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.

Corporate governance is the system of rules, practices

and processes by which a company is directed and
controlled.
Essentially involves balancing the interests of a
company's many stakeholders.

provides the framework for attaining a company's

objectives, it encompasses practically every sphere of
management, from action plans and internal controls to
performance measurement and corporate disclosure.

The board of directors is the primary direct

stakeholder influencing corporate governance.
Directors are elected by shareholders or appointed
by other board members, and they represent
shareholders of the company.
The board is tasked with making important
decisions, such as corporate officer appointments,
executive compensation and dividend policy.

Boards are often comprised of inside and

independent members. Insiders are major
shareholders, founders and executives.
Independent directors do not share the ties of
the insiders, but they are chosen because of
their experience managing or directing other
large companies. Independents are
considered helpful for governance, because
they dilute the concentration of power and
help align shareholder interest with those of
the insiders.

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

Law

Legal Standard

Ethics

Social Standard

Free
Choice

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, JulyAug: 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