Block 8 Flashcards
Business Ethics, Corporate Governance & Corporate Social Responsibility
What is business ethics and why is it important ?
- Ethics concerns principles of right or wrong conduct.
- Business ethics deals with the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel- why?
- Because business actions have to be judged in the context of society’s right and wrong
Name and describe the Schools of thought for Ethical Standards
- School of ethical universalism-
Believes fundamental concept of right and wrong are universal and transcend culture, society and religion- We agree that exposing employees to harmful /toxic chemicals or products sold to customers known to be unsafe or harmful is unethical- strength here is – collective views puts clear boundaries on what is right or wrong - Ethical Relativism-
Differing religions, customs and cultures give rise to multiple beliefs of what is right and wrong- So whether a business-related behaviour is right or wrong depends on prevailing local ethical standards. “one size fits all is inappropriate”. Local ethical standards take precedent over ethical standards of company home- create conflict.
Weakness- Gives rise to ethical dilemmas/problems- Use of underage labour / accepting bribes/ kickbacks. - Social contracts theory-
Ethical principle based on collective views of multiple societies to form a social contract to be observed by all.
(1) A ltd number of universal ethical principles that are widely recognized and place legitimate boundaries on behaviors in all situations.
(2) Additionally, circumstances of local cultures, traditions and values further prescribe what is ethically permissible behaviour - Explanation: Kick back and bribes- may be observed in some countries however- major religious and moral schools of thought condemn this behavior. Therefore, an MNC can conclude there is a universal ethical principle observed here and must comply irrespective of what local customs or sales behavior is
Define the 3 DRIVERS OF UNETHICAL STRATEGIES AND
BUSINESS BEHAVIOUR
1: Faulty oversight (lack of) and self dealing (Greed & ambition)
Deliberate oversight or self dealing eg. Insider Trading exchanging information to gain advantage on stock market or in mortgage lending practices led to US crises
- Responsible corporate governance and oversight are needed by the company’s board to guard against managers who might use their positions for personal gain rather than the firm’s interests; this requires increasing oversight and reforming policies
2: Pressure for short-term performance (Reputation)
Key personnel pressured to meet sale and profit expectations of shareholders- “to do what ever it takes” to protect reputation or
protect compensation. Eg. Diamond Foods falsified costs to boost earnings and stock price. “Short-termism”- focus on the ST performance at the expense of LT strategic objectives. Cutting ethical corners puts shareholders at risk. Costly- pay fines as a
result
3: A weak or corrupt ethical environment (Bend the rules)
Company culture puts profits and performance ahead of ethics- “Everybody does it” or “It’s okay to bend the rules to get the job done”. Winning at any costs creates an unethical culture such Enron’s On Car Day
Explain the 2 reasons why a company’s strategy should be ethical
- The moral case for ethics-
Because strategy that is unethical is morally wrong and reflects badly on the strategy of the company and personnel
* In reality an ethical strategy is the product of managers who are of strong moral character.
* Managers with high ethical principles are usually advocates of a corporate code of ethics and strong ethics compliance - The business case for ethics-
An ethical strategy can be good business and serve the self interest of shareholders.
* Unethical practices only damages reputation and have costly consequences
Describe the 3 costs companies can incur through ethical wrongdoing
- Visible costs
-Government fine, penalties etc
- Civil penalties from lawsuits etc
- cost to shareholders from a lower stock price (and possibly dividends) - Internal Administrative costs
-Legal and investigative costs
-Costs of remedial education and ethics training
- Costs of taking corrective action
- Administrative costs ensuring future compliance - Intangible or less visible costs
- Customer deflections
- Loss of reputation
- Loss of morale + higher cynicism
- Higher employee turnover
- higher recruiting costs
What are the 4 consequences of unethical business practices?
Sizable civil fines and stockholder lawsuits
- Facebook
Devastating image and public relations hits
-KPMG
Sharp stock price drops as investors lose confidence
- Steinhoff
Criminal indictments and convictions
- Wells Fargo
Which questions do executives truly committed to a high standard ethics ask ;
- Is what we are proposing fully compliant, is there any ambiguity?
- Is there any aspect of the strategy (policy or operating practice) that appears ethically
questionable? - Is there anything in the proposed that customers, employees, shareholders, suppliers, competitors, regulators, community, activists, media might consider ethically questionable?
Describe the board of Directors and their duty
- As representatives of the shareholders, directors have both the authority and the responsibility to establish basic corporate policies and to ensure that they are followed.
- The board of directors, therefore, has an obligation to approve all decisions that might affect the long-term performance of the corporation.
- This means that the corporation is fundamentally governed by the board of directors overseeing top management, with the concurrence of the shareholder.
Describe corporate Governance (4)
- The system by which organisations, particularly business corporations are directed and controlled by their owners” ( Carpenter & Sanders, 2009)
- Corporate governance sets down guidelines to discipline organisations and
ensure that the goals of owners and managers are aligned, thereby setting the
organisation on the road to sustainable success. - “The role of how board of directors approve top management decisions that
affect a company’s long-term performance in the benefit of the shareholder”
(Wheelen et al., 2018) - “ Is the way in which boards oversee the running of a company by its managers,
and how board members are in turn accountable to shareholders and the company. This has implications for company behaviour towards employees
shareholders, customers and banks” OECD
What is the objective of corporate governance ?
Exercise of ethical and effective leadership by the governing body to achieve:
- Ethical culture
- Good performance
- Effective control
- Legitimacy
Describe the history of the King code
- King Code was stimulated by the concern for competitiveness of the South African private sector following the admission of the country to the global economy after the collapse of apartheid.
- South African corporations was exposed to a new political system, rapid trade liberalisation, demanding international investors, emerging market challenges and rapid regulatory reform.
- In view of this, corporate governance, with its focus on quality of decision-making and
corporate monitoring, impacts both on stability and growth prospects. (Maritz)
Outline the 4 stages of the King code including years of implementation
1994
* King I
* Standards of good conduct for board members of listed companies
2002
* King II
* Triple bottom line & role of internal risk
2009
* King III
* Integration of governance, strategy and sustainability
2016
* King IV
* Only effective 1 April 2017. Apply and explain integrated thinking
across the six capitals; financial, manufactured, intellectual, human,
relationship and natural
What is the importance of governance in business ?
- Provide guidelines for governance structures, ethical conduct and performance measurement, and reporting
- Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets.
- Poor corporate governance weakens a company’s potential and at worst can pave the way for financial difficulties and even fraud. If companies are well governed, they will usually outperform other companies and will be able to attract investors whose support can help to finance further growth.
What are the King Code Characteristics of good Corporate Governance ?
- Discipline:
Behavior that is universally recognized and accepted to be correct and proper, e.g., ethical conduct
2.Transparency: -
Independent source making sense of company performance and actions,
e.g., integrated report - Independence:
Minimize or avoid conflict of interest ,e.g., non-exec directorship and
sub-board committees - Accountability:
Management accountable for their decisions, e.g., investor relations
feedback - Responsibility:
Corrective action for mismanagement, e.g., disciplinary hearing - Fairness:
Equal consideration for shareholders, e.g., AGM and proxy forms - Social responsibility:
Consideration for environmental and social issues, e.g., social
investments
What is the Agency Theory
- Principal (shareholder) appoints an agent
(management) to perform tasks relating to
business performance. - The essence of corporate governance is
controlling the point at which there is a
separation of the principal and agent’s
perspective - conflict of interest
- Where
the agent is seen as self seeking/ self
interest (The Agency problem) - The solution to the agency problem is to
find ways to benefit shareholders and
stakeholders, ensuring that shareholders
get positive returns on their investment,
while the resources and profits managed by corporate executives protect the interest
of the shareholders
