Amity Business School

Amity Business School

MBA Class of 2011, Semester II
Business Environment and Strategic Analysis
Dr. Himani Sharma

1
Ethics Amity Business School

Discipline of dealing
with what is good
and bad, or right
and wrong, or with
moral duty and
obligation
 Amity Business School

Business Ethics

Business Ethics means conducting all

aspects of business and dealing with all
stakeholders in an ethical manner…
 Ethical Issues Amity Business School

Around the World

• Japan
– Payments to politicians for favorable treatment
– Concealing customer complaints
– Unequal status of women in the workplace
• Europe
– Widespread acceptance of side payments (bribes)
as a business cost
– Discriminatory workplaces
• China
– Lack of workers rights
– Weak IP protections/enforcement
 Amity Business School
Many Examples of Unethical
Corporate Behavior

• Headlines have exposed the far-from-ethical

exploits of Enron, Arthur Andersen, WorldCom,
Global Crossing, Adelphia Communications,
Tyco International, and others
• Enron’s stated values, respect, integrity,
communication, and excellence, were once
proudly etched on Enron’s paperweights
• Ruthless self-interest that motivated the leaders
of some large corporations has been revealed
 Not Just Amity Business School

Corporations
• Virtually no occupation has not had its own
painful ethical crises in recent years
• Even so, business ethics scandals continue to
be headline news stories today. Lying on
resumes, obstruction of justice, destruction of
records, stock price manipulation, cutting
corners to meet Wall Street’s expectations,
fraud, waste, and abuse, unfortunately, are
occurring all too often when those in business go
ethically wrong
 Amity Business School

Globalization, Business Ethics &

Competitive Advantage

• Globalization has brought about greater

involvement with ethical considerations and most
importantly achieving competitive advantage
through business ethics.
• Globalization and business ethics are linked as
they affect a company’s ability to commit to its
shareholders, in particular to external investors,
and preserve the trust needed for further
investment and growth.
 Amity Business School

“Ethics of Scandal” Versus

“Ethics of Strategy”
• It is increasingly important for companies to deal
with ethics as a corporate strategy that, if
uniquely implemented, could achieve competitive
advantage for the company rather than waiting to
react to possible ethical issues of importance to
the targeted stakeholders.
• It is the necessity of being ethically proactive
company rather than being ethically reactive
company.
 Amity Business School

Business Ethics as
Competitive Advantage
• As the speed of comparable tangible assets
acquisition accelerates and the pace of imitation
quickens, firms that want to sustain distinctive
global competitive advantages need to protect,
exploit and enhance their unique intangible
assets, particularly integrity (building firms of
integrity is the hidden logic of business ethics).
 Amity Business School

Business Ethics as
Competitive Advantage
(Cont.)
• “behavior that is trusting, trustworthy, and
cooperative, not opportunistic, will give the firm a
competitive advantage.”
• Sustainable global competitive advantage occurs
when a company implements a value-creating
strategy which other companies are unable to imitate.
• For example, a company with superior business
leadership skills in enhancing integrity capacity
increases its reputation capital with multiple
stakeholders and positions itself for competitive
advantage…
 A MODEL OF ETHICS Amity Business School

Sources of Our beliefs

Lead to Determine Our actions
ethical about what is
guidance right or wrong

Type I Ethics Type II Ethics

 Code of Ethics Amity Business School

• Statement of values adopted by company,

its employees and directors and sets
official tone of top management regarding
expected behavior
• Code of ethics establishes rules by which
organization lives and becomes part of
organization’s corporate culture
 Sources of Ethical Guidance Amity Business School

• Number of sources to determine what is right or

wrong, good or bad, moral or immoral
• Bible and other holy books
• Conscience
• Significant others
• Codes of Ethics
• Sources of ethical guidance should lead to our
beliefs or convictions about what is right or
wrong
Corporate and Auditing Accountability,
Amity Business School

Responsibility and Transparency Act of

2002
• Known as Sarbanes Oxley Act, primary
focus to redress accounting and financial
reporting abuses in light of recent
corporate scandals
• Criminalized many corporate acts
• Whistle-blower protections
• Prohibits loans to executives and directors
 Sarbanes-Oxley Act (2002) Amity Business School

• In US, for example, firms now operate

under Sarbanes-Oxley Act (2002)
– CEO and CFO required to approve and declare
accurate all financial statements provided to
SEC for publication
– Ensure transparency of all disclosures
– Make content appropriately accessible for audit
and verification
 Amity Business School
Organizational Ethics:
4 «bottom lines»
 Amity Business School

Example of Enron

 The scandalous nature of the Enron scandal:

the “financial fraud” gets most of the public’s
attention!
 The three other fields of ethics are
overshadowed : equity, dignity, viability
 Whereas the activities of Enron are
problematic in the 4 fields
 Amity Business School
Enron in India: an Isolated Case ?

 Other countries affected by Enron : Argentina,

Brazil, Mozambique, Poland… California…
 Other companies : Shell (Nigeria), BP
(Colombia), Mobil (Indonesia), Total (Burma);
Oracle, Merck, Qwest, Xerox, Vivendi, Worldcom…
 Characteristics of international finance
 LBOs
 acceleration of IPOs
 stock options (700% increase in 10 years)
 institutional investors (50%+)
 short term value of stock as only performance
criteria… “virtual assets”
 Amity Business School

Enron in India: an Isolated Case ?

 Characteristics of “New Economy” management:

 value associated to idealized top executives; CEOs =
500 times average employee salary; bonus gone from
3$ to 64$ per 1000$ of value in 10 years; aggressive
PR; image of “responsibility ” ; only 1.5% of stock
options paid to employees; etc.
 Complicity or cooptation of social actors:
 governments (Enron financed by 7M$ public
investments : USA, Germany, UK, France, Italy,
Japan…); financial analysts; accounting and consultation
firms; business schools; business press; host
governments; etc…
 Amity Business School

Precursory Signs (Prodomes)

 1992: rumors that the Dabohl contract signed in India was
corrupted (level of investment = 50% of the province’s
education budget)
 1993: the World Bank refuses to finance the project (cost
of energy 4 times higher than locally-produced energy)
 1995-96: the Indian government attempts to withdraw
from the project; beginning of physical violence with
assistance of police
 1997: Amnesty International report
 1997-2001: abnormal stock price growth
 1999: Human Rights Watch report
 2000: “note 16” in Enron’s financial report
 1992 – 2002: Enron : 29 allegations of corruption
 2001: resignation of VPs and CEO
 2002: report of the US House of Representatives
 Amity Business School

Response of Social Actors

to Ethical Issues
 Enron : denial; legal attack for breach of contract;
lobbying; corruption; intimidation; etc.
 Financial analysts: no investigation of allegations, nor
of “note 16”
 Accounting firms and internal audit: complicity and
cooptation
 Monitoring bodies ineffectual: SEC, FERC, board…
 Media: a few articles on tensions in India; no field
investigations, no images
 Still today: the Enron scandal: a financial scandal for
most people
 Amity Business School

Present-day Positive Signs

 Cleansing of financial markets

 Some companies enter stocks options into their
books as expenses : Boeing, G.E., G.M., Citigroup
 Some Enron top executives cooperate with justice
 Proliferation of new approaches and tools: ex:
U.N. Global Compact; CSR; social and
environmental accounting; OECD principles, Caux
Table; etc.
 36% of CEOs more aware of integral
responsibilities (but only 10% invest in CSR)
 19% of transnational companies have disinvested
from countries where Human Rights are violated
 Amity Business School

Many Questions Still Remain…

 How to bring accounting firms and financial analysts to

integrate CSR norms ?
 … guarantee that these norms represent reality ?
 … ensure company governance ?
 … make companies responsible not only towards
shareholders ?
 … “de-co-opt” media and other organizations ?
 … increase the integrity of business students and
managers ?
 … diminish the phenomenon of “ethical leveling”,
denounced by Kierkegaard in …1850 !?
Ethics and Social Responsibility Amity Business School

Around the World

Ethical Problems and
China
Concerns
• Ethical issues
– Workers not well paid (often work 12 hours a day,
7 days a week)
– Piracy of intellectual property, counterfeiting, and
industrial spying
• Human rights violations
• Use of prisoner and child labor
Ethics and Social Responsibility Amity Business School

Around the World

Ethical Problems and
United States
Concerns
• Political campaign contributions & lobbyists
• Fraud in mortgage sector
– Attitude of caveat emptor
• Rising wage inequality
– middle class wages stagnant for a decade
• Lack of health benefits for workers
– Loss of promised retirement benefits
 Globalization
Amity Business School

• Criticisms of globalization
– Offshoring of business services jobs to lower-
wage countries
– Growing trade deficits
– Slow wage growth
– Environmental and social impacts
Principles of the Global Amity Business School

Compact

http://www.unglobalcompact.org/AboutTheGC/faq.html
 Corruption Index: Amity Business School
Least and Most Corrupt Countries
 Definition Amity Business School

• Corporate social responsibility (CSR)

refers to
– Those actions taken by a firm that are
intended “to benefit society beyond the
requirements of the law and the direct
interests of the firm” (HLD, p. 65)
• CSR is generally concerned with
– Working conditions
– The social and environmental impacts of
corporate activities (externalities)
 Why is CSR Important? Amity Business School

• MNCs are becoming more concerned

about CSR. Why?
–Is it from the goodness of their hearts?
–Is it due to external pressure?
–Is it good for business?
• Is there a trade-off between financial
performance and social responsibility?
 MNC Concerns and Amity Business School

Response
• Why ethics is vital for business
– Increased media and public attention
– Ethical failures can have damaging effects on
workers, managers, investors
– An ounce of prevention….
• MNC responses
– Adoption of internal codes of conduct
– Working through business alliance
– Supporting the adoption of global standards
CSR and Sustainability Amity Business School

• In The Triple Bottom Line (2006),

Andrew Savitz wrote,
–“The truly sustainable company would
have no need to write checks or ‘give
back’ to the local community, because
the company’s daily operations would
not deprive the community, but would
enrich it.”
 Trust in Leaders Amity Business School

NGO leaders 52

Leaders at the U.N. 42

Spiritual/religious leaders 41

Leaders of Western Europe 36

Managers of the global economy 36

Managers of the national economy 35

Executives of MNCs 33

Leaders of the U.S.A. 27

0 10 20 30 40 50 60
Average Across All 15 Countries Surveyed
Adapted from Figure 3-1: Trust in Leaders: Percentage Saying “A Lot” and “Some Trust”
 Perceptions of MNCs Amity Business School

• TI’s 2006 Global Corruption Barometer

– Most corrupt: Political parties and
legislatures
– In the middle: the business sector
– Most trusted: religious bodies and non-
governmental organizations (NGOs)
• MNCs face pressure to pay greater
attention to CSR
– NGOs mobilize public support and
opposition
– MNCs expected to adhere to higher
standards
 The Role of NGOs Amity Business School

• Emergence of organized civil society

– NGOs have altered the global business
environment
– NGO activism has lead to important
changes in corporate behavior and
governance
• Major criticisms of MNCs by NGOs
– Exploitation of low-wage workers
– Environmental abuses
– Intolerable workplace standards
 Legal and Amity Business School
Regulatory Issues
• Foreign Corrupt Practices Act (http://
www.usdoj.gov/criminal/fraud/docs/dojdocb.html)
– Illegal to influence foreign officials through
• Personal payment
• Political contributions
– When bribes removed, MNCs more willing to do business in
that country
• Restrictive bureaucratization
– Government controls often inefficient and uncorrected
– Local politics often prevail over national concerns
– Privatization
 Corporate Governance Amity Business School

Stakeholders
Stakeholders
Corporate
Corporate Distribution
Distribution of
of •• Board
Board
Governance
Governance rights
rights and
and •• Managers
Managers
Structure
Structure responsibilities
responsibilities •• Shareholders
Shareholders

The system by which business

Spells
Spells out
out the
the corporations are directed and
rules
rules and
and
procedures controlled
procedures

•• Setting
Setting objectives
objectives
Making
Making •• Means
Means ofof attaining
attaining objectives
objectives
decisions
decisions •• Monitoring
Monitoring performance
performance
 International Assistance Amity Business School

• Governments and corporations increase

collaboration to provide assistance to
communities and locales through global
partnerships
• Best “investments”
– Controlling and preventing AIDS
– Fighting malnutrition
– Reducing subsidies and trade restrictions
– Controlling malaria
 Regulation of Trade Amity Business School
and Investment
• Individual countries use legal and regulatory policies to
affect the international management environment
• If a country is perceived to engage in unfair trade
practices (WTO and similar agreements)
– Government support (subsidies)
– Require MNCs to accept local partners
• Response may be
– Retaliatory tariffs
– Restrictive trade regulations
Millennium Development Goals
Amity Business School