Metropolia Business School International Project Week (IPW) 2013 Dr Denise Dollimore University of Hertfordshire, UK

Following this session students should be able to:  Define business ethics and describe the factors that shape a manager’s 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

 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’ Some business practices always considered unethical and often illegal

Free Choice Law Ethics A personal responsibility? Legal StandardSocial StandardPersonal Standard

 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 individual’s 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?

Corporate Governance Definitions…  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)

Corporate Governance 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’.

Corporate Governance (Jensen & Meckling 1976) 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

Corporate Governance & CSR? 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)

Corporate Governance & CSR The Debate… 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 organization’s 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 The Pyramid of corporate social responsibility: toward the moral management of organizational stakeholders. Business Horizons, July- Aug:  Demb and Neubauer. 1992, ‘The Corporate Board: Confronting the Paradoxes’. Long Range Planning, Vol 25, Issue 3, June, pp. 9–20.  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:  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