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Business Ethics and Corporate Governance
Prof. Abhay Singh
Borivali
January, 2010
No part of this document must be reproduced for distribution without prior consent from Prof. Abhay Singh.
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Prof. Abhay Singh
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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”.
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Unit 2: Contd.....
•
Nash stated that business ethics deals with three basic areas of managerial decision
making:
(a) choices about what the laws should be and whether to follow them;
(b) choices about economic and social issues outside the domain of law; and
(c) 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.
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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.
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Unit 2: Contd....
•
Ethical and moral issues in business can be examined from at least five levels: Figure 2.1
illustrates these five levels:
(i)
Individual,
(ii)
Organizational,
(ii)
Association,
(iii) Societal, and
(iv) International.
•
The five levels are explained through the example.
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Unit 2: Contd.....,
Business Ethics Levels:
Individual Level
Organizational Level
Association Level
Societal Level
International Level
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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.
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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.
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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.
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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.
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Unit 2: Contd....
(3) 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.
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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.
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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.
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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:
1)
Mapping stakeholder relationships.
2)
Mapping stakeholder coalitions.
3)
Assessing the nature of each stakeholder’s interest.
4)
Assessing the nature of each stakeholder’s power.
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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:
(i)
Who are our stakeholders currently?
(ii)
Who are our potential stakeholders?
(iii) How does each stakeholder affect us?
(iv) How do we affect each stakeholder?
(v)
For each division & business, who are the stakeholders?
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Unit 2: Contd....
Stakeholders Map of a Large Organization
Owners
Political
Groups
Financial
Community
Activist
Groups
Governme
nt
Suppliers
Customers
Firm
Customer
Advocate
Groups
Competito
rs
Trade
Associations
Unions
Employees
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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.
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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.
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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.
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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.
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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.
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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.
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Unit 2: Contd.... Diagnostic Typology of Organizational Stakeholders
Stakeholder’s Potential for
Threat to Organization
C
o
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p
e
r
a
t
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n
w
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h
O
r
g
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Type 1
Type 4
SUPPORTIVE
MIXED BLESSING
Strategy:
Strategy:
INVOLVE
COLLABORATE
Type 2
Type 3
MARGINAL
NON-SUPPORTIVE
Strategy:
Strategy:
MONITOR
DEFEND
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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.
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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
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Unit 2: Contd....
Potential for Threat
P
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f
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C
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Type 1
Type 4
Supportive Stakeholders
Mixed Blessing Stakeholders
Strategy: Involve
Strategy: Collaborate
Suppliers
Trade Associations
Shareholders
Many Customers
Many Customers
Employees
Type 2
Type 3
Non-supportive Stakeholders
Strategy: Defend
Marginal Stakeholders
Strategy: Monitor
OEMs, ISPs, OLS, ICPs
Media
Apple (OS)
IBM (OS/2)
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Federal Government
State Government
Browser Suppliers (Netscape & Spyglass)
Sun Microsystem
AOL
Netscape
18 States
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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. .
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