theory is to create the greatest degree of benefits for the largest number of people while incurring the least amount of damage and harm.

Classical Deontological Ethical theory (Universalism) It depends on intentions of the person who makes the decision or performing the acts. For a universalism, moral cannot be dependent on the outcome because it is indefinite and uncertain. In addition, they must treat others as ends and not means. Therefore, from Universalism views, we cannot treat people as a subject. Distributive Justice theory It is a modern ethical system that based on values rather than principles. It is based on justice. The theory proposed two elements: a) Collaboration: Individual recognizes the benefits of collective actions than the individual efforts.

b) Conflicts: There will be problems or issues that surely will be arise Personal Liberty theory Based on single value: liberty. According to this theory, anything that violates individual liberty has to be rejected even it may benefit others.

1.5 Two Ethical Perspectives: Golden Rule and Kantian Rights Golden rule: Do unto others as you would have them do unto you. Treat others as the way you would want to be treated. Kantian right: It was proposed by Immanuel Kant. It is focusing on the basic rights of human which are: a) Free consent- Right to be treated only as they knowingly and willingly to be treated.

b) Privacy- Right to do what they want in their private lives, and they have the right to reveal the extent of their private activities. c) Freedom of conscience- Right to refuse to do what violates their moral beliefs. d) Freedom of criticizing- Right to criticize an organizations ethics, as long as their criticizing does not violates the right of individuals in the organization. e) Fairness- People have the right to voice out their feeling of being violated or treated unfairly.

Chapter 2: Stakeholder Relationships

Lets Understand:
1. Stakeholder concept 2. Classifications of Stakeholders 3. Three stakeholder theory arguments: Descriptive, Normative and Instrumental 4. Stakeholder management 5. Responsibilities of the firm toward its stakeholders 6. Managing stakeholder relationships

2.0 Stakeholder concept Stake is defined as an interest, claim or share in an undertaking or enterprise. In business, stakeholder is defined as individuals or groups who can affect or is affected by the actions, decisions, policies, practices or goals of an organization. 2.1 Classification of stakeholders There are two categories of stakeholders in the organization: Market stakeholders Non-market stakeholders

2.1.1 Market stakeholders/ Primary stakeholders Definition: individual or group that has interest in organization and engaged in economic transactions in producing goods and services. Examples of market stakeholders: employees, shareholders, customers, creditors, competitors, suppliers

2.1.2 Non- market stakeholders/ Secondary stakeholders Individual or groups that not engage with economic transactions but may be affected or can affect decision of organization. Examples of non-market stakeholders: media, communities, business groups, government, general public

2.2 Three arguments to support stakeholder concept Descriptive argument: Describes how organizations manage or interact with stakeholders. Examples: producing safe and innovative product to the customers, follow the governments regulation

Normative argument: Describes on how organization taking care of its stakeholders. Examples: Warranty for customers, insurance for employees, and generate local investments for the country.

Instrumental argument: Describes stakeholder theory as an effective corporate strategy. Organization which concerns about the stakeholders are ensure to have a better performance compared to the others that neglecting it. Example: Corporate social responsibility, volunteerism

2.3 Stakeholder Management Definition: Process of managing the expectations of individuals or groups that have interest in organization or will be affected by organization activities. 2.3.1 Identify the firms relevant stakeholders For a firm to identify the relevant stakeholders for their business, there are three elements that the manager must considers: Stakeholder power- ability to use resources to make an event happens or to secure the desired outcomes. There are three types of stakeholder power: 1. Coercive power: uses force or violence Example- Protest for disagreement on firms policies 2. Utilitarian power: Power to control of resources such as financial or materials Example: Shareholders have the biggest control over their investments towards the company. 3. Symbolic power: Have access or able to use symbol or prestige. Example: A TNB worker wears the TNB corporates shirt as a way to show the sense of belongingness

Stakeholder legitimacy- Refers to whether stakeholder claims are justified or proper within a given context. Claims are legitimate when it is considered reasonable by other stakeholders. Example: Shareholders have the right to claim of ownership because they are owners of the organization.

Stakeholder urgency- The responds time for the organization towards the stakeholders needs. The urgency of the issue will depend on two factors: 1. 2. Time sensitivity: degree of managerial delay in attending to the claim Criticality: importance of claim

2.4 Responsibilities of Firms toward its Stakeholder The firms responsibilities can be considered as corporate social responsibility (CSR). The social responsibilities are: Economic: Maximize profit, increase shareholder return Legal: Obey the law Ethical: Do the right things. Philanthropic: Be a good corporate and engage in volunteerism, provides support

2.5 Managing Stakeholder Relationship There are 3 steps to manage stakeholder relationship: 1. 2. Integrate stakeholder management into firms philosophy, values and vision. Create vision statements or value statements that includes stakeholders Example: Now everyone can fly (Air Asia) 3. Implement a stakeholder performance measurements system. It must be auditable, integrated and monitored as stakeholder relations are improved. Example: key performance index (KPI)

Chapter 3: The Nature of Ethics in Modern Business

Lets Understand:
1. Characteristics of Ethical Problems in Management 2. Examples of Ethical Problems in Management 3. Analysis of Ethical Problems in Management 4. Ethics in Islam

3.0 Introduction Ethical problems are considered as managerial problems because they show a conflict between an organizations economic performance and social performance. Therefore, the dilemma faced by management of the organization is to balance the social and economic performance. 3.1 Characteristics of Ethical Problems in Management There are 5 characteristics of ethical problems in management: Extended consequences- Decision or act of the manager give impacts to people within the organization and outside the organization such as public communities. For example, unsafe products destroying people lives.

Multiple alternatives- A dichotomous framework (yes or no) does presents the ethical issues in a sharp contrast, but it does not accurately reflect the managerial dilemma. Thus, multiple alternatives has to be considered to make ethical choices. For example, should McDonald and other Jewish-related products banned by our government?

Mixed outcomes- Social benefits and costs as well as financial revenues or expenses are directly associated with most of the alternatives in ethical choices. For example, a common thought by organization is when it produces a design with slightly unsafe product, but it reduces the material and labor costs of manufacture. But, it could give a bad image for them when customers or competitors are able to identify the lacking of the product.

Uncertain consequences- The effects of decisions or acts that being made by the organization is very uncertain and unpredictable. A manager usually will think that the ethical issues such as paying the bribes are free of risk being published to the public, but most of the cases related to bribe, the authority managed to detect the bribes transactions.

Personal implications- Most of ethical decisions have personal implications For example, when a manager decides to reduce the resting hour of its organization, the employees might face some personal problems such as unable to fetch their children at the school or performing their prayers.

3.2 Examples of Ethical Problems in Management


Pricing level- It can give harmful effects on some customers. For example, when the price of sugar and flour are increased, the small stallers are taking for granted for that matter by increasing their price of drinks, kuih and etc.


Advertising messages- Most of advertisements are showing a mixed between false and truth of the products or services. The dilemmas faced by both parties which are the advertiser and the organization who pays to promote their product is whether to: a) Advertise a rigidly truthful television or magazine advertisement with each of the statements are supported by scientific study will be very ineffective and possibly unattractive for the viewers. b) Advertise a totally untruthful television or magazine advertisement with exaggerated claims and might be equally ineffective to attract viewers.


Product promotions- Promotion of a product might face several issues of ethics. For example, most of buy one free one promotion will physically attractive to the customers to buy it, but it also caused them to expend more for the product that they usually bought at a lower price for a single item.


Working conditions- A non-ideal and uncomfortable working environment is also considered as unethical. In order to reduce the budget of monthly rental, a manager decided to place his employees in tight and compact offices that would affect their work performance.


Workforce reduction- When most of companies decided to utilize the machine to replace labor forces, a large number of employees are retrenched and forced to leave their current job that gives bad impact for their life.


Environmental pollution- Disposal of waste and air pollution are two most common ethical issues that normally related to the factories. Though the law and rules have been established but the environmental pollutions are very serious throughout the world.

3.3 Analysis of Ethical Problems in Management To create the balance between social and economic performances, there are 3 analysis methods to resolve ethical problems: Economic analysis- Relying on impersonal market forces to make decisions. When workforce reduction is decided, the manager is facing dilemma such as the employees might be effected by the retrenchment. But, through the impersonal market forces, the manager should realize that there are many job opportunities at the labor market, and the employees must adjust their wages requirements to get the job. For the organization, the analysis will help it to supply the best product for their customers with a limited resources.

Legal analysis- Relying on impersonal social forces to decide between right or wrong. Workforce reduction and plant closures are definitely unpleasant and affecting the people involved but they must know how to utilize the law to deal with the situation. A democratic society is able to establish its own rule and the people in the society must follow these rules, so that they will be treated fairly.

Ethical analysis- Relying on basic principles and values to decide between right or wrong. All the rational men and women in a society must act on the same principles consistently so that the members will be treated fairly.

3.4 Ethics in Islam Holistic approach of Islam: a) Unity of God

b) Unity of human kind c) Unity of religion

Islam is universal and timeless because it can be applied to all people in all places. Syariah: Law of Islam that based on Al- Quran. The most important prescription of syariah which stated in Al-Quran is to act in a decent and benevolent way, and to refrain from wrongdoing.


Syariah regulates almost every aspects of relationship, ranging from Creator and human, to intimate matters of interpersonal relations. Islam teaches us about the economic practices such as: 1. 2. 1/10 of business profits must be allocated as a zakat to other needy Muslim people There are guidelines between halal and haram of a business that must be followed by Muslim businessman 3. 4. Riba such as interest of loan is illegitimate and cannot be practiced by Muslim A Muslim is allowed to earn profit only from his work or if his capital is involved, whenever he shares the risk of loss. 5. Gambling is prohibited because it is a sin to profit from the need or misery of others.

The obligations of piety: Any defects in the thing sold must be made obvious. If the defects being hidden, the contract or agreement made will be void. Not taking undue advantage of another Fairness and honesty are the expected traits for every Muslim.


Chapter 4: Managerial Ethics and the Rule of Law

Lets Understand:
1. Differences between moral dilemma and ethical dilemma 2. Law as a guide for managerial decisions and actions when faced with an ethical dilemma 3. Five characteristics in definition of law 4. Explain the relationship between law and moral standards 5. Four processes involved in the formation of law

4.0 Differences between moral dilemma and ethical dilemma

Moral dilemma: A moral dilemma is when you are put in a situation that tests your own belief of something. Situations in which each possible course of action breaches some otherwise binding moral principle. For example, a horse has fallen and broke his leg/back and you are an Animal Rights activist who fights for the rat on the street. The horse is clearly suffering and you are against shooting or harming animals but the only way you can help the horse is by shooting him out of his misery right then and there. There is no other choice of whatsoever! Will you shoot the horse to end his misery or stay within your "Moral beliefs"?

Ethical dilemma: That you are caught between two possible choices in a situation where both could be considered "ethical" (right or moral choices) but the goodness of one cancels out the other. For example, you are an inmate in a concentration camp. A sadistic guard is about to hang your son who tried to escape and wants you to pull the chair from underneath him. He says that if you don't he will not only kill your son but some other innocent inmate as well. You don't have any doubt that he means what he says. What should you do?"

4.1 The Rule of Law


Law acts as a basis for making managerial decisions when we are confronted with an ethical dilemma. Law: a set of rules established by as society to govern behavior within that society.


Law is used when a conflict between organizations economic performance and social performance exist. It is a collective judgments made by the members of society.


Law as a guide to moral choice Legal arguments: An established set of rules in a society. These rules reflect the collective choice of members of its society represents any decisions and actions that affect its welfare.


Law as combined moral judgment The need to get the majority of the voters to pass a law restricting these actions. Before that happened, we must comply with majority of the population

4.2 Definition of Law


Law: A consistent set of universal rules that are widely published, generally accepted and usually enforced.


Five characteristics in definition of law: Consistent- requirement to act or not to act have to be consistent and cannot be contradict with each other. Universal- requirement to act or not to act must be applicable to anyone and anywhere. Published- the law must be published and put in print to make it accessible to everyone in the society. For example, attorneys are trained to interpret and explain the law to the client (public). Accepted- The law must be obeyed by all, whether voluntarily or involuntarily. Enforced- People must conduct or not conduct their act based on the law, or else if it is proven they disobey the law, they will lose money, works, freedom or even their lives.


Social institutions and their responsibilities Responsibilities Law formation Law explanation Law interpretation Law enforcement

Social Institutions Legislatures and councils Attorneys and paralegal personnel Courts and agencies Police

4.3 Formation of Law


Law is formed through several processes: a) Individual process

b) Group process



Social process

d) Political process


Individual process Individual has a set of norms, beliefs, and values which collectively forms his or her moral standards. The individual moral standards are: a) Norms- Criteria of behavior and involves action. The ways in which an individual expects everyone to act when faced with a given situation. b) Beliefs- Criteria of thought. There is no action but an abstract way of thinking that supports individual norms. They are the ways an individual expects people to think about given concepts. For example, if you believe in parliamentary democracy, then you would expect or want others to accept the concept as you do. c) Values- Rankings or priorities given to the norms and beliefs. The important norms and beliefs that a person values or holds in high esteem.


Group process: Context or the general background or surrounding environment of a situation plays a significant role in the norm, belief, and values of an individual. Each individual develops his or her set of norms, beliefs, and values through exposure to these contexts: a) Cultural or religious

b) Social or political c) Economic or technological

The contexts are interrelated with each other as shown in Figure 4.3

Technological changes

Political changes

Economic changes

Cultural changes

Figure 4.3: Interactions of interrelated factors of the context 4. Social process The social process involves an accumulation of power. People with similar norms, beliefs, and values tend to become associated in small groups. The small groups are part of larger organizations such as: Business firms Labor unions


Political parties Charitable agencies Religious institutions The small group functioning as the channel to set up their own common norms, beliefs and values and compromise with each other to achieve their objective. It is more manageable and easy to control or make decisions through the small groups compared to individual or a larger group of people (nation).

The compromise is formed through: a) Autocratic decisions

b) Bureaucratic adjustment c) Collective choice/ collective bargaining


Political processes

In political processes, the norms, beliefs, and values held by organizations, groups and individuals are institutionalized into law to resolve the conflicts. Every organizations, group and individuals have different views on norms and beliefs. Therefore, through political process, the different views will be accustomed to develop consistent and universal rules. It can be implemented according through the alternative theories such as: a) Presidential leadership

b) Institutional compromise c) Congressional bargaining

d) Constituent pressure The public can express opinions on potential laws by voting for some administrators and legislators. Besides that, they can express their opinions through media, letters and surveys. The elected representatives are formally assigned the responsibility of the formulation of laws in a representative system. 4.4 Problems in the Transfer from Individual Moral Standards to Universal Legal Requirements.

Moral standards of individual may be diluted in the formation of small groups Since each individual of small groups has their own norms, beliefs and values, compromise have to be made. If the personal moral standards are not conveyed accurately, then it is difficult to influence the law.

Moral standards of members of society: Lack of information on corporate conduct


The members may be unaware about their organizations misconduct; hence it is difficult to influence the law if relevant information is missing.

Misrepresented in large corporation There is no evidence to suggest that each individual and each group within the organization has equal influence in determining that all of them are sharing the same norms, beliefs and values.

Misrepresented in formulation of laws There is no guarantee that all organizations have equal influence in determining the law. For example, in the provision of tax legislation, certain organizations always seem to be favored.


Chapter 5: Organizational Approaches in Improving Ethical Behavior

Lets Understand:
1. Four main ethical safeguards. 2. Structural causes of unethical conduct in organizations. 3. Solutions to structural causes of unethical behavior. 4. Responsibilities of management in addressing ethical problems.

5.0 Improving ethical climate of organization Ethical safeguards is used to improve the ethical climate of an organization. There 4 main ethical safeguards which are: Ethical codes- Statement about norms and beliefs of an organization. a) Norms: standard of behavior that usually stated in negative statements. For example: Dont smoke in the office area. b) Beliefs: standard of thought that usually stated in positive statements. For example: We will provide the best airline facilities for the users.

Ombudsman position- Ombudsman is a person within an organization, often older or respected manager who is close to retirement. Normally, the ombudsman will be relieved of operation but involved in counseling other workers.

Ethics hotline- Most of big companies are utilizing ethics hotline as a way for their workers to channel their problems that related with their work place. Usually, the ethics hotline is used by women employees that involved in sexual harassment at their workplace to communicate their problems to the organization. The hotline is a useful method for the workers because it will not provide the details of the workers and they will not be threatened to lose their job or feeling embarrass to tell the truth.

Ethics training- A program that purposely held to educate employees about firms ethical standards. Effective ethics training should be related to real situations that employees may experience in their job and


possible ethical solutions to those problems. The ethics training should educate the employees about firms policies, expectations, laws and regulations. 3 goals of ethics training are: a) Recognizes situation that requires ethical decision making

b) Understand the cultures and values of the organization c) Able to evaluate the consequences of ethical decisions on the company

5.1 Structural Causes of Unethical Behavior There are 2 structural causes of unethical behaviors in organization: Divisionalization- When the organization is divided into several functions and departments, the decisions are implemented based on the head of department and not through collective meeting with other department in the organization. The problem with divisionalized organization, the aim or objectives of each division might not be the same or sharing mutual mission. A cross-functional team does not allow to be built because of the differences in knowledge and objectives.

Decentralization- A decentralized decision making might be effective for a big company but it also can cause severe damages for those company if it not implemented in the best approach. Decentralized decision making allows lower employees to decide or act on something that related to their work without the authorization of higher management people. The authority given to the employees can caused several unethical issues such as expending companys money on personal satisfaction.

5.2 Solutions to Structural Causes of Unethical Behaviors Multiple analysis using economic, legal, and moral forms of reasoning make the issues clearer and apparent. Less emphasis on financial measures of performance such as sales revenues and profits but more on numerical measures for example customer complaints and employees absentees.

5.3 Ethical Responsibilities of Management Resolutions of conflict have to be done as part of strategic planning process. Ethical issues have to be made part of the process and cannot be ignored Hard ethical questions have to be asked by managers and specific ethical answers have to be supplied by corporate executives. In order for the executives to give a good response, there must be 2 components in the responds: a) Character The character to face issues which have adverse social impacts associated with each of the alternatives b) Courage- Thoughtfully evaluates each of alternatives following economic, legal and moral forms of reasoning.


Chapter 6: Social Responsibility and Organizations

Lets Understand:
1. Definition of Corporate Social Responsibility (CSR). 2. Historical Views of Social Responsibility 3. Areas of Social Responsibility 4. Arguments on Social Responsibility 5. Organizational Approaches to Social Responsibility 6. Relationship between Government and Social Responsibility of Organizations 7. Managing and Evaluating Social Responsibility

6.0 Definition of Corporate Social Responsibility (CSR) Corporate social responsibility or CSR is defined as the adoption of an organization regardless of private or public, large or small, at a strategic level of its economic, legal, ethical, and community responsibilities to meet the stakeholder expectations. It is a set of obligations that an organization has to protect and extend to the society in which it functions. Figure 6.0 shows the level of CSR and its role.

Philanthropy Responsibilities Ethical Responsibilities

Legal Responsibilities

Economic Responsibilities

Figure 6.0: Pyramid of Social Responsibility Philanthropy responsibilities- A good corporate citizen, engage in volunteerism, support to the community by providing education programs and health services. Ethical responsibilities- Do what is right and fair and avoid harm.


Legal responsibilities- Obey the laws and regulations such as environmental, employment and consumer laws. Economic responsibilities- Be profitable, maximize sales and minimize costs.

6.1 Historical Views of Social Responsibility Evolution of social responsibility can be divided into three eras: 1. 2. 3. Entrepreneurial era Depression era Social era Explanations and Practices 1. Started in United States on late 1800s. 2. Monopoly by large businesses on small businesses that lead by several influential entrepreneurs such as J.P. Morgan (railroads) and John D. Rockefeller (oil). 3. The early entrepreneurs used their powers to practice undesirable business. The practices of early entrepreneurs:

Era of social responsibility Entrepreneurial era


Labor lockouts- Temporary work stoppage or denial of employment initiated during labor dispute initiated by management of company. A lockout can act to force union workers to accept changes such as lower wages. If the union is asking for higher wages, an employer may use the threat of lockout such as hiring guard, changing lock and fine to convince the union to back down.

b) Discriminatory pricing policies- A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. The seller places customers in groups based on certain attributes such as economy status and charges each group a different price.


Kickbacks- It is a form of negotiated bribes because there is implied collusion between the two parties. It happens when a payment or offering of services with the intent to influence or gain something from an organization or a person. For example, President Suharto was known as Mr. Twenty -


five percent because he required that all major contracts throughout the nation provide him with 25 percent of the income before he would approve the contract.

d) Blackmail- Act of extorting money or a valuable item from person by threatening to expose an act or discreditable information.


Tax evasion- A person, organization or corporation intentionally avoids paying its true tax liability.

The public official forced the federal government to overcome the undesirable practices by enforcing the law. Depression era 1. Large organizations dominated the American economy and people criticized them for irresponsible financial practices which led to stock market crash. 2. President Franklin Roosevelt (32nd USA leader), introduced New Deal Program to protect the investors and small businesses. 3. The program was based on three essential things which are relief, recovery and reform to solve the economic(stock market crashed, downfall of farming sector) and social (extremely poor citizens) issues. 4. The government introduced the New Deal Program with three main focuses: a) Help unemployed Americans and troubled manufacturing sector

b) Promoting economic recovery c) Reforming the American finance system

5. The program help American to move out from Depression era as it shaped the attitudes of American. 6. In 1934, Securities and Exchange Commission (SEC) was established to: a) Regulate the sales of securities

b) Control unfair stock market practices 7. As a result, the government actions managed to insist the organizations to actively involves in promoting the welfare of the American public. Social era 1. The era where American history was characterized by social responsibility as the Social Era of 1960s. 2. During this era, there were growing trend towards social responsibility


6.2 Areas of Responsibility There are three key areas of organizations social responsibility: Constituents Natural environment General social welfare


Organizational constituents

Organizational constituents are people that affected by the organizations practices and have stakes in its performance. The major constituents are: a) Federal government

b) Suppliers c) Employees

d) Customers e) Investors

The people who own or invest in the organization are affected by anything the firm does. For example, if a manager is caught because of practicing bribe, the organizations constituents will be affected in term of profit, public image and negative customers perceptions towards the organization. Practices to maintain social responsible in an organization: a) Maintain proper accounting procedures Manage the organization righteously to protect the shareholders rights and investments

b) Provide appropriate information on current and projected financial performance of the firm c)


Organizational Natural Environment

Recently, many companies have become more socially responsible in handling the pollutants from their factories that can cause great effects on the environment for example global warming and ozone depletion. Therefore, to strengthen the efforts of the organizations, there are methods to protect the environment that can be implemented such as: a) Develop feasible ways to avoid contributing to acid rain, depletion of ozone layer and global warming. Ex: use filters to reduce carbon emission b) Find alternative methods to handle sewage, hazardous wastes and trash c) Develop safety policies to guide the organizations


Company may also practices the following activities: a) Support and join non-profit foundations and associations.

b) Support for museums, radio and televisions c) Lead the effort to improve public health and education


Organizations General Social Welfare

Organizations should act to correct or at least not contribute to political inequalities. 6.3 Arguments on Social Responsibility Supporting Social Responsibility 1. Businesses create problems and should help to solve them 2. Corporations are citizens in our society 2. Involvement in social program gives business too much power 3. Business often have the necessary resources to solve problems 4. Social responsibility can enhance profits 4. Business lack the expertise to manage social program 3. There is a potential for conflict of interest Opposing Social Responsibility 1. The purpose of business is to generate profit

Usually, organizations that make clear and visible contributions to society can achieve enhanced reputation aand gain a greater market share for their products or services.


6.4 Organizational Approaches to Social Responsibility Four approaches that an organization can implement ranging from low to high degrees of socially responsible practices: Highest degree of social responsibility

Social contribution Social response

Social obligation
Lowest degree of social responsibility

Social obstruction

Social contribution: a) Has the highest degree of social responsibility

b) Exceeding minimal requirements and involves proactively seeking opportunities to contribute to society. c) View themselves as citizens in a society.

Social response: a) Meet legal and ethical requirements and going beyond those requirements in certain cases.

b) Voluntarily to participate in certain social programs but the organizer must convince the organization that the program is worthy of their supports. Social obligation: a) Follow the legal requirement; solve social or environmental problems which related to the organization. b) Managers insist that their main task is to generate profit. Social obstruction: a) Lowest degree of social responsibility

b) Do as little as possible to solve social or ethical problems. c) Usually, the organizations that practice this approach will cover up their false action or deny any accusations when they do unethical and illegal activities.


6.5 Relationship between Government and Social Responsibility


Influences of business to Gov.: a) Personal contacts and network b) Lobbying c) Political Action Committee d) Favours and other influence tactics

Influence of Gov. to business: a) Environmental protection legistation b) Consumer protection legislation c) Employee protection legislation d) Securities legislation e) Tax codes

Business organization

Figure 6.3: How organization and government influences each other 6.5.1 Influences of Government to Organizations


The government influences organizations through direct and indirect regulations.

b) Regulation- establishment of laws and rules that guide what organizations can and cannot do under certain circumstances.


Direct regulationi) Focuses on two areas of social responsibility which are organizational constituents and natural environment. ii) The federal / state government has created special agencies to monitor and control certain aspects of business activities

d) Indirect regulationi) Influence how organizations spend their social responsibility dollars by providing greater or less tax incentives. ii) If the government wants organization to spend on training the unemployed people, through Parliament, the law to provide the tax incentives can be passed to companies that open new training facilities.



Influences of organization to government

Four methods that organization able to influence the government: a) Personal contactsi) Many executives and political leaders know each other because they are in the same social circles.

ii) Business executive may able to contact a politician directly and present his case regarding a piece of legislation being considered.

b) Lobbyingi) An attempt by individuals or groups called as lobbyist to influence legislation.


Political Action Committees (PACs)i) Special organizations which created to solicit and distribute money to political candidates because organizations cannot legally make direct donations to political campaigns ii) The organizations will encourage the employees to donate to PCA and support the political candidates that have the same views with the organizations to achieve mutual benefits.

d) Favorsi) Sometimes, organizations rely on favors and other influence tactics to gain support

6.6 Managing and Evaluating Social Responsibility

a) Managing Social Responsibility Formal and informal approaches are used to manage the social responsibility of an organization. 1. Formal approaches: Legal compliance- Organization complies with local, state, federal, and international laws. Functional managers are assigned to manage the legal compliance.

Ethical compliance- Members of the organization follows basic ethical and legal standards of behavior. Formal ethics committee is assigned to review proposal for new project, evaluate new strategies and assess a new environmental plan.

Philanthropic giving- Give funds, scholarships or other gifts to charities or other programs.



Informal approaches: Leadership and culture- A good leadership practices and organization cultures are able to lead to adoption of employees on social responsibility

Whistle-blowing- Disclosure by an employee of illegal or unethical conducts by others within the organization. The whistle-blower might be fired by the organization or received appreciation.

b) Evaluating Social Responsibility

Social audit- a process of assessing and reporting business performance of economic , legal, ethical and philanthropic social responsibilities expected by stakeholders. Corporate social audit- a formal and detail analysis of the effectiveness of the firms social performance.

Social audit encourages corporations to look into the social, environmental, and economic bottom lines (Triple Bottom Line).

Benefits of social audit to corporation: i) To achieve the best social performance

ii) To improve relationships with stakeholders through dialogues iii) To facilitate organizational improvement and organizational learning iv) To allow the company to assess its impacts on the environment, community and society

Social audit is recorded in a social report. The benefits of social reporting to corporations: i) To facilitate reputation management

ii) To promote accountability iii) To increase transparency iv) To make the stockholders and investors easy to evaluate the social performance of the company


Chapter 7: Corporate Governance

Lets Understand:
1. Definition of Corporate Governance 2. The Needs of Study Corporate Governance 3. Components of Corporate Governance 4. Perspectives of Corporate Governance 5. The Code of Corporate Governance 6. Supporting Bodies of Corporate Governance. MICG vs. MAICSA 7. Future of Corporate Governance

7.0 Definition of Corporate Governance Corporate governance-A formal system of oversight, accountability and control of corporate decisions, operations, and actions has to be in place to earn the corporations stakeholders continuous trust. The needs to study corporate governance: a) It is part of corporations responsibility to observe some practices that are regarded as appropriate.

b) Top managements are responsible and accountable to their stockholders. c) Due to recent malpractice cases, the companies are under greater scrutiny by all parties which include stockholders, future investors, the government, the media and industry. d) Corporate governance aims to balance power, address mistakes, reduce risks and avoid misconduct to achieve integrity.

7.1 Components of Corporate Governance Three components of corporate governance are: Oversight 1. 2. 3. 4. Oversight means check and balance. Allows management decisions to be questioned and challenged that reduce risk of mismanagement The main objective of oversight is to minimize top management abuse of power For example, the employees can question the top management for the practicality of investing in a new project at abroad.


Accountability 1. Accountability means how the decisions taken by the management align with the firms direction (mission and vision). 2. As the promises are made to the public, management has to be accountable to them or else they will lose the public trust.

Control 1. 2. A process of auditing and improving organization decisions and actions. The actual performance is compared with budget, standard or goal

7.2 Corporate Governance Perspective Corporate governance can be viewed from two perspectives: Shareholder perspectives1. 2. Organizations must practice good corporate governance to serve the interest of shareholders. As the owners of the corporation, the corporation should be responsible and accountable to its shareholders 3. For example, if the shareholders satisfied with top managements decision then, top management will proceed with the process. All other stakeholders interests are of secondary importance.

Stakeholder perspectives1. The spirit of corporate governance is in the interest of the stakeholders because they also invest in the success of the firm. 2. 3. All corporate decisions and actions can affect or might be affected by its stakeholders. For example if a corporation involved in bribe, the people who might be affected: a) Shareholders might suffer losses Loyal customers might discontinue purchasing or using the corporations service and product.

b) Employees might lose their jobs c)


7.3 Code of Corporate Governance Malaysian Code of Corporate Governance is formulated and governed by Securities Commissions (SC). Securities Commissions (SC)a) Established on 1 March 1993

b) A government agency which is self-funding statutory body with investigate and enforcement powers c) Report to Minister of Finance d) Protect the stockholders right by making sure that the stock markets are conducted fairly and the investment information is fully disclosed. e) Regulatory functions of SC: Regulating all matters related to securities and future contracts Regulating the take over and mergers of companies Regulating all matters relating to unit trust schemes Licensing and supervising all licensed persons Encouraging self-regulation Ensuring proper conduct of market institutions and licensed persons

Code of corporate governance issued in 2000 which covers three main areas: a) Directors- The code covers director appointments, formality and transparency

b) Shareholders- Emphasize on information for investment decisions and annual general meetings c) Accountability and audit- Internal control and auditor relations

Revised version of the Code (2007) concentrates on strengthening the Board of Directors and the audit committee The Code is divided into two parts: a) The principles of corporate governance

b) The best practices of corporate governance 7.4 Supporting Organizations on Corporate Governance in Malaysia The Malaysian Institute of Corporate Governance Malaysian Institute of Chartered Securities and Administrators Established in 1988 Non- profit public company Established in 1958 Aims:

To produce qualified company secretaries and ensuring the professionalism of its members


Maintain the highest standard of integrity and ethics among its members within the profession Objective: Missions:

To be a leading establishment for promotion of best practices and corporate governance development


Provide education and training in good corporate governance, ethical practices and corporate administration

through continuous education programs for a major corporate figures such as company directors, CEO and investors. 2.





publication of corporate governance guides and standards 3. Commit Chartered Secretaries to advocate good corporate governance principles and practices



Facilitate business and corporate governance development in the country

2. 3.

Improve corporate governance best practices Achieve satisfactory level of corporate

governance best practices and compliance. 4. Promote voluntary disclosure of corporate governance best practices 5. Strengthen corporate governance principle and compliance effort

7.5 Future of Corporate Governance Corporate governance will be a significant part of corporate management. Therefore, organizations are encouraged to practice good corporate governance: Involvement of Board of Directors- The BOD should take the responsibilities to develop the corporations mission and vision by taking stakeholders interest into careful consideration. They must not be isolated from organizations operations.

Perform self-assessments- BOD also required to perform self-assessment. The objective of this assessment is to reflect the effectiveness of the boards in governing the corporation.


Enhanced role of nomination committee- The nomination committee is expected to play a more active role in nominating qualified board members.

Well-elaborated explanation- More narrative information will appear in the annual report. The corporations are expected to explain their decisions and justify their actions. They also must inform their weaknesses and failures in the report.

Shift of the model- Shift to the stakeholder model from shareholder model will be more apparent.

Conduct training and seminar- Series of training and seminar are conducted for the corporations to realize the best person that are accountable for their organizations.

Greater management support- A greater management support for corporate governance is vital to realize good corporate governance practices.

Well-informed shareholders and stakeholders- Shareholders and stakeholders are now more well-informed and educated. Aware the current business situations that might give them opportunities and harms.

Greater government involvement- When the government increase involvements to promote good corporate governance practice, it will ensure continuous support for business, thus strengthening the natio ns economy.


Chapter 8: The Moral Dimensions of an Economic System

Lets Understand:
1. Definitions of Economic System 2. Factors of Good Management 3. Moral Dimensions of an Economic System 4. Differences between Affirmative action and Preferential Statement 5. Ranking and Rating 6. Ethical Implications of Performance Appraisal

8.0 Definitions of Economic System Economic system is an ongoing process where people exchange materials goods and personal services in support of a wide range of human interests. Good economic system will ensure the following: a) Fairness in the access to resources and the exchange and distribution of goods and services

b) Prohibit obstacles like discrimination on irrelevant reason that interfere with anyones access to resources c) Everyone in the system enjoying the fair share of resources

Factors that indicate good management: Attract capable people into the organization Keep turnover low Secure employees loyalty to the company Maintain and increase their productivity level

Methods to motivate and satisfy employees: Provide them with on and off-the- job training Give job performance feedback Allow them to participate in decision making affecting the structure and objectives of their jobs Provide them with safe working conditions


8.1 Moral Dimensions of an Economic System 1. Moral right to employment 2. Fair hiring practices Viewpoints given by ethical theorists: a) Natural Law of Moralist- screening practices based on race, gender, age or religious preference are immoral and violate the right of anyone to be treated with dignity. The employers must ensure not to discriminate on characteristics that have nothing to do with individuals job performance. b) Utilitarian- Adopt the same principle with naturalist but the judgment would be depended upon the overall consequences of these practices. If the fair hiring practices are beneficial for an organization, should act that way. then it


The cultural relativist- if there are no laws against discrimination, then hiring and promotion policies would have to follow the customs acceptable to a particular society. The right or wrong behaviors are determine by the specified society. Ex: It is morally wrong to deny women equality in the work-place in modern America, but in the early 19s the statement is unacceptable by the American .

3. Affirmative action and preferential treatment Differences between affirmative action and preferential treatment: Affirmative action Deals with employment and promotion opportunities being open to all, regardless of gender, race, religion, age and etc. This action will ensure that everyone has an equal opportunity to compete for any job he or she is qualified to do. Ex: 20% Malay, 20 % India, 60% Chinese to work in a Western company Setting specific quotas for minorities Preferential treatment Practice of hiring or promoting members of minority groups in preference to those from non-minority groups.

4. Wages Employees wages are generally determined by the job market. a) Large industry: Competitive salaries include basic wages and bonuses and assorted benefits like paid holidays, vacations, sick days, medical and dental insurance, savings and pension plans.


b) Small business: Wages depend on the financial affordability of an enterprise. Bonuses and benefits may or may not be the part of the package Employment is the employees access to a fair share of material resources, so at minimum, the jobs should provide wages and benefits that will assure they live in some minimal but comfort enough. 5. Equal pay for equal work The principle states that people performing the same kind of work must be paid the same salaries. Race, gender, age, and handicaps will not affect the principles as equal work is concerned. However, the principle is not taken into consideration when the employees can do the work faster or more efficient than other employees, which justifies to be paid more. 6. Equal pay for comparable work The principle refers to pay equal salaries for a job with different responsibilities. The principle is argued by many employees because each job requires different capacity. For example, in some states in USA, by using this principle employers want to pay civil servants the same salaries if it can be proved that jobs involving different responsibilities, such as lorry driver and tree trimmers require the same levels of education, skill, knowledge and experience. But, it was argued because it must considers other factors such as long working hours, risk of accident), that will surely requires the employer to pay higher. 7. Share of the return on resources Managers and workers have the right to a fair share of the return for their contribution to the companys success. Shareholders have the right to a fair share of their companies return. The have the right to claim the largest share as they had invested in the company. 8.2 Ranking and Rating There are two types of performance appraisal which are: Informal appraisal- For a small business, employers are able to observe the employees performance directly and judge their work. The appraisal process is not very complex. Formal appraisal- For a large company, the systems used are grading, ranking, and rating their co-workers in various units of business. The one who perform better than others at the same level will receive a higher pay.


8.3 Ethical Implications of Performance Appraisal The formal or informal public recognition of their work received from the employers is a powerful constituent of their self-image. Therefore, an employer must follow the appraisal plan and performs evaluation righteously to judge the employees because it will reflect their hard work. To ensure ethical treatment of employees in the appraisal process, there are guidelines that need to be observed. The key ethical guidelines for performance appraisal are: 1. Set the objectives: Give a clear and concrete objectives for the appraisal period


Get the feedback: Employees must be informed about their performance as a result of the feedbacks. A subordinate whose performance is poor or unsatisfactory has to be made aware of the fact. It would be bad to let a person think that he is doing good job when that is not the case.


Use valid criteria: Performance must be measured based on valid criteria.


Have essential information on subordinate: Only person who knows well about their employees will be the best choice to rate the employees. Supervisors need to provide the details of his subordinate performance to choose the best employees for the appraisal.


Have the right for improvement: Subordinates have right to counsel, coach, and train to help improve their performance.


Chapter 9: Employees and the Workplace

Lets Understand:
1. Definition of Employees Right to Privacy 2. Substance abuse 3. Abusing Employees

9.0 Definition of Employees Right to Privacy In most states, employees have a right to privacy in the workplace. This right to privacy applies to the employee's personal possessions, including handbags or briefcases, storage lockers accessible only by the employee, and private mail addressed only to employee. Employees may also have a right to privacy in their telephone conversations or voicemail messages. However, employees have very limited rights to privacy in their e-mail messages and Internet usage while using the employer's computer system. 9.1 Substance Abuse Random testing for substance may be morally justified if there is valid suspicion and strong evidence that a significant number of employees may be abusing alcohol or using illegal drugs. Many organizations used drug test to avoid issues of hiring drug addict that will harm their organizations and job reputation. In order for an organization to conduct the pre-employment test on the candidates, it needs to ensure that; a) The test is accurate; the applicant is allowed to provide evidence that he or she is taking drugs under a legitimate medical prescription. b) The results of the test are remain confidential and will only inform to person who is concerned. 9.2 Abusing Employees Some employees who unable to control their anger, scold the employees in front of the other employees which cause the employees felt demoralized and violating his rights. Usually, the reason for the employees to scold his employees is because for the work failure. But, employees may be threatened with the loss of jobs for such failures as: Disagree to falsify financial statement Refuse sexual advances Refuse to commit deception on behalf of a union or a company


Using threats to try to force employees to violate the law is a kind of invasion of privacy. Natural law moralists would regard any abuse of an employee as morally wrong, while utilitarian moralists would find it justified only in extreme circumstances where the overall goods demands it. For a cultural relativist, it is unlikely that societal customs anywhere in the world would accept this kind of treatment at the workplace.


Chapter 10: Loyalty to a Company

Lets Understand:
1. Definitions of loyalty to a company 2. Whistle- blowing 3. The Morality to Terminate Whistle-Blower 4. Improper Loyalty

10.0 Definitions of Loyalty to a Company Loyalty indicates the moral obligations of employees to do the following: a) Discharge their duties competently

b) Obey the legitimate orders of their superiors c) Keep company information and trade secrets confidential d) Avoid any conduct that is in conflict with the companys rightful interest Once a person accepts a job with a company, he is considered to owe his loyalty to the company, both while employed and after leaving the company. Employee will not share any confidential information with outsiders whether family, friends, family members or the media. Any person who violates the terms of the employment contract is subject to disciplinary actions such as: Dismissal Face a lawsuit

Managers are not allowed to do any activities that conflict with their companys interests, unless it is directly permitted by the companies. Managers are not allowed to provide any off-hours consultation to competitors or patent invention that may directly receive information from employment or using companys facilities. 10.1 Whistle- blowing Whistle-blower- is someone that reports on fellow employees, supervisors, or company officers illegal or immoral actions.


Whistle-blowing can be divided into two categories: a) Internal whistle-blowing: Accusation is made through the lines of supervision or other designated channels within the company. b) External whistle- blowing: Accusation is reported to people outside the company such as government authorities or the media. 10.1.1 Internal Whistle-blowing Criteria of justification for internal whistle- blowing: Criteria of Justification Significant harm Accurate facts It should be evident that the harm to the company is significant. The blower must be sure about his facts. Wrongful accusation may seriously damage the reputation of the accused, if he proved not guilty. Already known by the management Reasonable expectations Impact on oneself The whistle-blower should try to find out whether the suspects activity is already known by the higher management. There should be reasonable expectations that accusation will be effective and the suspects supervisor will put a stop to the false acts. Consider the possible damage on the whistle-blowers reputation. He might help his company to catch a suspect but, he also might be fired as act of troublemaking. Moral obligations If it proves that employees commit act that breach the moral obligations, then the whistle blower has the right to tell the superior. Explanation

10.1.2 External Whistle-blowing Criteria of justification for external whistle-blowing: Criteria of Justification Internal report of It must be ensured that effort has to be made to report wrongful conduct internally, through proper lines of organization. The company has the right to clean it name before it goes to public. External agencies There is evident that external agencies such as auditors or public regulatory bodies are unable or unwilling to report what is going on. Significant case of harm A significant harm to stockholders, employees, or the public has to be at issue such as fraud and unsafe working environment. Degree of harm The degree of harm that the company will suffer as a result of the whistle-blowing should Explanation

wrongful conduct


be proportionate to the harm its wrongdoing is causing.

A manager would be obliged to report wrongdoing to outsiders only if serious harm is at issue and if it is evident that appropriate levels of supervision are unable to stop it. In the United States, government employees who blow the whistle are protected by law against retaliation. They consider as being loyalty towards the government. But for private sectors, whistle blower is regarded as informer. 10.2 Morality of Terminating Whistle-Blowers As the whistle-blowers have reported a genuine case of misconduct through appropriate channels or have gone outside the company, there are no legitimate reasons to discipline them. Justification in taking action against the whistle-blower: Lied about the case, misinterpreted it and cause it to be more serious than it really was Act of revenge on a fellow employee or supervisor As a protest over an unfavorable company policy Eliminate a rival for the purpose of promotion

10.3 Improper Loyalty It would be violation of fiduciary duty to cover up actions by a supervisors mistakes and wrongdoings. Though the employee is just a low operator in a company but he or she has the right to inform the superiors about the wrongdoings of higher staff.