Can Corporations Have A Conscience Of Their Own?: Mim Vi 27 February 2007

Can Corporations have a conscience of their own? MIM VI 27th February 2007

Team Members Name

Roll No

Shinde Nitin

86

Verma Devendra

99

Shah Chandresh

78

Zare Shripad Chincholi Satish

103 10

Agenda •Definition •Modern Business Environment •Causes of unethical behavior & some facts •How to decide what is right or wrong? •The Solution - Institutionalizing Ethics •Conclusion

Conscience – What is it? •Conformity to one's own sense of right conduct; •Motivation deriving logically from ethical or moral principles that govern a person's thoughts and actions •Inner sense of right and wrong, as in: Wouldn't it bother your conscience to lie to your friends?

The Modern Business Environment Today, things have got more complicated 5. There is no longer one agreed moral code. Most people have a weak sense of religion or none at all. So their morals must come from somewhere else. 2. There are competing religious and social moral codes, especially for multinational companies operating in different parts of the world and employing people from different cultures. 3. The pursuit of profit has become a goal in its own right, and this puts pressures on people to compromise their standards, not just ethically, but in less important areas also. So when good behavior and good profits come into conflict, businesses find it difficult to resist the profits.

The Modern Business Environment 4. Businesses are only the people who work there; businesses don’t decide anything – it’s the people who make decisions. But businesses have group cultures with their own norms and standards. Individuals have a strong need to fit in and be accepted, so it is very difficult for any individual to stand up against attitudes and decisions they disagree with. 5. Greater wealth in the western economies means people have less tolerance for ethically dubious behavior. We are no longer so desperate for growth and employment at any cost. People are also better educated and better informed. People are less deferential ie they are less accepting of what people in authority say. So there are higher expectations of how businesses should behave. 6. Businesses have to sell to consumers and employ workers who have their own standards and opinions. They are not going to buy from or work for a business they disapprove of. So there is a competitive pressure for better behavior from businesses.

The Modern Business Environment 7. Many managers and owners have ambitions of social acceptance and recognition eg knighthoods, and so are not going to get caught behaving unethically. 8. Modern technology creates ethical dilemmas which never existed until quite recently. Medical products, and gene technologies, are a good example of this. Should parents be allowed to alter the genes of their unborn children, and should businesses sell the products to do this? The above factors all pull in different directions. It has all got a lot more difficult and a lot more complicated.

Impact of unethical conduct According to a study conducted in the U.S., unethical or illegal conduct in Corporate America results in an estimated $40-$300 billion a year in lost revenues to government, and in higher prices paid for products and services by consumers. Similarly, some estimate that 20-40% of all financial transactions in India go unreported, in the form of bribes, illegal activity and to avoid taxes.

Causes of unethical behavior •

Unethical behavior is conditional upon expectations. (expectations are derived from what people know as well as what people believe) • On ambiguous situations, where the ethically correct path is not clear, people choose the ethical path when they are reminded of ethical norms before the experiment, • Those facing an ambiguous situation without ethical guidance are more likely to transgress. • People who behave unethically without a reason are rare

What should the business do? Whatever it does, it is going to upset one group of people or another, because society at large cannot clearly answer these questions, and there is no clear guide to the business how to behave Institutionalizing of ethics is important because people will act ethically where opportunities for corruption are minimized and ethical norms are publicized

How to decide what is right or wrong for a business? Business is based on voluntary exchange for mutual benefit If any of the stakeholder is unhappy, they exit the relationship in a following way • • • •

Customers - to shop at another competitor Employees - to seek a job with a different firm that provides more of what they seek Investors - to sell their shares and invest their money in some other alternative Suppliers - to seek alternative outlets to sell their products

The voluntary exchange for mutual benefit creates the ethical foundation of business and that is why business is ultimately justified to rightfully exist within a society

How to decide what is right or wrong for a business? • This ethical foundation of business doesn't necessarily mean that everything any particular business does is always ethical, but only that voluntary exchange for mutual benefit is itself an ethical process • A business is still expected to behave ethically in its voluntary exchanges (not lie, steal, or cheat) and to be responsible for any negative impacts it may create (for example, environmental pollution) • Character of corporate organizations is defined by the character of its leaders

Morality & Ethics Morality and ethics have same roots, • mores which means manner and customs from the Latin and • ethos which means custom and habits from the Greek.

Morality & Ethics • Morality: first-order set of beliefs and practices about how to live a good life • Morality The quality of being in accord with standards of right or good conduct. • A system of ideas of right and wrong • conduct: religious morality; Christian morality. • Virtuous conduct. • A rule or lesson in moral conduct. •

Ethics: a second-order, conscious reflection on the adequacy of our moral beliefs.

• Lawrence Kohlberg using surveys, Kohlberg presented his subjects with moral dilemmas and asked them to evaluate the moral conflict. He was able to prove that• youth at various ages, as youth proceed to adulthood, they are able to progress up the moral development stages presented.

Kohlberg’s Stages of Moral Development • Kohlberg believed that individuals could only progress through these stages one stage at a time. • That is, they could not "jump" stages. • Kohlberg's ideas of moral development are based on the premise that at birth, all humans are void of morals,ethics, and honesty. • He identified the family as the first source of values and moral development for an individual. • He believed that as one's intelligence and ability to interact with others matures, so does one's patterns of moral behavior.

Ethics is long term policy •

All religion, all ethics and morals spring from the basic conflict between short term and long term: – If we limit ourselves to the short term: • Pleasures today, even at the cost of pains tomorrow, sound like a good bargain

– If we take long term into account: • Every such pleasure which is not lasting, is avoidable

•

Long term is how long: – Do we look at our lifetime? – Do we look at the lives of our children and posterity? – Do we take the eternal view of perennial life

•

Religion in its absolute form tends towards the eternal view: – All practical adaptations of ethics are essentially truncated forms of the total religious view

Long termism in business •

Issues of corporate ethics have taken the form of short-termism vs. long-termism • If businesses are focused on long term stability and growth, they are ethical: – Short term strategies, aimed at earning per share for the year in question, compromise on longer interests

• •

Warren Buffet has often stressed on long term strategies Investigations into Fannie Mae suggested that the entire senior management was intensively focused on earnings guidance • Capital market orientation of companies force them to be tempted by short term targets: – Increasingly, the entire system of how companies are evaluated by analysts, investors and stock markets leads to a short term approach – McKinsey survey [March 2006] shows that companies are focused on short term strategies due to market pressures

Can it be ethical, if it is not legal? • Is law the embodiment of ethics? • The essence of ethics is long-termism • Laws are contemporary – Not all laws are based on foundations of ethics

• Laws change every quarter; surely every year – The way present-day laws are made, they are full of errors and aberrations – Hence, it is possible to draw lines of distinction between law and ethics

Warren Buffet’s rule of thumb for ethical conduct • “…I want employees to ask themselves (when they are in doubt about whether a particular conduct is ethical or not) whether they are willing to have any contemplated act appear the next day on the front page of their local paper – to be read by their spouses, children and friends – with the reporting done by an informed and critical reporter.” [Berkshire Hathaway’s code of ethics]

Ethics are no more in religious texts; they are a part of business law • If you think business and ethics are aliens, you are mistaken • Not only are ethics respected in business, they are a part of the law • As a part of Sarbanes Oxley law, directors have to sign an ethics declaration – This law enacted in pursuance of series of corporate scandals: • Enron, WorldCom, Tyco, etc.

• In India also, this has been implemented: all directors annually sign Code of Corporate Ethics – This is part of Corporate Governance Code – Clause 49 of the Listing Agreement

Purpose • If most entrepreneurs don't create their businesses for the primary purpose of maximizing profits, then what are their primary goals?

“Service to others” • The first great purpose that great businesses express is "Service to others". • Genuine empathy leads to the development, growth, and expression of love, care, and compassion • E.g Indian Railways,Wal-Mart,NGO’s

“Excitement of discovery” • The second great purpose that animates great businesses is "excitement of discovery and the pursuit of truth". • To create a product or service that has never before existed and that advances the well-being of humanity! • Google,Intel.

“The Heroic” • The third great purpose that inspires many great businesses is "The Heroic"— changing and improving the world through heroic efforts. • Unconventional thinking • Passion • TATA,INFOSYS,RELIANCE,MICROSOFT

Bill Gates • Bill Gates announces he will leave his day-to-day role at Microsoft by July 2008, it signals an end to his running of the firm, which has lasted over 20 years. • Bill Gates and his wife Melinda found the Bill and Melinda Gates Foundation, an organization focused on tackling global health and education problems • The foundation aims to fight disease and promote education around the world, particularly in developing countries

Lee Iacco • I have found that being honest is the best technique I can use. • Right up front, tell people what you're trying to accomplish and what you're willing to sacrifice to accomplish it. • Worked on 1$ per annum for couple of years

Warren Buffet • Warrren Buffet donated a whopping 37bn$ to Bill and Melinda Gates Foundation • One of the terms of the donation is that at least one of Bill or Melinda Gates continues to be involved with the foundation

Muhammed Yunus • • • •

Founded Grameen Bank in Bangladesh in 1983 Micro financing Winner of 2006 Nobel Peace Prize Grameen operates 1,084 branches, serving 2.1 million borrowers in 37,000 villages. • On any working day Grameen collects an average of $1.5 million in weekly installments. Of the borrowers, 94% are women.

Narayan Murthy • Introduced ESOP • Early adopters of Corporate Governance • GLOBALISM

Institutionalizing Corporate Ethics A firm that seriously desires to operate in an ethical and socially conscious manner would do well to Institutionalizing its Ethics. Such Institutionalizing would requires 3 steps: • Drawing up a company policy or code of ethics. • Familiarizing its employees at all levels with the code and with the processes of ethical reflection on complex issues through special training. Programmes, or through special sessions on ethics in the course of regular tanning programmes. • Ensuring the implementations of the Code by means of a formally designated Ethics Committee of the Board of Directors.

Institutionalizing Corporate Ethics •

A code of ethics that is going to be observed cannot be drawn up by an individual or a small group of the top management and then promulgated without discussion among the employees • Having an ethical code and doing nothing to ensure its implementation only leads to cynicism on all sides. • This is, in fact, a form of unethical and deceptive behaviour. Therefore, besides having such a code, steps must be taken to see that it is implemented. • The first step is to ensure that the employees at all levels are familiar with the code and understand that it is not meant to be mere window dressing but is to be implemented and that the company is serious about the matter.

Institutionalizing Corporate Ethics Making the Code Known: •

Company’s ethical codes should be printed and copies sent to every employee.

•

The company should help employees understand the implications of the code for their daily work life

Institutionalizing Corporate Ethics Implementing the Code: The management should let it be known that unethical or anti-social conduct on the part of the employees will not be tolerated, no matter what be pretext might be, even if it is to make greater profits for the company •

Constitution of an Ethical Committee • To solve problems that arise in the grey area of ethical policy • Recommend decisions to the board of directors • To make the policy decisions of the Board known so that employees would understand the reasons behind the same • Monitor compliance with the ethical policy of the company and make periodic reports to the Board • To recommend to the Board any changes in the company’s ethical policy

Institutionalizing Corporate Ethics Ethical and Social Audit: Periodical Social Audit conducted by outsiders of unimpeachable honesty and competence

CONCLUSION Corporate Ethics is an intensely practical issue which should engage the serious attention of the management of any company today While such responsibility can impose onerous burden on the management of any corporations, it also brings its own rewards

CONCLUSION Too much of business ethics today is focused on questions of law and policy -questions about regulations, business practices, and legal requirements -such as pollution control, worker safety, truth in advertising, employee due process, social responsibilities to surrounding communities, and others. All of these, while they are important, are considered as either legal or social requirements for businesses But what gets left out in this thinking is an adequate sense of or an emphasis on personal values and integrity. Business does not operate in a vacuum. It is a subsystem of our social order. Business ethics is a more personally oriented ethics rather than a public policy or a legal contract. Ethics is what is legal, and more. Much more. It encompasses honesty, forthrightness, reciprocity, fair play, keeping commitments, and kindness -- virtues that may be too much to ask for in today's world.

It all begins with you!! As a good start, how many of the following questions can you say are true for you?

• • • • • • •

I know what I stand for, and I stand for at least 10 things. I only do what I feel is right and just. I keep my word 99% of the time. I am in optimum emotional, spiritual, and physical condition. I always leave people better off. I understand my values and orient my life around them. I have not lied or been deceptive in any of my dealings for at least a year. • My needs are met, and I don't drain others around me. • I am on time 98 % of the time. • I tell my truth, but am unconditionally constructive in my interactions with others. If you can truthfully agree with at least 8 of the questions above, your character is probably well developed and you probably already know it!

THANK YOU