Module :-2 Managerial Ethics

Managerial ethics Managerial ethics are focused on workplace behavior ethics and ethics in leadership. Ethics and ethical reasoning are necessary characteristics for business culture Ethics is difficult to define in a precise way. In a general sense, ethics is the code of moral principles and values that governs to behaviors of a person or group with respect to what is right or wrong

There are two broad areas associated with the concept of managerial ethics 1) Managerial mischief 2) Moral mazes. "managerial mischief" includes "illegal, unethical, or questionable practices of individual managers or organizations, as well as the causes of such behaviors and remedies to eradicate them" the "moral mazes of management" include the numerous ethical problems that managers must deal with on a daily basis, such as potential conflicts of interest, wrongful use of resources, mismanagement of contracts and agreements, and misuse of power and influence.

Factors influencing workplace ethics Individual moral standards Influence of mangers and co-workers Effective control

Managing ethics in workplace Integrated ethics management Pro-active role Open communication Atmosphere of trust Code of conduct & ethics Policies /procedures Group decision – making Cross – functional teams Ombudsperson Grievance redressal

Ethical issues in workplace Ethical dilemma Business relationship Conflicts interest Fairness and honesty

Ethical dilemma A situation that arises when all alternatives choice or behaviors have been deemed undesirable because of potentially negative consequences making it difficult to distinguish right from wrong.

CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large

Definitions and Relationships Corporate social responsibility (CSR) is the process by which businesses negotiate their role in society In the business world, ethics is the study of morally appropriate behaviors and decisions, examining what "should be done” Although the two are linked in most firms, CSR activities are no guarantee of ethical behavior Companies can engage in CSR activities even while they are acting in unethical ways. For example, Enron was a champion of community involvement, but used off-balance-sheet partnerships to bilk investors and eventually ruin the company. Similarly Parmalat helped many Parma people and gave $2 million to restore the sixteenth-century Correggio frescoes at Parma Cathedral. But he diverted hundreds of millions from publicly held Parmalat to family owned companies like soccer team Parma AC and Parmatour. Companies can say one thing and do another.

Need for C.S.R The iron law responsibility Long term business interest Better public image Conversion of resistance into resources Avoid government regulation or control Avoid misuse of natural resources and economic power Minimize the environmental damage Wealth creation

Key developments of C.S.R Increased stakeholder awareness Transparency and reporting Value chain Codes ,standards, and indicators CSR and corporate governance Investor Pressure and Market- based incentives CSR ‘’ROI”

Arguments in Favor of CSR Long –run survival of the business concerns Profitable for the business concerns Moral and social commitment Improvement in public image Helps in avoiding government regulation Resources

Arguments Against CSR Business is an economic activity Quantification of social benefits Cost –benefit analysis Lack of skill and competence Transfer of social costs Increase in price Reduction in wage Reduction in profit Sub- optimal utilization of resources

Is CSR the same as business ethics? There is clearly an overlap between CSR and business ethics Both concepts concern values, objectives and decision based on something than the pursuit of profits And socially responsible firms must act ethically The difference is that ethics concern individual actions which can be assessed as right or wrong by reference to moral principles. CSR is about the organization's obligations to all stakeholders – and not just shareholders.

There are four dimensions of corporate responsibility Economic - responsibility to earn profit for owners Legal - responsibility to comply with the law (society’s codification of right and wrong) Ethical - not acting just for profit but doing what is right, just and fair Voluntary and philanthropic - promoting human welfare and goodwill Being a good corporate citizen contributing to the community and the quality of life

Social Responsibility... an organization’s obligation to maximize its positive impact on stakeholders and to minimize its negative impact includes legal, ethical, economic, and philanthropic (discretionary) dimensions

Legal Dimension... refers to obeying governmental laws and regulations civil law: rights & duties of individuals and organizations criminal law: prohibits specific actions and imposes fines and/or imprisonment as punishment for breaking the law

Ethical Dimension... behaviors and activities that are expected or prohibited by organizational members, the community, and society (not codified into law) standards, norms, or expectations that reflect the concern of major stakeholders

Models of CSR Philanthropic model :- European model:-

Philanthropic model Focus on the nonprofit needs and its mission Focus on tax benefit to company Little relation to the business of business Making money for shareholders Competing for executives, and by default, company’s attention

Indian models of CSR Trusteeship model Stakeholder model

Theories of CSR Feminist theory Stakeholder theory Social contract theory Ethics and nature Pragmatism

Ethics :- Individuals and The Organisation

ORGANISATION AND THE INDIVIDUALS Rational organisations are those wherein the activities of a number of people are coordinated for the accomplishment of some common explicit purpose or goal, through the division of labour and function along with a hierarchy of authority and responsibility. In a rational model, ethics focus on the contractual obligations of the employer and employees.

Cont… Political organisations, seldom look merely at the formal lines of authority and communication within the organisation. They do not behave in a purely rational way and do not accept that rationality is sacrosanct in achieving the business goals and objectives. These organisations view business as a system of competing power and formal and informal lines of communication for coalitions. In a political model, the central ethical issues are guided by the constraints of morals or laws of the land.

Co-existence of Political and Rational Organisation

Cont… Caring organisations are not engaged in the pursuit of profits and personal gains, but are involved in caring for those for whom the organisation has been designed, with whom it interacts, and the people in the organisation itself.. In a caring organisation, the employers may grow closer to their employees and seek the ways to serve and care for whom they exist, e.g. employees, customers, society, stakeholders, etc.

Moral and ethical issues of individuals in an organisation are influenced by, and dependent on, the nature of the organisation and its work culture.

RIGHTS AND OBLIGATIONS OF INDIVIDUALS IN THE ORGANISATION In business, ethical behaviour and the obligations of individuals are mutual relationships based on the model of organisation, the law of the land, contractual duties and obligations, work environment, and codes of general ethics that are acceptable as moral and rational to general public. Employees at all levels are obliged (duty-bound) to the company to behave ethically as a part of their contracts and the relationships outlined by what is commonly called the ‘law of agency’. Law of agency specifies the legal duties of employees (agent) towards their employers (principals) and prohibits the agent (employees) to act in conflicts of interests with those of the principal (employer).

Cont… In India, the Industrial Disputes Act, 1947 and other labour laws have been enacted to protect trade union rights and the rights of individuals in employment. These laws are quite explicit about the duties and obligations of employees and employers as well.

ORGANISATION AND THE RESPONSIBILITY FOR ETHICS An organisation has the responsibility of designing ethical policy and programmes with a holistic view such that they serve and complement each part of the business organisation. Individuals, in turn, have the responsibility to follow and abide by the policy direction and programmes in their respective areas of work and responsibility. Ethics management mechanisms provide the people of the organisation with the moral power – more commonly known as ‘whistle blowing’ – to prevent any kind of wrongdoing.

Creative Accounting What is creative accounting? Creative accounting, also called aggressive accounting, is the manipulation of financial numbers, usually within the letter of the law and accounting standards, but very much against their spirit and certainly not providing the “true and fair” view of a company that accounts are supposed to. Can be done through: Accounting induced operational and financial decisions Choice of accounting policies Manipulation of accounting estimates Fraudulent transactions

Impact of Creative Accounting Creative accounting can be used to signal internal information Helps outsiders to understand more about the firm Creative accounting can be used to “undo” temporary situations, that are not expected to persist US Government and manipulations

Impact of Creative Accounting Creative accounting can be used unethically, to manipulate markets and benefit the preparer Impact is often a failure of markets Price protection: Would you buy leather jackets from the trunk of a car? At what price? Intent is what matter!

Solutions to the Creative Accounting problem Limit the flexibility within GAAP Transactions can be designed around/within GAAP May reduce the usefulness of financial statements in general Change performance measure  Cash flow is a hard measure Cash flow is easier to manipulate  This is why we have earnings Give accountants an ethics course

Solutions to the Creative Accounting problem Impose legal liability on those who get caught Securities regulators may not have the resources How do you define something illegal? Sarbanes-Oxley Act Let the market forces work Grant firms that commit to full disclosure a lower cost of capital Penalize firms that do not through a higher cost of capital (price protect) Increase investors’/analysts’ training “Remove” “bad” managers from the job market

Summary of cases of creative accounting in India

Whistle-blowing

Definition of Whistle-Blowing One who reveals wrong-doing within an organization to the public or to those in positions of authority. One who discloses information about misconduct in their workplace that they feel violates the law or endangers the welfare of others. One who speaks out, typically to expose corruption or dangers to the public or environment.

Types of Whistle-Blowing Internal Whistle-Blowing When an individual advocates beliefs or revelations within the organization. External Whistle-Blowing When and individual advocates beliefs or revelations outside the organization.

Characteristics of a Whistleblower Utilitarian Uninterested in Altering Their Behavior Allows Own Attitudes and Beliefs to Guide Them Often are Well Educated and Holds Professional Positions

Effects of Whistle-Blowing Forced to leave organization/demotion Credibility ruined Family, health, and/or life in jeopardy Outrage and divisiveness of people directly or indirectly involved Physical or psychological isolation Organization experiences loss of money, restitution, productivity, and positive reputations. Incarceration

Protection Laws The Whistleblower Protection Law ~ 1989 The Whistleblower Act ~ 1994

2002: Year of the Whistleblower Cynthia Cooper WorldCom Coleen Rowley FBI Sherron Watkins Enron http://foi.missouri.edu/whistleblowing/whistle2002/persons.html This is where three women of ordinary demeanor but exceptional guts and sense come into the picture. TIME magazine named Sherron, along with two others, Coleen Rowley of the FBI and Cynthia Cooper of WorldCom, as their 2002 Persons of the Year, for being "people who did right just by doing their jobs rightly." These women were for the 12 months just ending what New York City fire fighters were in 2001: heroes at the scene, anointed by circumstance. They were people who did right just by doing their jobs rightly—which means ferociously, with eyes open and with the bravery the rest of us always hope we have and may never know if we do. Their lives may not have been at stake, but Watkins, Rowley and Cooper put pretty much everything else on the line. Their jobs, their health, their privacy, their sanity—they risked all of them to bring us badly needed word of trouble inside crucial institutions. Democratic capitalism requires that people trust in the integrity of public and private institutions alike. As whistle-blowers, these three became fail-safe systems that did not fail. For believing—really believing—that the truth is one thing that must not be moved off the books, and for stepping in to make sure that it wasn't, they have been chosen by TIME as its Persons of the Year for 2002. Sherron Watkins is the Enron vice president who wrote a letter to chairman Kenneth Lay in the summer of 2001 warning him that the company's methods of accounting were improper. In January, when a congressional subcommittee investigating Enron's collapse released that letter, Watkins became a reluctant public figure, and the Year of the Whistle-Blower began. Coleen Rowley is the FBI staff attorney who caused a sensation in May with a memo to FBI Director Robert Mueller about how the bureau brushed off pleas from her Minneapolis, Minn., field office that Zacarias Moussaoui, who is now indicted as a Sept. 11 co-conspirator, was a man who must be investigated. One month later Cynthia Cooper exploded the bubble that was WorldCom when she informed its board that the company had covered up $3.8 billion in losses through the prestidigitations of phony bookkeeping.

Sherron Watkins Former Vice President of Enron Corporation Alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company Warned that Enron 'might implode in a wave of accounting scandals.' Testified before Congressional Committees from the House and Senate investigating Enron's demise. Lauded in the press for her courageous actions, but left her job at Enron after a few months when she wasn't given much to do Sources: http://www.icmtalent.com/lect/images/watkinss.jpg http://www.icmtalent.com/lect/profiles/50094.html Sherron Watkins is the Enron vice president who wrote a letter to chairman Kenneth Lay in the summer of 2001 warning him that the company's methods of accounting were improper. In January, when a congressional subcommittee investigating Enron's collapse released that letter, Watkins became a reluctant public figure, and the Year of the Whistle-Blower began. Enron (22 August 2002) * In 15 years, Enron grew from nowhere to be America's seventh largest company, employing 21,000 staff in more than 40 countries. * Enron’s success turned out to have involved an elaborate scam. * Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts so they didn't show up in the company's accounts. * As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into Chapter 11 bankruptcy in December. * More than six months after a criminal inquiry was announced, the guilty parties had still not been brought to justice. * Source: http://news.bbc.co.uk/1/hi/business/1780075.stm

Coleen Rowley FBI staff attorney Wrote 13-page memo to FBI Director about pre-9/11 intelligence in May 2002 Testified for the Senate Judiciary Committee Concerned the FBI was becoming more bureaucratic and micromanaged Helped government focus on better intelligence management Fanny Pack Coleen Rowley is the FBI staff attorney who caused a sensation in May with a memo to FBI Director Robert Mueller about how the bureau brushed off pleas from her Minneapolis, Minn., field office that Zacarias Moussaoui, who is now indicted as a Sept. 11 co-conspirator, was a man who must be investigated. http://archives.cnn.com/2002/ALLPOLITICS/06/06/terror.lapses/

Cynthia Cooper WorldCom’s Director of Internal Audit Her team discovered $3 billion in questionable expenses Met with 4 executives to track down and explain the undocumented expenses Disclosed findings, WorldCom stock frozen, corporate credit rating went from B+ to CCC- Remained as VP of Internal Audit, not promoted, no gratitude, resented by employees One month later Cynthia Cooper exploded the bubble that was WorldCom when she informed its board that the company had covered up $3.8 billion in losses through the prestidigitations of phony bookkeeping. During an audit in May 2002, Cooper discovered that some of WorldCom's financial practices were suspect. The company, then based in Clinton, Miss., had been classifying operating costs as capital expenditures, thereby inflating its profits. She took her findings to the audit committee of WorldCom's board in June 2002. Within days, the board fired its CFO, Scott Sullivan, and revealed to the investing public—and government regulators—that the company had overstated its profits by what ultimately proved to be $11 billion. It was the biggest corporate fraud in U.S. history. Excerpts from Accounting Fraud at WorldCom, Harvard Business School Case Study 9-104-071 On July 21, 2002, WorldCom Group, a telecommunications company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees, filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. Between 1999 and 2002, WorldCom had overstated its pretax income by at least $7 billion, a deliberate miscalculation that was, at the time, the largest in history. The company subsequently wrote down about $82 billion (more than 75%) of its reported assets. WorldCom’s stock, once valued at $180 billion, became nearly worthless. Seventeen thousand employees lost their jobs; many left the company with worthless retirement accounts. The company’s bankruptcy also jeopardized service to WorldCom’s 20 million retail customers and on government contracts affecting 80 million Social Security beneficiaries, air traffic control for the federal Aviation Association, network management for the Department of Defense, and long-distance services for both houses of congress and the General Accounting Office. Cooper’s internal audit team, by the beginning of June 2002, had discovered $3 billion in questionable expenses, including $500 million in undocumented computer expenses. On June 11, Cooper met with Sullivan (CFO), who asked her to delay the capital expenditure audit until after the third quarter. Cooper refused. On June 17, Cooper and Glyn Smith, a manager on her team, went to Vinson’s office and asked her to explain several questionable capital expense accounting entries that Internal Audit had found. Vinson admitted that she had made many of the entries but did not have any support for them. Cooper immediately went to Yates’s office, several feet away, and asked him for an explanation. Yates denied knowledge of the entries and referred Cooper to Myers, who acknowledged the entries and admitted that no accounting standards existed to support them. Myers allegedly said the entries should not have been made, but that once it was started, it was hard to stop. On June 20, Cooper and her internal audit team met in Washington, DC with the audit committee and disclosed their findings of inappropriate capitalized expenses. When Sullivan could not provide an adequate explanation of these transactions, the board told Sullivan and Myers to resign immediately or they would be fired. Myers resigned. Sullivan did not and was promptly fired. On June 25, 2002, WorldCom announced that its profits had been inflated by $3.8 billion over the previous five quarters. Nasdaq immediately halted trading of WorldCom’s stock. Standard and Poor’s lowered its long-term corporate credit rating on WorldCom bonds from B+ to CCC-. On June 26, the SEC initiated a civil suit of fraud against WorldCom. Attorneys in the US Justice Department launched criminal investigations into the actions of Bernie Ebbers, Scott Sullivan, David Myers, Buford Yates, Betty Vinson, and Troy Normand. Cynthia Cooper remained as WorldCom’s vice president of Internal Audit and was named by Time magazine, in December 2002, as one of its “Persons of the Year”. She was not promoted, and no senior company executive had ever personally thanked her. Several employees resented Cooper, believing that her revelation of accounting irregularities had led to WorldCom’s bankruptcy.

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The Manjunath case 27 year old Engineer and MBA from IIM-L Marketing manager in IOCL at Lakhimpur Kheri A “nightmare” for petrol outlet owners “Manju was not the typical business school wonder boy who had a way with cold statistics and fuzzy logics” – Prof. Debashish Chatterjee, IIM-L

People involved Dinesh Seth & Rajendra Singh – Owner & Manager of L D Service station respectively Monu Mittal - son of the owner of Mittal outlet District supplies Inspector Villagers in Lakhimpur village

Sequence of events “Most pumps in UP are political gifts given by politicians to their goons” PDS scam and siphoning of Kerosene widespread in Lakhimpur Mittal outlet and L D Service station closed for a month after failing adulteration tests. Monu’s license is cancelled Manjunath gets informants among Lakhimpur Villagers

The plot on Nov 19th Manjunath checks samples in Mittal outlet at 4 PM Leaves at 6 PM leaving the measuring instrument in the outlet Monu gathers accomplices to kill Manjunath and waits till 8 PM for him to return Manjunath turns up at 9:30 PM and gets murdered

Aftermath Mittal sentenced to death in an extremely fast judgment and other accused get life term Manjunath Shanmugam trust Manjunath Shanmugam integrity award Relook into the subsidy mechanism of Kerosene by the Govt. Govt. resolution empowering Central Vigilance Commission – Whistle blower protection act

Learnings Personal and External Whistle blowing done by Manjunath Rule Utilitarianism was followed Actions coincide with Kant’s Deontology – Universaliziblity and Reversibility

Conclusion Whistle blowing is beyond being morally defensible “What life is this if we have nothing to die for?” - Manjunath Strong faith in system, justice and reason force the whistleblowers’ actions

Delineations of Ethical & Professional Responsibilities ACA TCA LPC SBEC The association is to clarify the nature of ethical responsibility held by members. A licensee shall not make any false, misleading, deceptive, fraudulent, or exaggerated claims about licensee’s services and services of the mental health organization. The Texas educator shall comply with standard practices and ethical conduct toward students, colleagues, school officials and parents. The association is to establish principles that define ethical behaviors that all members should adhere to. A licensee shall discourage a client and others whom the license does not control from effectiveness of services, practice, qualifications, associations or products. The Texas educator should respect and obey the law, demonstrate personal integrity, and exemplify honesty The Code of Ethics will serve as the basis for processing ethical complaints initiated against members of the association. The Texas educator should exemplify just and equitable treatment.

A Closer Look ACA TCA SBEC H.2 When a Counselor possesses doubt as to whether or not a Counselor is acting in an ethical manner take appropriate action. D.1.C Counselors must alert their employers to conditions that may be potentially disruptive or damaging to the counselors professional responsibilities or that may limit their effectiveness. b.1.A,B,F /b.2.B, D,F,G The educator shall not knowingly engage in deceptive practices, misappropriate, divert, use monies for personal gain, or falsify records or coerce others to do so. The educator shall not harm others by making false statements, interfere w/ political or professional responsibilities, use coercive means of special treatment, or retaliate against any individual who has filed a complaint.