B368 Business Issues and Ethics

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B368 Business Issues and Ethics

• Group 7
• Tutorial 3
• C.S. Lai
• Dec. 2012

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Welcome! todays agenda

• Review of last tutorial 20 mins.
• Unit 4 Corporate issues and business ethics
• Shareholders 60 mins.
• Break 10 mins.
• Employees 60 mins
• TMAs 15 mins.
• QA, Your Suggestions 15 mins.

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Tutorial 2 - Summary 1

• Business ethics is related to the social role of
  the corporation
• Confining corporations to commercial activities
  too limited
• Different perspectives and their relevance in
  European context
• CSR
• Stakeholder theory
• Corporate accountability
• Effects of globalization on role of corporation
• Corporate citizenship is latest concept in the
  field

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Tutorial 2 Summary 2

• Discussed the various stages of and influences on
  ethical decision-making in business
• Presented basic model of decision-making
• Outlined individual and situational influences on
  ethical decision-making
• Suggested that some individual factors such as
  cognitive moral development, nationality and
  personal integrity are clearly influential
• Suggested that in terms of recognising ethical
  problems and actually doing something in response
  to them, it is situational factors that appear to
  be most influential

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Traditional ethical theories

• Generally offer a certain rule or principle which
  one can apply to any given situation
• These theories generally can be differentiated
  into two groups

Motivation/ Principles
Action
Outcomes
Consequentialist Ethics
Non-consequentialist Ethics
Source Crane and Matten (2007)
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Typical Perspective
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Pluralistic Perspective
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Framework for understanding ethical
decision-making
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Stakeholder theory of the firma network model
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Overview

• The nature of shareholder relations to the
  corporation
• Analysis of the rights and the duties of
  shareholders
• Specific ethical problems and dilemmas arising in
  the relation between companies and their
  shareholders
• The ethical implications of globalisation on
  shareholder relations
• The notion of shareholder democracy and the
  accountability of corporations to their
  shareholders and other stakeholders
• The differences in shareholder roles and
  corporate governance in various parts of the
  world
• Perspectives on how shareholders can influence
  corporations towards sustainability

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Shareholders as stakeholders

• Understanding corporate governance

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Crucial problem separation of ownership and
control

• Peculiarities of corporate ownership
• Locus of control
• Fragmented ownership
• Divided functions and interests

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Rights and duties in firm-shareholder relations

• Rights of shareholders
• The right to sell their stock
• The right to vote in the general meeting
• The right to certain information about the
  company
• The right to sue the managers for (alleged)
  misconduct
• Certain residual rights in case of the
  corporations liquidation
• Duties of managers
• Duty to act for the benefit of the company
• Duty of care and skill
• Duty of diligence

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Corporate governance

• Corporate governance describes the process by
  which shareholders seek to ensure that their
  corporation is run according to their intentions.
  It includes processes of goal definition,
  supervision, control, and sanctioning. In the
  narrow sense it includes shareholders and the
  management of a corporation as the main actors
  in a broader sense it includes all actors who
  contribute to the achievement of stakeholder
  goals inside and outside the corporation

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Corporate governance a principal-agent relation
Principal Shareholder
Seeks profits, rising share price, etc.
Agent Manager
Seeks remuneration, power, esteem etc.

• Features of agency relations
• Inherent conflict of interest
• Informational asymmetry

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Shareholders relations with other stakeholders
comparison of corporate governance regimes in
Europe
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Ethical issues in corporate governance
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Activity

• Being a manager / employee in your company, do
  you see any potential conflicts of interest
  between you and the shareholders of your company?
• How would you handle these potential conflict of
  interest?

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Executive accountability and control

• A separate body of people that supervises and
  controls management on behalf of shareholders
• Dual structure of leadership
• executive directors are actually responsible for
  running the corporation
• non-executive directors are supposed to ensure
  that the corporation is being run in the
  interests of the shareholders
• Anglo-Saxon model single-tier board
• European model two-tier boards, lower tier
  executive directors, and upper tier
  supervisory board

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Executive accountability and control

• The central ethical issue here is the
  independence of the supervisory, non-executive
  board members
• No directly conflicting interests ensured by
• Typically drawn from outside the corporation
• No personal financial interest in the corporation
• Appointed for limited time
• Competent to judge the business of the company
• Sufficient resources to get information
• Appointed independently

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Executive remuneration

• Fat cat salary accusations
• E.g. average CEO salary in Britain 6.5m
• E.g. average annual pay rise for CEOs 11
• CEO increases outstrip shareholder returns
• Ethical problems with executive pay
• Performance-related pay leads to large salaries
  that cause unrest within corporations
• Influence of globalisation on executive pay leads
  to significant increases
• Board often fails to reflect shareholder (or
  other stakeholder) interests

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Ethical aspects of mergers and acquisitions

• Acceptable if results in transfer of assets to
  owner who uses them more productively
• Central concern is managers who pursue interests
  not congruent with shareholder interests
• Executive prestige vs profit and share price
• Hostile takeovers - concern when shareholders do
  not want to sell
• Intentions and consequences of mergers and
  acquisitions
• Restructuring and downsizing

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The role of financial markets and insider trading

• Speculative faith stocks
• dot-com bubble (companies not made any profit
  but worth billions on the market)
• Ethical issue bonds based entirely on
  speculation without always fully revealing amount
  of uncertainty
• Insider trading
• Insider trading occurs when securities are bought
  and sold on the basis of material non-public
  information (Moore 1990)
• Ethical arguments (Moore, 1990)
• Fairness
• Misappropriation of property
• Harm to investors and the market
• Undermining of fiduciary relationship

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The role of accountants

• Bridge asymmetric information distribution
  between shareholders and corporate actors.
• Tasked with providing a true and fair view of
  the companys financial situation
• Problematic aspects of auditors job
• Auditing companies that then go bust
• Cross-selling of consulting services to audit
  clients
• Long-term relationships with clients
• Size of the accounting firm
• Increase in competition between auditing firms

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Activity

• Some of you are studying Accounting or working in
  the audit firm. Assuming youre the partner of
  the audit firm, how would you handle the
  situation if you see irregularities in the books
  of your client?
• What are the ethical issues involved?

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Reforming governance

• Some important shortcomings in present systems of
  governance in many countries
• Main tool of reform in Europe is codes of
  corporate governance which deal with
• Size and structure of board
• Independence of supervisory or non-executive
  directors
• Frequency of supervisory body meetings
• Rights and influence of employees in corporate
  governance
• Disclosure of executive remuneration
• General meeting participation and proxy voting
• Role of other supervising and auditing bodies
• Legal basis and power of these codes varies
  dramatically
• US response Sarbanes-Oxley

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Shareholders and globalisation
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Global financial markets

• Global financial markets are the total of all
  physical and virtual (electronic) places where
  financial titles in the broadest sense (capital,
  shares, currency, options, etc.) are traded
  worldwide
• Ethical issues raised
• Governance and control
• Speculation
• Unfair competition with developing countries
• Space for illegal transactions

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The Tobin Tax

• Effort to impose control on global markets Tobin
  Tax tax on foreign currency transactions
• Not make impossible but impede international
  currency speculation
• Robin Hood Tax
• Two main problems with tax
• Global enforcement
• Does not differentiate between desirable and
  undesirable transactions

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Combating global terrorism and money laundering

• Deregulated social spaces are invitation for
  illegal financial activities
• Money laundering estimated up to 1.5
  trillion/year
• IMF recommendations for banks to help reduction
  of money laundering
• Know your customer
• Prevent criminals getting control of key
  positions in banks
• Identifying and reporting unusual/suspicious
  transactions
• Raise general awareness for regulators and staff

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Shareholders as citizens of the corporation
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Shareholder democracy

• Idea that a shareholder of a company is entitled
  to have a say in corporate decisions
• Supported by legal claim based on property rights
• Can shareholders be a force for wider social
  accountability and performance?
• Three issues to consider
• Scope of activities
• Adequate information
• Mechanism for change

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Two approaches to ethical shareholding
Ethical investment
Stakeholder activism
Multi-issue concerns
Single-issue focus
Strong financial interest
No financial concerns
Seeks engagement
Seeks confrontation
Avoids publicity
Seeks publicity
Source Sparkes (2001)
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Shareholder activism

• Buy shares in company for right to speak at the
  AGM
• Voice concern and challenge the company on
  allegedly unethical practices
• Possibility of broad media attention by
  disrupting the meeting
• Issues
• Gets involved with the enemy
• Only an option for reasonably wealthy individuals

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Ethical investment

• Ethical investment is the use of ethical, social
  and environmental criteria in the selection and
  management of investment portfolios, generally
  consisting of company shares

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Ethical investmentExamples of positive and
negative criteria for ethical investment

• Negative criteria
• Alcoholic beverages production and retail
• Animal rights violation
• Child labour
• Companies producing or trading with oppressive
  regimes
• Environmentally hazardous products or processes
• Genetic engineering
• Nuclear power
• Poor employment practices
• Pornography
• Tobacco products
• Weapons

• Positive criteria
• Conservation and environmental protection
• Equal opportunities and ethical employment
  practices
• Public transport
• Inner city renovation and community development
  programmes
• Environmental performance
• Green technologies

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Ethical Investment
Top 10 stocks held in European ethical investment
funds 2002
Position Company
1 Nokia
2 Johnson Johnson
3 Vodafone
4 GlaxoSmithKline
5 ING
6 Vivendi
7 Shell
8 Pfizer
9 BP
10 Home Depot
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Shareholding for sustainability
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The Dow Jones Sustainability Group Index

• Best-in-class approach
• Companies accepted into index chosen along
  following criteria
• Environmental (ecological) sustainability
• Economic sustainability
• Social sustainability
• Criticisms of index
• Depends on data provided by the corporation
  itself
• Questionable criteria used by index
• Focuses on management processes rather than on
  the actual sustainability of the company or its
  products

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Co-operatives as sustainable form of corporate
ownership?

• Co-operative are businesses that are owned
  neither by investors nor by their managers but
  are owned and democratically controlled by their
  workers or their customers
• Not set up to make profit but to meet the needs
  of their members
• Spanish Mondragon co-operative
• Striking contribution to sustainability

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Summary

• Principal-agent relationship between managers and
  shareholders
• Divergent interests and unequal distribution of
  information institutionalises some fundamental
  ethical conflicts in governance
• Shareholders have considerable opportunities to
  use their power over supply to influence
  corporations to behave more ethically
• Shareholders can play a role in driving
  corporations towards enhanced sustainability by
  their investment decisions at the stock market

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Overview

• The specific role of employees among the various
  stakeholder groups
• Core ethical topics of employees rights and
  duties
• Ethical issues and problems faced in
  business-employee relations
• The duties of employees and the companys
  involvement in enabling employees to live up to
  their duties
• The notion of corporate citizenship in relation
  to employees
• Basic issues and problems of managing employees
  in the different cultural and national contexts
  necessitated by globalisation
• The implication of sustainability for workplaces
  and for specific working conditions

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Ethical issues in the firm-employee relation
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Management of human resources an ethical
problem between rights and duties

• The term human resource management and its
  implications have been a subject of intense
  debate in business ethics
• Humans treated as important and costly resource
• Consequently, employees are subject to a strict
  managerial rationale of minimising costs and
  maximising the efficiency of the resource

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Rhetoric and reality in HRM
Rhetoric Reality
New working patterns Part-time instead of full-time jobs
Flexibility Management can do what it wants
Empowerment Making someone else take the risk and responsibility
Training and development Manipulation
Recognizing the contribution of the individual Undermining the trade union and collective bargaining
Teamworking Reducing the individuals discretion
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Rights of employees as stakeholders of the firm
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Duties of employees as stakeholders of the firm
Employee duties Issues involved
Duty to comply with labour contract Acceptable level of performance Work quality Loyalty to the firm
Duty to comply with the law Bribery
Duty to respect the employers property Working time Unauthorized use of company resources for private purposes Fraud, theft, embezzlement
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Discrimination

• Discrimination in the business context occurs
  when employees receive preferential (or less
  preferential) treatment on grounds that are not
  directly related to their qualifications and
  performance in the job
• Managing diversity prominent feature of
  contemporary business
• Extensive legislation
• Institutional discrimination discrimination
  deeply embedded in business

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Women in top management positionsFemale
Directors in FTSE 100 Companies 2000-2005
Source Singh, V. S. Vinnicombe. 2005
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Sexual and racial harassment

• Issues of diversity might be exploited to inflict
  physical, verbal, or emotional harassment
• Regulation reluctant
• Blurred line between harassment on one hand and
  joking on the other
• Influenced by contextual factors such as
  character, personality, and national culture
• Companies increasingly introduced codes of
  practice and diversity programmes (Crain and
  Heischmidt 1995)

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Equal opportunities and affirmative action

• How should organizations respond to problems of
  discrimination?
• Equal opportunity programme
• Generally targeted at ensuring procedural justice
  is promoted
• Affirmative action (AA) programmes deliberately
  attempt to target those who might be currently
  under-represented in the workforce
• Recruitment policies
• Fair job criteria
• Training programmes for discriminated minorities
• Promotion to senior positions

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Reverse discrimination

• In some cases, people suffer reverse
  discrimination because AA policies prefer certain
  minorities
• Justification for reverse discrimination
• Retributive justice past injustices have to be
  paid for
• Distributive justice rewards such as job and pay
  should be allocated fairly among all groups
  (Beauchamp 1997)
• Stronger forms of reverse discrimination tend to
  be illegal in many European countries

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Employee privacy

• Four different types of privacy we may want to
  protect (Simms 1994)
• Physical privacy
• Social privacy
• Informational privacy
• Psychological privacy

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Health and drug testing

• Highly contested issue
• Three main issues
• Potential to do harm
• Causes of employees performance
• Level of performance
• Despite these criticisms, such tests have
  increasingly come common in the US

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Electronic privacy and data protection

• Computer as a work tool enables new forms of
  surveillance
• Time and pace of work
• Usage of employee time for private reasons
• E-mail and internet
• Issue of privacy in situations where data is
  saved and processed electronically
• Data protection

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Due process and lay-offs

• Ethical considerations in the process of
  downsizing
• Right to know well ahead of the actual point of
  the redundancy that their job is on the line
• Compensation packages employees receive when laid
  off

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Employee participation and association

• Recognition that employees might be more than
  just human resources but should also have a
  certain degree of influence on their tasks, job
  environments, and company goals right to
  participation
• Financial participation allows employee share
  in the ownership or income of the corporation
• Operational participation
• Delegation
• Information
• Consultation
• Codetermination

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Working conditions

• Right to healthy and safe working conditions one
  of the very first ethical concerns for employees
• Dense network of health, safety and environmental
  (HSE) regulation
• Main issue is enforcement and implementation
• Newly emergent HSE issues relate to changing
  patterns of work
• Ethical issues in the context of
• Excessive working hours and presenteeism
• Flexible working patterns

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Excessive working hours and presenteeism

• Excessive work hours and their influence on the
  employees overall state of physical and mental
  health
• Presenteeism phenomenon of being at work when
  you should be at home due to illness or even just
  for rest and recreation (Cooper 1996)

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Flexible working patterns

• Another way of saying that management can do what
  it wants? (Legge, 1998)
• Non-standard work relationships
• Part-time work, temporary work, self-employment
  and teleworking (Stanworth 2000)
• Less secure legal status for periphery workers
• Potential for
• Poorer working conditions
• Increased insecurity
• Lower pay
• Exclusion from training and other employment
  benefits

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Fair wages

• The basis for determining fair wages is commonly
  the expectations placed on the employee and their
  performance towards goals
• Problems of performance-related pay (PRP)
• Risk
• Representation

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Freedom of conscience and freedom of speech in
the workplace

• Normally guaranteed by governments
• Situations in business where freedom of speech
  might face certain restrictions
• Speaking about confidential matters related to
  the firms RD, marketing or accounting plans
• Usually unproblematic, since most rational
  employees would find it in their own best
  interests to comply with company policy
• Some cases where those restrictions could be
  regarded as a restriction of employees rights
• Whistleblowing

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The right to work

• Fundamental entitlement of human beings
  established in the Declaration of Human Rights
• The right to work in a business context cannot
  mean that every individual has a right to be
  employed
• The right to work should result in every
  individual facing the same equal conditions in
  exerting this right

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Employing people worldwide

• The ethical challenges of globalisation

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National culture and moral values

• Different cultures will view employee rights and
  responsibilities differently
• This means that managers dealing with employees
  overseas need to first understand the cultural
  basis of morality in that country
• Raises the question of whether it is fair to
  treat people differently on the basis of where
  they live
• Relativism vs. absolutism
• Absolutism ethical principle must be applicable
  everywhere
• Relativism view of ethics must always be
  relative to the historical, social and cultural
  context

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Some yardsticks for ethical decision-making

• Start with human rights as a basic compass for
  providing direction
• Differences in the treatment of employees on a
  global scale depend on the relative economic
  development of the country in which the practice
  is taking place

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The race to the bottom

• Many critics argue that MNCs play a role in
  changing standards in countries
• Globalisation allows corporations to have broad
  range of choice of location
• Developing countries compete to attract foreign
  investment
• Large investors tend to choose country with most
  preferable conditions
• Lowest level of regulation and social provision
  for employee
• Leads to race to the bottom in environmental
  and social standards

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The corporate citizen and employee relations in a
varied European context
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The corporate citizen and employee relations in a
varied European context

• Extent to which corporations administer social
  and civil rights of citizens in the workplace
  varies across Europe
• Differences between Anglo-American and the
  European model of capitalism
• Continental Europe take interest of employees
  into account to a greater degree than the
  Anglo-American model
• Co-determination

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Towards sustainable development
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Re-humanized workplaces

• Alienation of the individual work in the era of
  industrialised mass production
• Brought tremendous efficiencies and material
  wealth, but have also created the prospect of a
  dehumanised and deskilled workplace
• Attempts to re-humanize the workplace
• empowering the employee
• job enlargement
• job enrichment
• Success of such schemes contested
• Suggested that humanized approach might be more
  appropriate and effective in some cultures (e.g.
  Scandinavia) than others

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Wider employment

• Large numbers of unemployed people becomes the
  norm in many countries due to mechanisation
• Threatens
• Right to work
• Social fabric of particular communities
• New technologies herald the end of work?
  (Rifkin 1995)
• From sustainability perspective ensure that what
  work there is, is shared out more equitably

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Work-life balance

• Increasing incursion of working hours into social
  life
• Growing pressure for longer hours
• Most notable amongst professionals
• Healthy work-life balance difficult to maintain
• Some solutions
• Sabbatical schemes
• Home-based teleworking
• Social benefits
• Economic benefits
• Ecological advantages

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Activity

• Ethical Dilemma 7 Off your face on Facebook?
• What is the dilemma?
• What are the main ethical issues in the Case?
• What are the main ethical arguments for and
  against the use of social networks sites for
  potential employers in this situation?
• Does this case influence the way you might use FB
  in future?
• How would you decide as the personnel manager?

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Summary

• Discussed the specific stake that employees hold
  in their organisations
• Discovered how deep the involvement of
  corporations with employees rights can be
• Corporate responsibility for protection and
  facilitation of these rights is particularly
  complex and contestable when their operations
  become more globalised
• Employees long been regarded as extremely
  important stakeholder in European business

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Enjoy the courseandGood LuckSee you next
time
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