2/20/2012

BUSINESS, GOVERNMENT, SOCIETY, ETHICS

ETHICAL DECISIONMAKING, CSR,

CORPORATE GOVERNANCE

SOME DEFINITIONS

Ethics morals pertaining to belief in what is right or

wrong; guides or rules that govern behaviour
Corporate social responsibility - The duty of a
corporation to create wealth in ways that avoid harm
to, protect, or enhance societal assets.

Ethical Decisionmaking
Corporate Social Responsibility
Corporate Governance

Fourteen Principles of Ethical

Conduct
1. Categorical Imperative

Making Ethical Decisions

in Business

2. The Conventionalist
Ethic
3. The Disclosure Rule

8. The Might-equals-right
Ethic
9. The Organisation Ethic
10. The Principle of Equal
F d
Freedom

4. The Doctrine of the

Mean

11. The Proportionality Ethic

5. The Ends-means Ethic

12. The Rights Ethic

6. The Golden Rule

13. The Theory of Justice

Ethic

7. The Intuition Ethic

14. The Utilitarian Ethic

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The Categorical Imperative

The Conventionalist Ethic

Origination: Immanuel Kant

Basic premise: Act only according to
that maxim by which you can at the
same time will that it should become a
universal law.
Criticism: Theory is dogmatic and
inflexible.

Origination: Albert Z. Carr

Basic premise: Business is like a
game with permissive ethics and any
action that does not violate the law is
permitted.
Criticism: Commerce defines the life
changes of millions and is not a game
to be taken lightly.

The Doctrine of the Mean

The Disclosure Rule
Do considerable research on the
Sarbanes Oxley
y Act and other legislation,
g
,
rules and codes of relevance and link to
any related corporate scandals

Origination: Aristotle
Basic premise: Virtue is achieved
through moderation. Avoid behavior
that is excessive or deficient of a
virtue.
Criticism: The doctrine itself is
inexact.

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The Ends-Mean Ethic

Origination: Ancient Roman proverb, but
often associated with Niccol Machiavelli.
Basic premise: The end justifies the
means.
Criticism:
In solving ethical problems, means may be as
important, or more so, that ends.
The process of ethical character development
can never be furthered by the use of expedient
means.

The Intuition Ethic

Origination: Defined by G.E. Moore in Principia
Ethica.
Basic premise: What is good or right is
understood by an inner moral sense based on
character development and felt as intuition.
Criticism:
The approach is subjective.
Self-interest may be confused with ethical
insight.
No standard of validation outside the individual
is used.
Intuition may fail to give clear answers.

The Golden Rule

Origination: Found in the great religions
and in works of philosophy.
Basic premise: Do unto others what you
would have them do unto you.
Criticism:
Peoples ethical values differ, and they
may mistakenly assume that their
preferences are universal.
It is primarily a perfectionist rule for
interpersonal relations.

The Might-Equals-Right
Ethic
Origination: Thracymachus
Basic premise: Justice is the interest
of the stronger.
Criticism:
C iti i
Confusion of ethics with force.
Invites retaliation and censure, and is not
conducive to long-term advantage.

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The Organization Ethic

Origination: Not credited.
Basic premise: Be loyal to the
organization.
Criticism:
C iti i
M
Many
employees
l
h
have
such deep loyalty to an organization
that it transcends self-interest.

The Proportionality Ethic

Origination: Medieval Catholic
theology
Basic premise: A set of rules for
making decisions having both good
and evil consequences.
Criticism: These are intricate
principles, requiring consideration of
many factors.

The Principle of
Equal Freedom
Origination: Herbert Spencer
Basic premise: A person has the right
to freedom of action unless such
action deprives another person of a
proper freedom.
Criticism: Lacks a tie breaker for
situations in which two rights conflict.

The Rights Ethic

Origination: Western Europe during the
Enlightenment
Basic premise: Each person has
protections and entitlements that others
have a duty to respect.
Criticism:
Rights are sometimes stretched into
selfish demands or entitlements.
Rights are not absolute and their limits
may be hard to define.

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The Theory of Justice

The Utilitarian Ethic

Originator: Contemporary, John Rawls.

Basic premise: Each person should act
fairly toward others in order to maintain the
bonds of community.
Criticism: Rawls principles are
resplendent in theory and may even inspire
some business decisions, but they are best
applied to an analysis of broad societal
issues.

Origination: Line of English philosophers,

including Jeremy Bentham and John Stuart Mill.
Basic premise: The greatest good for the greatest
number.
Criticism:
In practice it has led to self-interested
reasoning.
Because decisions are to be made for the
greatest good of all, utilitarian thinking has led to
decisions that permit the abridgement of
individual or minority group rights.

Reasoning with Principles

Character Development

The use of ethical principles, as opposed to the

intuitive use of ethical common sense, may
improve reasoning, especially in complex
situations.
Based on the application
pp
of utility,
y rights,
g
and
justice, the managers decision in the text example
to remain silent is acceptable.
Some judgment is required in balancing rights, but
the combined weight of reasoning with all three
principles supports the mangers decision.

Character development is a source of

ethical behavior separate from the use of
principles reasoning.
The theory that character development is
the wellspring of ethical behavior can be
called the virtue ethic.
Aristotle believed that by their nature ethical
decisions require choice, and we build
virtue, or ethical character, by habitually
making the right choices.

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Practical Suggestions for Making

Ethical Decisions
Learn to think about ethics in rational terms using ideas
such as universalizability, reversibility, utility,
proportionality, or others.
Consider some simple decision-making tactics to
illuminate alternatives.
Sort out ethical priorities early.
Be publicly committed on ethical issues.
Set an example.
Thoughts may be translated into action, and ethical deeds
often require courage.
Cultivate sympathy and charity toward others.
There are many paths to ethical behavior.
Not all managers appreciate the repertoire of principles and
ideas that exist to resolve ethical problems of business life

Evolving Idea of Social Responsibility

Fundamental idea - corporations have duties that go
beyond carrying out their basic economic function in a
lawful manner.
Evolved to require more expansive action by companies
largely because:
Now powerful Stakeholder groups impose agendas
Underlying ethical and legal philosophies matured

SR in Classical Economic Theory

Historically classical capitalism basic business inspiration
Business socially responsible if it maximizes profits while
operating within the law.
View that markets harness low motives and work them into
social progress has always attracted skeptics.
Today the classical ideology still commands the economic
landscape, but ethical theories of broader responsibility
have worn down its prominences.

Corporate Social
p
y
Responsibility

Defines the idea of corporate social

responsibility and explains how it has expanded
in meaning and practice over time.
Explains more about how corporations carry out
their social responsibilities.

Early Charitable Impulse

Colonial era business frugality; charity coexisting virtue.
Wealthy endowed social causes as individuals not by firms.
Steven Girard changed climate of education in the US by
bequeathing $6m for school to educate orphaned boys.
John D. Rockefeller systematically gave away $550 million.
Andrew Carnegie gave $350 million over lifetime to causes that
would elevate the culture of a society but believed fortunes should
not be wasted by paying higher wages or giving gifts to poor people.
With Herbert Spencer believed in the doctrine of social Darwinism
when it came to charity.
Social Darwinism held that charity interfered with the natural
evolutionary process in which society shed its less fit to make way for
the better adapted.
Additionally, courts consistently held charitable gifts to be ultra vires
(beyond the law) because charters granted by states when
corporations were formed did not expressly permit them.

DESCRIBE THE CARIBBEANAND NATIONAL EXPERIENCE

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SR Late 19th and Early 20th Centuries

Giving, no matter how generous, was a narrow kind of
SR often unrelated to a companys impacts on society.
During the Progressive era, three interrelated themes of
broader responsibility emerged:
Managers were trustees; Managers had an
obligation to balance multiple interests; many
managers subscribed to the service principle
Henry Ford touted citizenship but was ultimately
unconcerned about the welfare of his employees.
General Robert E. Wood believed in responsibility to
customers, the public, employees, suppliers, and finally
stockholders.
1920s and beyond, organized charities began forming to
which corporations contributed: - Community Chest, Red
Cross, Boy Scouts

1950The Present
Contemporary understanding of CSR formed in this time
Social Responsibilities of the Businessman
Dissenters to this theory were conservative economists
who claimed that business is most responsible when it
makes money efficiently, not when it misapplies its
energy to social projects.
1971 Bold statement by the Committee for Economic
Development outlining three concentric circles of
responsibilities.
1981 Statement on Corporate Responsibility from the
Business Roundtable.

DESCRIBE THE UK, CARIBBEAN AND NATIONAL EXPERIENCE

Basic Elements of Social Responsibility

General Principles of Corporate

Social Responsibility

Corporations are economic institutions run for profit.

All firms must follow multiple bodies of law.
Managers must act ethically.
Corporations have a duty to correct the adverse social
impacts they cause.
Social responsibility varies with company characteristics.
Managers should try to meet legitimate needs of
stakeholders.
Corporate behavior must comply with norms in an underlying
social contract.
Corporations should also accept a measure of accountability
toward society.

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Are Social and Financial Performance Related?

A recent review of 95 studies over 30 years found that
a majority (53 percent) of businesses showed a
positive relationship between profits and responsibility,
while only 5 percent showed a negative one.
Results inconsistent and ultimately inconclusive due to
methodological questions.
Safe to say corporations rated high in social
responsibility are no less profitable than lower rated
firms.

CSR in a Global Context

By the end of the twentieth century the doctrine of corporate

social responsibility had been widely accepted in industrialized
nations.
Recent debates over the duties of corporations in their
international operations.
International law is weak in addressing social impacts of business.
Giant corporations may not be subject to strong laws and
regulations in foreign countries.
In adapting to global economic growth corporations have used
business strategies that distance them from direct accountability or
social harms.
More national regulation of multinational corporations is unlikely.

Extraterritoriality enforcement is problematic.

Nongovernmental organizations (NGOs) voluntary
organizations becoming powerful advocates of restricting
corporate power outside the borders of industrialized nations.
Pushed for UN-sponsored conferences on the environment,
population, human rights, social development, and gender.
Soft law statements of philosophy, policy, and principle found
in nonbinding international conventions.

Global CSR: Development of

Norms and Principles
Norm a standard that arises over time and is
enforced b social sanction or law
Principle a rule, natural law, or truth used as a
standard to guide conduct
Milestones in the development
p
of norms
U.N. Universal Declaration of Human Rights
Tripartite Declaration of Principles concerning
Multinational Enterprises and Social Policy
Norms on the Responsibilities of Transnational
Corporations

Global CSR:
Codes of Conduct
Codes of conduct set forth aspirations, principles,
guidelines, and rules for corporate behavior.
Created by companies, trade associations, NGOs,
governments, and international organizations.
The target is the corporation.
corporation
The codes effectiveness depends on how the
corporation carries it out.
Many codes are weak because they lack the force
of law.

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Global CSR: Reporting and

Verification Standards

Global CSR: Labeling and

Certification Schemes

Sustainability reporting the practice

of a corporation publishing information
about its economic, social, and
p
environmental performance
Two problems of sustainability
reporting:

Influence the market on the demand

side.
Criteria for labels set by industry,
NGOs unions,
NGOs,
unions and sometimes
governments.
Certifications promote many ideals
including human rights, fair trade, and
campaigns against child labor.

Defining and measuring social performance is

difficult
Reports are not comparable from company to
company

Global CSR:
Management Standards
Eco-Management and Audit Scheme
(EMAS)
International Standards Organization
(ISO)

Global CSR:
Social Investment and Lending
U.N. Principles for Responsible Investment require
signatories to consider a companys environmental,
social, and governance performance when they
invest.
FTSE4Good Global Index is intended to set the
world standard for investors seeking companies
that meet globally recognized corporate
responsibility standards.
International Finance Corporation (IFC) seeks to
promote development and reduce poverty by
funding projects for corporations.

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Global CSR: Government Actions

and Civil Society Vigilance
Governments advance corporate
responsibility through binding
regulation and by actively promoting
voluntaryy actions.
NGOs watch multinational
corporations and police actions they
see as departing from emerging
norms.

Corporate Governance
Discusses recent corporate scandals related to corporate

governance.
Discusses corporate governance; how boards of
directors are structured, their duties, and reforms; and
issues associated with executive compensation.
Highlights the Sarbanes-Oxley Act by which Congress
responded to demands for reform
reform.
Research options backdating and other types of corporate
scandals

An option is the right to buy a share of company

stock at a fixed price on a later date. Backdating
occurs when options are granted on one date, but
priced as if they had been granted on a historical
date when the market price was lower. Backdating
is legal if it is revealed to shareholders, but illegal if
it is hidden.

Assessing Evolving Global CSR System

As MNCs grew in power with the expansion of global
trade, a perceived deficiency in regulation was
countered by action within civil society.
Emerging global CSR system that promotes and
enforces corporate adherence to international CSR
standards.
Is the emerging system the most appropriate way to
regulate large corporations?

Corporate Governance - The exercise of authority over the

members of a corporate community based on formal structures,
rules, and processes.

The rules of corporate governance define how power is

distributed among shareholders, boards of directors, and
managers and how disputes are settled.
The nature of corporate governance has changed
dramatically over time.
perform the critical role of
Boards of directors evolved to p
monitoring hired managers for the shareholders.
The corporate charter is the document that authorizes
formation of a corporation. It specifies the rights and
responsibilities of stockholders, directors, and officers.
Directors have a fiduciary responsibility to the
shareholders.

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Regulation of Governance

Flow of Authority in Corporate Governance

Corporate governance laws

primarily the state or government
the Constitution empowers the regulation of
corporations where necessary.
Government or legal intervention generally comes in
reaction to conspicuous failures of governance and
imposes mandatory rules and restrictions
restrictions.
Extensive intervention into corporate governance came
in the 1930s, the 1960s, and in 2003.
Corporate Governance failed at Enron which enjoyed
admiration and respect among investors, managers of
other companies, and the public. The boards Special
Investigative Committee did not place sole blame for thr
failure on its directors, but accused the board of failing to
exercise it oversight responsibility. A fundamental cause
of the catastrophe was the firms culture

The Sarbanes-Oxley Act

It holds management responsible for
accurate financial reports and strengthens the
power and responsibility of board audit
committees.
A few of the acts provisions are:
Creates a five-member oversight board that has
authority over practices of accounting firms.
Prescribes rules to improve auditing.
Requires the CEO and CFO to sign and certify the
accuracy of annual and quarterly financial
statements.
Establishes heavy criminal penalties for violating
its provisions.

Boards of Directors

11 members on average although no set number.

Directors in large corporations are chosen after being nominated by
the board and approved by a majority vote of shareholders.
Inside Directors - employees of the company
Outside Directors - not employed by the company
Boards are divided into committees.

Duties

Laws impose duties to represent the interests of stockholders; and to

exercise due diligence in the oversight of corporate activity
Directors do not make day-to-day decisions.
Boards exercise a very broad oversight.
Compensation varies substantially among industries.
Some specific board functions:
Review and approve goals and strategies; Select the CEO,
evaluate his or her performance, and remove the CEO if necessary;
Give advice and counsel to management; Create firms governance
policies including on compensation; Nominate candidates to be
presented to the stockholders for election as directors; Exercise
oversight of ethics and compliance programs.

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Percent of Equity Held

by Institutions

Institutional Investors and Governance

The growth of pension and mutual fund assets has given
institutional investors new power in corporate governance.
Jesse Unruh formed the Council of Institutional Investors
(CII). The CII endorsed a Shareholders Bill of Rights
demanding a voice in fundamental decisions which could
affect corporate performance and growth. Since then,
institutional investors have been more active in corporate
go ernance issues.
governance
iss es

Shareholder resolutions
In the 1970s and 1980s these focused on corporate
social responsibilities such as automobile safety and
doing business in apartheid South Africa. In recent years
they focused on corporate governance issues, especially
the methods for the election of directors and limits on
executive compensation. Resolutions are voted on by all
shareholders at annual meeting, by mail, or by Internet.

Executive Compensation
A compensation committee of the board of directors
sets the pay and benefits of top executives.
Elements of compensation include a combination of the
following.- Base salary, Annual cash incentives, Long-term stockbased incentives, Stock options, Performance shares, Restricted
stock, Retirement plans, Perquisites

Criticisms of Executive Compensation

The size of extraordinary
y payouts.
p y
The compensation packages given to some newly hired CEOs.
Golden handshakes received by some CEOs leaving under fire.
An alleged bias in favor of boosting CEO compensation due to the
composition of the compensation committees.
Nonconformance with the interests of shareholders.
The number and misuse of stock option grants.
The spread between executive pay and that of the average worker.

In Defense of CEO Pay

1993 legislation regarding the expensing of CEO pay linked to the
boom in stock options which became a large part of compensation
during a period marked by long rises in stock markets.
Many large compensation packages were justified by the gains of
stockholders during their tenure.
Boards of directors point out that if they do not pay their CEOs what
executives in comparable companies get, they stand to lose them.
Most managers
g
do not g
get dramatically
y high
g salaries.

Suggested Compensation Reforms

The SEC should require more data on
compensation in reports to shareholders.
Reveal pay and performance relationship
Tie bonuses to long-term performance.
Allow shareholders to vote on executive
compensation.

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