Muhammad Sohaib Ashraf

Following this session students should be able to:

Define business ethics and describe the factors that shape a

managers ethical decision making.

Describe the principles of good Corporate Governance

Define corporate social responsibility and explain how to

evaluate it along economic, legal, ethical, and discretionary
criteria.
 An oxymoron! bringing together of two
contradictory concepts (Collins 1994)

Principles of conduct within organizations that

guide decision making and behavior (David 2008)
Good business ethics is a prerequisite for good
strategic management

The study of business situations, activities, and

decisions where issues of right and wrong are
addressed (Crane & Matten 2004)
Ethical values: shared beliefs about right and wrong,
good and bad
Govern the behaviour of a person or a group

Ethical issues: problems or dilemmas which present a

conflict of values
Pay a living wage or personal financial gain

Ethical choices: decisions about which option to take in

response to a dilemma
Difficult decisions, because each option has its own
drawbacks
Some business practices always
considered unethical and often illegal

Misleading advertising
Misleading labeling
Poor product or service safety
Harming the environment
Insider trading
Padding expense accounts
Dumping flawed products on foreign markets

But in many other cases, the law is unclear and all

choices have elements of both right and wrong
 Free
Law Ethics
Choice

Legal Standard Social Standard Personal Standard

A personal responsibility?
 You are a strategic analyst at a successful hotel enterprise
that has been generating substantial excess cash flow.
Your CEO instructed you to analyse the competitive structure
of closely related industries to find one the company could
enter, using its cash reserve to build up a substantial position.
Your analysis suggests that the highest profit opportunities
are to be found in the gambling industry. You realise that it
might be possible to add casinos to several of your existing
hotels, lowering entry costs into this industry.
However, you personally have strong moral objections to
gambling

Should your own personal beliefs influence your

recommendations to the CEO?
 Utilitarian approach moral behavior produces the
greatest good for the greatest number
Individualism approach acts are moral when they
promote the individuals best long-term interests
Moral rights approach moral decisions are those
that best maintain the rights of those affected,
including free consent, life and safety
Justice approach decisions must be based on
standards of equity, fairness, and impartiality; (esp.
important in HR managment)
 Companies experience social blowback when
stakeholders perceive that they have breached their
deal with society

Good business ethics is a prerequisite for good

strategic management
 Companies have responded to increasing
expectations by advocating what is now a common
term in business: Corporate Social Responsibility
(CSR)

Most large companies now feature CSR reports,

managers, departments, and the subject is
increasingly promoted as a core area of
management - next to marketing & accounting
Crane, Matten & Spence (2008)
 Government: the law makers?
Business ethics begins where the law ends
The strategists: CEO, CSO, CFO, managers
Core values, beliefs embedded in organization
Business code of ethics (Banking, Media, Food Industry)
Board of Directors
Corporate Governance
Duties & Responsibilities

Stakeholders
Consumers/pressure groups/local community/Media
Who is Responsible for Ethics / CSR?
Leadership & Management Issues
CEO / Strategists

Code of business ethics:

Provides basis on which policies can be devised to
guide daily behavior and decisions in the workplace
CEO & Management responsible for implementation
Who else is responsible for Ethics / CSR?
Governance Issues

Board of Directors Roles & Responsibilities

Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights

Is being ethical good for business?

Is it possible to be both profitable and responsible?
 The way in which organizations are directed and
controlled
Cadbury (1992)

The process by which corporations are made

responsive to the rights and wishes of
stakeholders
Demb and Neubauer (1992)
The Growth of Modern Corporations
The Agency Problem

The agency problem arises because of the

separation between ownership of an organization
and its control

The agency problem is inherent in the

relationship between the providers of capital,
referred to as the principal, and those who
employ that capital, referred to as the agent.
The Agency Problem
Agency problems occur because no contract, however precisely
drawn, can possibly take account of every conceivable action
that an agent may engage in

How do you ensure that the agent will always act in the best
interest of the principal?

Agency costs occur where there is a divergence between these

interests
Hence original purpose of Board of Directors
How are such issues addressed?
 No more than 2 directors are current or former company
executives
No directors do business with the company
Each director owns a large equity stake in the company
At least one outside director with extensive experience
Each director attends at least 75% of all meetings
Board is frugal on executive pay, diligent in CEO
succession, and prompt to act when trouble arises
CEO is not also the chairperson of the board
Shareholders have considerable power and information to
choose & replace directors
The Purpose of Corporations?
To maximise shareholder value

In a free enterprise, private property system, a corporate

executive is an employee of the owners of the business. He
has direct responsibility to his employers. That
responsibility is to conduct the business in accordance
with their desires, which generally will be to make as much
money as possible
Milton Friedman (1970)
The Purpose of Corporations?
To meet the needs of stakeholders

Stakeholders are individuals or groups that affect or are

affected by the achievement of an organizations objectives

Edward Freeman (1984)

eg., shareholders, customers, suppliers, employees,

government, local community, media
Socially obstructive
Prioritising short-term shareholder interests
Avoids highly regulated business locations, lobby to change
laws
Socially obligative
Prioritising longer-term shareholder interests
Comply with laws
Socially responsive
Balancing multiple stakeholder obligations
Pay attention to pressure groups, use CSR to build competitive
advantage
Socially contributive
Seeking to shape society
Promoting sustainability and locally led economic development
The Pyramid of CSR
Archie Carroll (1991)
Key question
Should a business prioritise shareholder value or
stakeholder needs?

Shareholders own the business

Primarily for financial gain

Stakeholders are affected by the decisions and operational

activities of the business
Financial, non-financial and personal benefits

The social contract between business and society

is constantly evolving... (Waddock 2010)
 The early message doing well by doing good
CSR imposes political functions of govt on corporate executives
CSR has failed to create the good society expecting too much
from business
Close adherence to CSR agenda leads to falling profits
Difficulty in allocating rights responsibilities and enforcing
them who decides?
Stakeholder theory the way forward CA through building
superior relationships.
Good CSR manages the paradox of profitability & responsibility

Jury is still out you decide!

 Cadbury. 1992, Corporate Governance and Chairmanship. Oxford.
Carroll, A.B. 1991 The Pyramid of corporate social responsibility: toward the
moral management of organizational stakeholders. Business Horizons, July-
Aug: 39-48.
Demb and Neubauer. 1992, The Corporate Board: Confronting the
Paradoxes. Long Range Planning, Vol 25, Issue 3, June, pp. 920.
David, F. 2008, Strategic Management Concepts and Cases Pearson
International Edition.
Freeman, E. 1984, Strategic Management: A Stakeholder Approach. Boston:
Pitman.
Friedman, M. 1970, The Social Responsibility of Business is to increase its
Profits. New York Times Magazine, 13 September.
Jensen and Meckling, 1976, Theory of the Firm: Managerial Behaviour,
Agency Costs and Ownership Structure. Journal of Financial
Economics.3:305-60
Waddock, S. (2010) The Social Contract of Business in Society in Aras and
Crowther eds. A Handbook of Corporate Governance and Social
Responsibility 2010 pp. 69-82