Chap 12

Chapter 12: Ethical Management Systems Group Members: Madiha Siddiqui, Faiza Jamall, Mehr Azeem, Anum Tariq, Kinza Tanveer, Fahd Ali

Corporate Governance and Ethical Management Corporate (self) governance is the responsibility of the corporation’s board of directors • the ultimate purpose –the end itself-of capitalist business is to maximize long run profits and business strategy seeks to calculate the means to achieve the this ultimate objective given a company’s history, resources, market situation and other relevant circumstances. • the McKinsey Investor Survey reflects the importance attached to self- governance as an instrument of profit maximization by the market.

To summarize the corporate governance… Improved self governance is a way to respond to pressure raised by interest groups specially vocal in various strands of the anti globalization movement

Must serve the following purposes… • ensuring that managers effectively execute the strategy laid

down by the board of directors • avoiding fraud, deception and malpractices within corporation

which frustrate or increase the cost of execution of this strategy providing opportunities for shareholders to scrutinize functioning and performance of the corporation •

responding to pressure from special interest groups and from general public •

reducing pressure for increased state regulation and intervention in corporate affairs •

Must be committed to the following principles: • Fairness • Accountability • Responsibilities • Transparency

Triple Bottom Line Reporting 

The triple bottom line reporting implies that a company’s directors should report not only to the shareholders but also to all the stakeholders who are likely to be affected by the company’s policies

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Ethical Reporting should be done

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The directors are expected to outline the financial, environmental and social risks associated with the implementation of certain policies that are to be implemented

Ethical Risks 

larger the ethical risk involved in the implementation of a certain policy, the greater chance that the Board of the company will take ethical management and reporting seriously

Reputation 

Reputation helps a company to build strong brand image and brand equity. In other words, reputation builds up the goodwill of an organization

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ensures the credibility of that organization and attracts high investments and higher quality employees as well

Identifying Ethical Risks The organization’s internal risk of unethical behavior can be determined by: • • • •

Culture Policies Organizational systems Operational procedures

Identifying Ethical Risks The external factors that determine the risk of unethical behavior are: • National legal environment • The organization and its social salience of crime • Level of corruption in the society

Stakeholders Involvement 

The stakeholders’ perceptions should be considered while evaluating the strategy options and the organization should seek to coordinate its ethical perspective with that of its stakeholders

Ways of Involving the Stakeholders 

Identify the stakeholders whose ethical perspective matter

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Prioritization of stakeholders interests in terms of legal, technological, social, financial and political power of different stakeholders

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Planning stakeholder interaction and setting the objectives of what the company wants to achieve

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Prioritization of these objectives and then deciding on timelines of when to achieve them

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Formulation of a stakeholder engagement strategy (How is the information exchange between stakeholder and organization is to be structured? How much information is to be revealed? etc)

Ways of Involving the Stakeholders 

Identify • Measures of assessing the quality of information provided by stakeholders • Mechanisms to evaluate the risks pointed out by the stakeholders • Actions required to control the ethical risks pointed out • Mechanisms to evaluate the outcomes of the stakeholder involvement process in terms of costs and benefits to the organization

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The Board should develop a strategy that will: • To control the significant ethical risks • Enable the organization to take advantage of the opportunities that maybe generated through Ethical risk management.

Codes of Ethics

• A code of ethics is a statement which explicates morally acceptable behaviour within a corporation

Objectives • Raising ethical awareness and expectations (by establishing explicit ethical standards and official ‘values’) • Provide guidance for ethical decision making • Promote organizational integration by strengthening a ‘value’ based organizational culture

• The code of ethics are designed to promote the corporation’s reputation, pacify objectors and preempt legal action and state intervention • self discipline, accountability and loyalty are expected to be strengthened by the formulation and the implementation of the corporate code of ethics • codes can have a negative tone if their main purpose is the stamping out of malpractices • an aspirational code is relatively short statement of expected ethical norms

• Directional codes-sometimes called ‘ codes of conduct’ provide guidelines about ethical expectations as far as employee behaviour is concerned in specific circumstances

It typically includes: 

a statement of the rationale for the code

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expected ethical standards of behaviour

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guidelines for conduct in specified situations

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sanctions for violation of guidelines

Ethical Management Systems 

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Ethical management systems have to be constructed to operationalise ethical practice in the working life of the corporation an ethical management strategy seeks to change the behavior of corporate insiders, both managers and employees

Modes of Ethical Management

The ‘ Immoral’ Corporation Risks involved:  the long run financial costs of ethical ‘ misbehavior’ may be seriously underestimated  stakeholders may become alienated and consumer loyalty may be undermined

The Hypocritical Corporation Risks involved:  Avowed ethical stance lacks credibility specially among major stakeholders.  Distance between claims and action increase vulnerability to scandals  Employees are tempted to mimic the hypocrisy the corporation displays in the larger social environment by prioritizing self interest while pretending to promote corporate goals

The ‘ Internalizing’ corporation Risks involved:  definition and focus on corporate identity may suffer as personal autonomy is encouraged  ethical dissidence may emerge as a consequence of the encouraging of personal autonomy and “ethics talk” leaders may dispute managerial authority  Discretion granted to employees may be abused

The ‘Ethically ideal’ Corporation Risks involved:  development of a sense of superiority and ethical complacency  unrealistic ethical expectations of employees and specially of new recruits  Absence of a formal structure for ethical management

The ‘Law Abiding' Corporation Risks involved: 2) Emphasis on the letter of the law obscures the need for compliance with the spirit of the legislation and conceals the risks involved in a too literal interpretation of legal and regulatory requirements. 3) Personal autonomy and judgment of employees is undermined as all that is required is strict compliance with the letter of the law 4) The ethical code is elaborate and detailed and there is a need to continuously revise it as new unforeseen circumstances develop

Dimensions of Ethical Management Systems 

Ethical management systems need to be designed and implemented for articulating the ethical orientation of the corporation which “takes ethics seriously”

The EM system should provide ethical considerations in the following areas: • • • • • •

Communication Recruitment Orientation Performance Evaluation Training Monitoring and Disciplining

Communication    

Awareness Programs Ethics Talk Ethical Help Line Ethical Newsletters

Recruitment 

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Recruitment processes structured to select employees with appropriate ethical orientation Integrity is a measurable variable in the process However, checking integrity of employees in Pakistan through reference checking does not prove useful due to exaggeration of references

Orientation 

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Orientation programs for new entrants influence ethical orientation New entrants have an open mind and are receptive to cultural adaptation

Performance Evaluation 

Since decision making involves ethical dimensions, measuring ethical conduct can be the best performance evaluator in jobs

Training 

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Enables employees to interpret and apply the code of ethics Generic case studies are used for training Training helps identify means for stimulating ethical motivation and to develop an ethical organizational culture Involves cognitive, behavioral and managerial competence

Monitoring and Disciplining 

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Disciplinary systems usually impose punishment for major violations of the corporation’s ethical code Monitoring and evaluation of the corporation’s ethical performance can focus on regular interaction with key stakeholder groups to respond to changing expectations

Role Players 

Improving inter personal relations within the corporation is a key stimulant of ethical development

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The major role players according to Business Ethics literature are

e) f) g) h) i) j)

The CEO The ethics sponsor The ethics champion Members of the Ethics Committee of the Board The ethics manager Line managers

Reporting Systems  

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Sustainaibility/ triple bottom line reporting: Where ‘ethical reporting systems’are integrated with ‘environmental’ and ‘social resposibility’ reporting systems. Found in mature capitalist orders. Used to counter public criticism Improves relationship with stakeholders Popularity of ‘ ethical investment funds’ Its quality is dependent the quality of its measurement system.

(AA 100) provided be ISEA

Accountancy Process   

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Identify indicators to be reported. Identify sources of information. Identify methods of information collection and analysis. Set targets with respect to key indicators. Formulate an ‘improvement’ plan.

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Costs and benefits of ‘ethical reporting’ being integrated with ‘MIS’ American System’s format vs GRI system. Internal reporting vs External reporting. Pakistani perspective.