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Business Ethics The Managerial Approach to Business Ethics.

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1 Business Ethics The Managerial Approach to Business Ethics

2 Roadmap 1. What is the role of managers in corporate ethics? Leadership and example. 2. Corporate culture: raising the ethical performance of a corporation by an inch. 3. Control systems: steering corporations away from ethical failure. 4. Stakeholders: Merck and Enron as examples.

3 The point  ‘Rather than ask “What was going on with those people to make them act that way?”, we ask, “What was going on in that organization that made people act that way?”’ James Waters  If we want individuals to be ethical, then we must support them.

4 Jackall’s five rules of corporate morality (survival) (1) Don’t go around your boss; (2) even if your boss invites dissent, tell him or her what he or she wants to hear; (3) if the boss wants something dropped, drop it; (4) anticipate the boss’s wishes - don’t force him or her to act the boss; (5) do not report what the boss does not want reported, cover it up and remain silent.

5 Raising ethical culture by an inch  Say you are a new manager. As the managing director walks out the door for her annual holidays, she asks you to deliver a strategy to raise the ethical standards of the corporation by an inch by the time she returns.  What would you do?

6 TWO BASIC RULES 1. Identify (and state) your rules of operation clearly. Make commitments and values explicit. 2. Avoid organisational hypocrisy. Don’t subvert formal requirements with informal laxity (see Stonecipher case below).

7 Leadership at every level  The single biggest factor in sustaining ethical conduct is example from superiors.  The CEO sets the example and all other managers should follow.

8 Institutional supports CodesLeadership & mentoring Ethics training Incentives and disincentives Ethics officersHotlines CommitteesOmbudsman Newsletters Performance standards

9 Use examples  Reward good behaviour and never punish it, even if brings problems - Sherron Watkins; Cynthia Cooper.  Recognise good conduct and use it in staff training.  Punish poor behaviour and never reward it, even if it brings results - Enron.  Use examples of ethical failure in training, but balance them with examples of excellence.

10 CODES  State fundamental values & establish a common floor akin to the rule of law  Can combine general principles & prescriptions  Must be used frequently to be effective  Should be part of induction and development  Must cover whole organisation  Can be developed at top

11 Harry Stonecipher  Became CEO of Boeing to clean up corruption and refurbish the corporation’s ethical image.  Championed a strong code of ethics, which among other things, forbade relationships between subordinates and their managers.  Had a brief affair with a vice-president who did not report to him.  This became known and he had to resign. His judgment was questioned, he had embarrassed Boeing by breaching his own code, and there is always the shadow of litigation …

12 Auditors/Consultants  Auditors are supposed to attest to accounts independently.  The big firms ran lucrative consultancy businesses and Andersens was a classic example. It complied with pressures from Enron, Sunbeam and others to provide good audits.  Its consultancy prospered until spun off into Accenture.

13 Law and regulation  Lobby for a regulatory environment appropriate to the times. A good company don’t have to be ethical alone and lose competitive advantage because it is ethical.  Self-regulate and be firm about it. Codes are only one form of this. Policies and procedures complement ethical directives and exhortations.

14 Classic Symptoms Preceding Collapse  Overstatement of the value of assets, and understatement of liabilities in financial reports.  Use of related party transactions to disguise the reality, e.g. to create a false impression about earnings.  Delays in financial reporting.  Continuing financial losses and cash flow deficiencies  Weak management  Inadequate management succession planning  Looming debt payments & concealment of bad debts  Inadequate capital expenditure programs  Lack of adequate information systems  Shareholder disputes

15 In failing corporations 1. There is a "kill the messenger" ethos in the organisation - justifies distortion and concealment of information. 2. There is a low degree of confidence in the accuracy of internal reports. 3. Despite claims to doing the right thing, in the last analysis, top management does the most expedient thing. 4. Employees do not know of or refer to written ethics policies. 5. The operative value of the organisation is: if it's legal it's ethical. 6. Top management's stated concern for ethics is for public relations. 7. Managers while basically truthful are willing to deceive in order to accomplish organizational or personal goals. 8. Managers do not believe there is an obligation to be candid where could harm personal or organizational goals. 9. People who ignore ethics but produce bottom line results get promoted.

16 Criteria for legitimate whistleblowing  You have good evidence of an immediate and serious issue of public concern in your organisation.  You have tried reporting the matter to the proper authorities without success.  Your intervention is likely to make a difference.  You believe the damage resulting from your action will be proportionate to the resolution of the issue.

17 Whistleblowing: a last resort  Public exposure of a danger to public interest  Permitted when a serious issue is not addressed within an organisation  Not internal  Involves a betrayal of kinds  Is a costly remedy  Motives of whistleblower not central  Difficult to legislate protection for

18 Sherron Watkins to Ken Lay Dear Mr. Lay, Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay? … I am incredibly nervous that we will implode in a wave of accounting scandals. My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax. Skilling is resigning now for "personal reasons" but I would think he wasn't having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than resign in shame in two years. … I firmly believe that the probability of discovery significantly increased with Skilling's shocking departure. Too many people are looking for a smoking gun.

19 Sherron Watkins Enron heroine Do you think that post-Enron America is a more ethical place? “Not really. We are building more Enrons, but we don't want to admit it. I fall into Warren Buffett's camp when he says that C.E.O. pay is the acid test. When C.E.O. pay has been reduced, then I'll believe that our business leaders have adopted a spirit of corporate reform.”

20 A legal remedy: the Sarbanes - Oxley Act  Sarbanes-Oxley (2002) passed in wake of Enron and other collapses to strengthen corporate governance and restore investor confidence and public trust in accounting and reporting practices.  Establishes enhanced governance and management standards for all US publicly listed companies and public accounting firms.  Establishes the Public Company Accounting Oversight Board under the SEC to oversee public accounting firms and issue accounting standards.

21 The effect …?  Accounting firms and lawyers are booming on the back of Sarbanes-Oxley.  In May 2004, RateFinancials found that most financial statements did not reflect public companies' true financial states.  In November it found that related party transactions were still common.

22 Misconduct encouraged by  A lack of a system of laws that clearly state obligations and prohibitions  A diminished sense of personal responsibility  A lack of enforcable laws and regulations  A a small risk of being detected  A insufficient penalties  A a climate of sharp practice  A a lack of ethical recognition

23 But law and enforcement  Will not replace ethics and a personal sense of responsibility  Will not prevent corruption by themselves  Still rely upon a level of trust: fear will make people risk averse and stifle business.  Are expensive means of securing compliance

24 Al Dunlap  ''He is the logical extreme of an executive who has no values, no honor, no loyalty, and no ethics. And yet he was held up as a corporate god in our culture.”  At Scott Paper he fired 35% of the workforce and sold the company to Kimberly-Clark.  Recruited to Sunbeam in July 1996, drove the stock price up steeply by sacking half the corporation’s 12,000 workforce, closing 12 of its 18 factories, and inflating inventories.  The stock price collapsed and he was sacked in June A cruel and uncaring man he was over rated as a manager by the markets and media.

25 An Example of Excellence: Merck and Mectizan  In 1979, Merck scientist William Campbell, suggested that the company’s veterinary product, Ivermectin, should be appraised to combat ‘river blindness’ in humans.  River blindness is a disease of the poor of tropical Africa and South America caused by a parasitic worm, which burrows beneath the skin and breeds there. These subcutaneous parasites colonise the skin to such an extent that people are driven to suicide by the itching they cause.

26 Justifiable goodness?  If Campbell was correct, then Merck would be able to cure river blindness cheaply and safely.  But development - trials etc. - would cost $M100 and as the afflicted were poor, there would be no profit in developing it.  The point in Merck’s case is that it held the patent for a potential life saver: could it lock it up? Would it not protect its patent by developing a human version?  An example of direct corporate humanitarian investment

27 Merck’s decision  Merck did develop the drug, Mectizan, and tried to interest the US and UN agencies in supporting its distribution. Eventually, after 10 years of development, they not only gave the drug away, but paid for its distribution.  Was this decision justifiable?

28 The case of Enron  Kenneth Lay, former chairman and CEO of Enron, claims that he and the board were misled by CFO, Andrew Fastow (who has pleaded guilty to fraud and is to be sent to jail).  A clutch of Enron officers have pleaded guilty to crimes, so what does that say about the CEO and board’s governance?

29 Not just rotten apples  Enron’s culture, which included strategies such as the ‘war for talent’, licenced officers to act on their own initiative but to act without regard for probity. This made it possible for Enron to manipulate the Californian energy market.  It adopted a veritable thicket of questionable accounting practices, such as booking its energy trades at full value rather than at the value of its margin, thus inflating profits.

30 The culture at Enron  It was clear that Enron routinely engaged in sharp practice, that it sought to disguise this from investors and the financial world by a complex and an all but unintelligible structure of accounts and partnerships.  It is clear that Enron encouraged maverick behaviour by sacking the lowest performing 10% of staff and promoting the best 10%. Results were all that counted.

31 Conversing with Enron traders Kevin: So the rumour’s true? They’re fuckin’ takin’ all the money back from you guys? All those money you guys stole from those poor grandmothers in California? Kevin: So the rumour’s true? They’re fuckin’ takin’ all the money back from you guys? All those money you guys stole from those poor grandmothers in California? Bob: Yeah, grandma Millie, man. But she’s the one who couldn’t figure out how to fuckin’ vote on the butterfly ballot. Bob: Yeah, grandma Millie, man. But she’s the one who couldn’t figure out how to fuckin’ vote on the butterfly ballot. Kevin: Yeah, now she wants her fuckin’ money back for all the power you’ve charged right up - jammed right up her ass for fuckin’ $ 250 a megawatt hour. Laughter Kevin: Yeah, now she wants her fuckin’ money back for all the power you’ve charged right up - jammed right up her ass for fuckin’ $ 250 a megawatt hour. Laughter  These guys were beating up grandmothers, not regulators, legislators or legal draftsmen.

32 Corporate ethics  Should not have to rely on individuals to do the jobs of regulators.  Should support individuals in their ordinary ethical commitments.  Should be exemplified in formal and informal practices in the organisation.  Should be led from the top and throughout management structure.  Can always be improved by an inch.


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