Business Ethics and Corporate Governance Prof. Abhay Singh

SFIMAR Business Ethics and Corporate GovernanceProf. Abhay Singh Borivali January, 2010 No part of this document must be reproduced for distribution without prior consent from Prof. Abhay Singh. Prof. Abhay Singh

Unit 2: Relationship between ethics and Corporation Excellence: The September 11 attacks on the World Trade Centre and Pentagon moved the U.S to war and realigned international stakeholders. Crises and issues about security, ideologies, cultures, ethics, and national identities are occurring. (1) What is business ethics? Why does it matter? • Business ethicists ask, “what is right and wrong, good & bad, and harmful and beneficial regarding decisions and actions in and around organizational activities? • Learning to think, reason, and act ethically can enable us to first be aware and recognize a potential ethical problem. • Laura Nash defined business ethics as “the study of how personal moral norms apply to the activities and goals of commercial enterprise”. Prof. Abhay Singh

Unit 2: Contd..... • Nash stated that business ethics deals with three basic areas of managerial decision making: • choices about what the laws should be and whether to follow them; • choices about economic and social issues outside the domain of law; and • choices about the priority of self interest over the company’s interests. • Business and governments operate in technological, legal, social, economic, and political environments. • Understanding the effects of these environmental forces on industries and organizations (profession and jobs) is a first step in identifying stakeholders and the issues that different groups must manage in order to survive and compete. Prof. Abhay Singh

Unit 2: Contd.... • Business ethics deals with what is “right and wrong” in organizational decisions, behaviour, and policies. • Business ethics provides principles and guidelines that assist people in making informed choices to balance economic interests and social responsibilities. (2) Levels of Business Ethics: • Since business leaders and professional must manage a wide range of stakeholders inside & outside their organizations, understanding the levels of issues that stakeholders face facilitates our understanding of the complex relationship within and among participants involved in solving ethical problems. Prof. Abhay Singh

Unit 2: Contd.... • Ethical and moral issues in business can be examined from at least five levels: Figure 2.1 illustrates these five levels: • Individual, • Organizational, • Association, • Societal, and • International. • The five levels are explained through the example. Prof. Abhay Singh

Unit 2: Contd....., Business Ethics Levels: Prof. Abhay Singh

Unit 2: Contd.... Case Study: RU 486 (i) At the individual level, Dr. Sakiz felt pressured to question his own ethics as both as a medical doctor and as an advocate of women’s rights. On another level, as a business professional, he had an obligation to help his company earn a profit. It was suggested that he may have had a crisis of conscience and an ethical dilemma because he had to choose between his job and his values. If an ethical issue involves or is limited to an individual’s responsibilities, that person may examine his or her own ethical motives and standards before choosing a course of action. In Dr. Sakiz’s case, his values became transparent internationally. His eventual decision reflected his choice of his business ethic over his personal ethic. Prof. Abhay Singh

Unit 2: Contd.... (ii) At the organizational level, ethical issues arise when, for example, a person or group is pressured to overlook the wrongdoings of his or her peers in the interest of company harmony or when an employee is asked to perform an unethical or illegal act to earn a division or work unit profit. Sales professionals are sometimes pressured to meet quotas, in which case they, as individuals, may be faced with committing illegal, if not unethical, decisions to offer kickbacks and lie to customers. If an ethical issue arises at the organizational level, the organizational members should examine the firm’s policies or taking action. Here, Dr. Sakiz felt responsible as a leader of the company. Representing the company, he had to face host of questions from his stakeholders. Prof. Abhay Singh

Unit 2: Contd.... (iii) At the association level, Dr. Sakiz had to decide whether he, as a physician, was violating his code to save life, while also acting in the role of a business leader. He was, no doubt, also well aware of the Hippocratic oath and the values it places on human life. Conflicts of interest and conscience- as discussed earlier-can arise in such situations. (iii) At the societal level, laws, norms, customs, and traditions govern the legal and moral acceptability of behaviours. Business activities acceptable in Italy or Turkey may be immoral or illegal in U.S & vice versa. While RU 486 may have met the Chinese govt’s needs for population control in 1988, the U.S govt. may not have been able to accept the consequences of allowing sales of the drug, given opposing stakeholder’s belief and political power. Prof. Abhay Singh

Unit 2: Contd.... The early history of RU 486 story illustrated how ethical levels can quickly overlap: what started as a distribution question became an international ethical and moral dilemma. It is interesting to note that, eventually, the FDA approved distribution of RU 486 in the US. Certain restrictions do apply. Not all stakeholders agreed to this decision. Anti-abortion and pro-life groups strongly opposed the FDA’s ruling. Prof. Abhay Singh

Unit 2: Contd.... • Stakeholder Management Approach: The stakeholder approach is a response to the growth and complexity of understanding and study of the modern corporation and its influence on the environment, the economy, and the public. The stakeholder approach includes nonmarket forces that affect organizations and individuals, such as moral, political, legal, and technological interests, as well as economic factors. Case Study: Microsoft: Predator or fierce Competitor. Prof. Abhay Singh

Unit 2: Contd.... The stakeholder approach provides a framework that enables users to map and, ideally, manage the corporation’s relationship (present & potential) with groups to reach “win-win” collaborative outcomes i.e making moral decisions that benefit all constituencies within the constraints of justice, fairness, and economic interests. In reality, unfortunately, this does not always happen. Stakeholders: • A stakeholder is “any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization.” • Focal stakeholder, is the company or group that is the center and focus of our analysis. In the Microsoft case, the Microsoft company and its top managers were the focal stakeholder. Prof. Abhay Singh

Unit 2: Contd.... • The primary stakeholders of a firm include its owners, customers, employees, and suppliers. • Secondary stakeholders include all other interested groups, such as the media, consumers, lobbyists, courts, governments, competitors, the public and society. Stakes: • A stake is any interest, share, or claim that a group or individual has in the outcome of a corporation’s policies, procedures, or actions toward others. • Stakes and claims may be based on legal, economic, social, moral, technological, ecological, political, or power interests. • The stakes of stakeholders are not always obvious or explicit. The economic viability of competing firms can be at stake when one firm threatens competition in a market. • The physical health of a community can be at stake when a corporation decides to empty toxic waste near residential sites. Prof. Abhay Singh

Unit 2: Contd.... How to execute a stakeholder analysis: The stakeholder approach is a pragmatic way of identifying and understanding multiple political, social, legal, economic, and moral claims of many constituencies. The Stakeholder analysis is a series of steps aimed at the following tasks: • Mapping stakeholder relationships. • Mapping stakeholder coalitions. • Assessing the nature of each stakeholder’s interest. • Assessing the nature of each stakeholder’s power. Prof. Abhay Singh

Unit 2: Contd.... 5) Constructing a matrix of stakeholder moral responsibilities. 6) Developing specific strategies and tactics. 7) Monitoring shifting coalitions. Step 1: Mapping Stakeholder Relationships: The following set of questions will help us: • Who are our stakeholders currently? • Who are our potential stakeholders? • How does each stakeholder affect us? • How do we affect each stakeholder? • For each division & business, who are the stakeholders? Prof. Abhay Singh

Unit 2: Contd.... Stakeholders Map of a Large Organization Prof. Abhay Singh

Unit 2: Contd.... Step 2: Mapping Stakeholder Coalitions: • After identifying and mapping the stakeholders the next step is to determine and map any coalitions that have formed. • Coalitions among and between stakeholders form around issues and stakes that they have or seek to have in common. • Interest groups and lobbyists sometimes join forces against a common “enemy”. Competitors also may join forces if they see an advantage in numbers. • In reference to the Microsoft eg. notice that the State Attorneys General formed a strategic coalition against Microsoft. Mapping actual and potential coalitions around issues can help anticipate & design strategic responses toward these groups before and after they form. Prof. Abhay Singh

Unit 2: Contd.... Step 3: Assessing the nature of each Stakeholder’s interest: • Step 3 & 4, which is assessing the nature of each stakeholder’s power, overlap to some extent. By identifying the “supporters” (active & non-active, or uncommitted) and the active “opposition”, we have already begun to assess the relative power of each stakeholder’s interests. • In the MS example, the opposition , or those who may seek to disrupt and change Microsoft’s ways of doing business, include Netscape, Spyglass, and the U.S Department of Justice. Who else would you add to those in opposition to MS? • By systematically completing this audit through brainstorming about the actions, beliefs, cooperative potential, and stakes of your stakeholders, we can create a broader, more objective picture of the situation, the players, and firm’s potential and actual role in the situation. Prof. Abhay Singh

Unit 2: Contd.... Step 4: Assessing the nature of each stakeholder’s power: • This part of the analysis asks, “what in it for each stakeholder? Who stands to win, lose, or draw over certain stakes?” • Three types of power stakeholders (1) Voting power, (2) Political power and (3) Economic power. • For example, owners and stockholders can vote their choices to affect the firm’s decisions in the Microsoft case. • Federal, state, and local governments can exercise their political power by adjoining the ongoing lawsuits or by originating new ones. Prof. Abhay Singh

Unit 2: Contd.... • Consumers can exercise their economic power by boycotting MS products or buying and using other operating systems, browsers, and software. • What other sources of stakeholder power exists? • Bill Gates apparently tried to exercise his market power when he approached Netscape early on and suggested, according to Netscape officials, that they work together to share the market in the expanding browser domain. Prof. Abhay Singh

Unit 2: Contd.... Step 5: Identifying Stakeholder Ethics & Moral Responsibilities: • Next step is to determine the ethics, responsibilities, and moral obligations, the company has to each stakeholder. • For example, MS’s CEO may see the firm’s economic responsibility to the owners (as stakeholders) as “preventing as many costly lawsuits as possible.” • Legally, the CEO may want to protect the owners and the executive team from corporate as well as personal liability and damage; this would entail proactively negotiating disputes outside the courts, if possible. • Ethically, the CEO may keep the company’s stockholders and owner current, as to his or her ethical thinking and strategies to show responsibility toward all stakeholders. Prof. Abhay Singh

Unit 2: Contd.... Step 6: Developing Specific Strategies and tactics: Using results from the preceding steps, we can now proceed to outline the specific strategies and tactics with each stakeholder. • First, we should consider whether to approach each stakeholder directly or indirectly. • Second, we need to decide whether to do nothing, monitor, or take offensive or defensive position with certain stakeholders. • Third, we should determine whether to accommodate, negotiate, manipulate, resist, avoid, or “wait & see” with specific stakeholders. • Finally, we should decide what combination of strategies should be used with each. • A useful typology for both identifying and deciding on strategies to employ in a complex situation. Prof. Abhay Singh

Unit 2: Contd.... Diagnostic Typology of Organizational Stakeholders Stakeholder’s Potential for Threat to Organization Cooperation with Organization Prof. Abhay Singh

Unit 2: Contd.... • The ideal strategic situation for the focal corporation is type 1, the supportive stakeholder with a low potential for threat and high potential for cooperation. Here the strategy of the focal company is to involve the supportive stakeholder. • Think of both internal & external stakeholders who might be supportive and who should be involved in the focal organization’s strategy, such as employees, suppliers, board members, the parent company, and vendors. • In contrast, there is type 3, the non-supportive stakeholders who shows a high potential for threat and a low potential for cooperation. • The suggested strategy in this situation calls for the focal organization to defend its interests and reduce dependence on that stakeholders. Prof. Abhay Singh

Unit 2: Contd.... • A type 4 stakeholder is a “mixed blessing”, with a high potential for both threat and cooperation. • This stakeholder calls for a collaborative strategy. In this situation, the stakeholder could become supportive or non-supportive. Collaborative attempts to move the stakeholder to the focal company’s interests is the goal. • Finally, type 2 is the marginal stakeholder. This stakeholder has a low potential for both threat and cooperation. • Such stakeholders may not be interested in the issues of concern. The recommended strategy in this situation is to monitor the stakeholder, to “wait & see” and minimize expenditure of resources, unless and until the stakeholder moves to a mixed blessing, supportive, or non-supportive position. Example of MS in diagnostic typology of Organizational Stakeholders Prof. Abhay Singh

Unit 2: Contd.... Potential for Threat Potential for Cooperation Prof. Abhay Singh

Unit 2: Contd.... Step 7: Monitoring Shifting Coalitions: • Because time and events can change the stakes and stakeholders, we need to monitor the evolution of the issues and actions of the stakeholders. • Media exposure, politics, economics, legal actions, and public reactions change stakeholder strategies and positions on issues. . Prof. Abhay Singh

Business Ethics and Corporate Governance Prof. Abhay Singh