1. Session 1 What is business ethics?
Sungkyunkwan University (SKKU) International Summer Semester (ISS) 2017
“Global Synergy: Innovating through Collaboration”
Business Ethics
Session 1
What is business ethics?
Prof. J. G. Frynas
27 June 2017

2. Classroom Task: Royal Dutch/Shell
Please read the Ethics in Practice case: Two crises influence the strategy of Royal Dutch/Shell Why was Royal Dutch/Shell waiting so long to take ethical and environmental stakeholder concerns seriously?

3. Growth of ethics and social responsibility
In 1988, 18% of FTSE 100 companies had an ethical code of practice.
In 2006, 90% of FTSE 100 companies had an ethical code.
In 2002, 45% of Global 250 had a CSR report.
In 2013, 93% of G250 had a CSR report.
In 2011, 20% of India’s 100 largest companies had a CSR report.
In 2013, 73% of India’s 100 largest companies had a CSR report.

4. Global vs. International
Globalization…at its simplest means crossing borders. Capital crosses borders; companies cross borders; whole industries cross borders; people, ideas, diseases, even governments cross borders. (The Economist, 2001)
But can we accept such a definition of globalization?
People, ideas and private companies have crossed borders for hundreds of years. There is a major difference b. internationalization and globalization…

5. Internationalization
Internationalization refers to…
processes involving the simple extension of economic activities across national boundaries. It is, essentially a quantitative process which leads to a more extensive geographical pattern of economic activity. (Peter Dicken)

6. Globalization Globalization is…
different from internationalization processes. Globalization involves not merely the geographical extension of economic activity across national boundaries but also - and more importantly - the functional integration of such internationally dispersed activities. (Peter Dicken)

7. The losers of globalization
Critics argue that globalization has exacerbated inequality, as winners of globalization (esp. workers with esoteric skills and MNEs) have further concentrated their power. Consider:
Out of 6 billion people, 2.8 billion live on less than $2 a day, 1.2 billion live on less than $1 a day, as the richer got richer.
The number of chronically hungry people in the world declined steadily in the 1970s and 1980s, but has been increasing since the early 1990s; 800 million people go to bed hungry every night.
Unskilled workers are vulnerable to job losses (call centre migration or textile jobs) as their bargaining power vs. employers declined.
Inequality is also deepening within the developed countries; e.g. 35% of US jobs described as “grunge jobs”.
The Growing Divide: The world’s 475 billionaires equal the combined income of the bottom half of mankind

8. Even the CIA is worried…
Globalization will create “an even wider gap between regional winners and losers than exists today. [Globalization’s] evolution will be rocky, marked by chronic volatility and a widening economic divide… deepening economic stagnation, political instability, and cultural alienation. [It] will foster political, ethnic, ideological, and religious extremism, along with the violence that often accompanies it”.
(US Central Intelligence Agency study Global Trends 2015)
So can/should business address social issues?

9. Ethics and CSR: Globalization Context
Rise of deregulation from the 1980s (including changing ideology and GATT/WTO):
more areas of society are left to private sector
reluctance or inability of some countries to impose higher labour or environmental standards
no global institutions to enforce global standards.
Rise of global communications and non-governmental organizations and call for businesses to fill the void left behind by the state. 9

10. New technologies and ethical / social concerns
Risk of damaging global reputations for the MNE
Ability to co-ordinate global NGO campaigns

11. What is business ethics?
Business ethics is the study of business situations, activities and decisions where moral issues of right and wrong are addressed.
Andrew Crane and Dirk Matten
We can distinguish ethics from other important business concepts, e.g. :
Corporate Social Responsibility (CSR)
Sustainable Development
Accountability

12. Ethics vs. morality vs. ethical theory
Morality is concerned with the norms, values and beliefs embedded in social processes which define right and wrong for an individual or a community.
Ethics is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for any given situation.
These rules and principles are called ethical theories.

13. The relationship between morality, ethics and ethical theory
…that can be applied to any situation.
… to produce ethical
theory …
Ethics rationalizes morality …
Morality
Ethics
Ethical theory
Potential solutions to ethical problems

14. Differences across organizational types
Large corporations
Small businesses
Civil society organizations
Public sector organizations
Stakeholders
Main priorities in addressing ethical issues
Financial integrity, employee/customer issues
Financial integrity, employee/customer issues
Delivery of mission to clients; integrity of tactics; legitimacy and accountability
Rule of law, corruption, conflict of interest; procedural & accountability issues
Approach to managing ethics
Formal, public relations and/or systems-based
Informal, trust-based
Informal, values-based
Formal, bureaucratic
Responsible and/or accountable to
Shareholders and other stakeholders
Owners
Donors and clients
General public, higher level government organizations
Main constraints
Shareholder orientation; size and complexity
Lack of resources and attention
Lack of resources and formal training
Inertia, lack of transparency

15. Differences between large and small businesses
Classic large corporation
Typical Small Business
Ownership and control
Shareholders principal, CEO agent
Owner-manager as principal and agent; Personal and family influence
Governance and reporting
Formalized and codified. Professionalization of management
Informal, personal, no codification
Transactions (both internal and external transactions)
Contract based. Profit maximization and shareholder value
Relationship based in embedded community networks; Reputation, status and legacy; Importance of trust
Organisational structures
Hierarchical and role orientated
Flat, flexible, owner-manager power. Personalized responsibility
Source: Spence, L., Frynas, J. G., Muthuri, J. and Navarre, J. (2017) Research Handbook on Small Business Social Responsibility, Edward Elgar.

16. Differences across levels of analysis
Four different levels of business ethics have been identified based on what type of business and how their actions are evaluated.
1. The society level, which defines ethical behavior and assesses the effect of business on society.
2. The industry level, which suggests that different industries have their own set of ethical standards (e.g., chemical industry vs. pharmaceutical industry)
3. The organizational level, under which different companies have their own set of ethical standards
4. The individual manager level, at which each manager and other corporate participants are responsible for their own ethical behavior
CONSEQUENTLY, one feasible way to judge ethical behavior is to focus on determinants of business ethics and behaviour such as corporate culture, incentives, opportunities, and choices.

17. Ethical responsibility in global supply chains

18. Classroom Task: Ethical dilemma
Please read the story No such thing as a free drink?
Please divide into groups of 3-4 and discuss these questions:
Who is wrong in this situation? Jenna, you, both?
How would you handle this situation?
Does the bad treatment from her boss condone Jenna’s behaviour? Does it help to explain her actions or your actions?

19. Business ethics is necessary for business (1)
In order to function well, businesses must have basic ethical standards in everyday business activities, such as honesty, trustworthiness and cooperation.
Think about these types of transactions:
repeated contracts for buying and selling (e.g. honesty of suppliers)
cooperation between firms on sharing an asset (e.g. trust and cooperation between the firm and its business partner)
ensuring product safety (e.g. trust between the firm and customers)

20. Business ethics is necessary for business (2)
In general terms, business requires people’s trust in order to function well – to retain an open, global trading system.
However, trust in business has eroded around the world.
Consider the following results of the 2017 Edelman Trust Barometer – a global survey on trust published in 2017, which is based on 33,000 respondents in 28 countries.

28. Trust in business versus other groups
Doctors
Teachers
Professors
Judges
Clergymen/Priests
Scientists
TV news readers
The Police
Ordinary persons
Business leaders
Politicians
Journalists
Source: UK survey Ipsos Mori/RCP, based on 2,074 British adults aged 15+, November 2006.

29. So why are business ethics and trust important?
Core ethical values
Enhances trust & reputation
&
Sustains financial performance
Influences conduct
Expressed in a Code of Ethics
The actions of one person can bring down the whole org
Ethic of greed can be reinforced
Culture is the context for decision making
Reduces risk
Reinforces corporate culture

30. Ethics and the law
Both ethics and the law are about issues of right and wrong.
The law is the codification of ethical rules into legal rules.
However, the law does not cover all possible situations and normally provides minimum acceptable standards of behaviour.
For example, the law prohibits a company to engage in outright fraud, tax evasion or selling health-destroying products. But the law does not prohibit selling lethal weapons to oppressive regimes, testing products on animals or avoiding tax through offshore accounts – all issues that some people feel strongly about.
In some sense then, business ethics begins where the law stops – situations where there is no societal consensus over right and wrong.

31. ETHICS LAW ETHICAL BUT ILLEGAL? LEGAL AND ETHICAL LEGAL BUT IS IT
EXAMPLES:
A MAN STEALS BREAD TO FEED HIS CHILDREN
A COMPANY REFUSES TO PARTICIPATE IN HUMAN RIGHTS ABUSES
EXAMPLES:
A GROUP ON FACEBOOK SPREADS UNTRUE STORY
A COMPANY AVOIDS PAYING INCOME TAX
© J. G. Frynas, 2017

32. Mandatory versus discretionary
Law is mandatory- you are obliged to obey
Ethics is discretionary – you have a choice – this choice is determined by ethical values and standards of behaviour
Hard sanctions versus soft sanctions:
Law has hard sanctions (e.g. prison sentence, fine, injunction)
Ethics has soft sanctions (e.g. ostracism, reciprocity, reputation)

33. Ethics and Compliance Ethics Prevention Principles based Values driven
Implicit
Spirit of the law
Discretionary
Compliance
Detection
Law based
Fear driven
Explicit
Letter of the law
Mandatory

34. Classroom Task: Law versus Ethics
Please consider areas of business behaviour which are permitted by law but may raise ethical concerns. Please form groups of 3-4 and provide at least five examples of business behaviour which is legal but may be considered by some people as unethical.

35. What are important business ethics topics?
Supply chain management
Late payments
Speak up policies (whistleblowing)
Gifts & entertainment
Conflicts of interest
Facilitation payments
Remuneration issues
Harassment & discrimination
Work/home balance
Lobbying & donations
AFTER DESCRIPTION OF EACH, GET A VOTE TO CHOSE (3?) MOST POPULAR ISSUES FOR CAMEOS.
Have enough copies of each option ready and cartoon slide if there is one.
Divide class into groups to do one each – identify issues (why its an ethical issue) and actions
Summarise the cameo back to group and do on issues and actions on flipchart
Supply chains
Business Ethics issues within supply chains can be extremely complex.
For example, tracing the origins and route of chocolate products from growing cocoa beans through to the end user is almost impossible.
Forced/bonded labour is another issue that crops up in the supply chain. It is excluded by the ILO but still occurs in certain parts of the world.
Free association – the right to join a trade union
Health and safety standards
Child labour. The Tetley example. In India, children are allowed to work at the age of 14, although the ILO advocates no younger than 16. So far Tetley has agreed with local legislation, although it has been under pressure from NGOs.
Wage levels and working hours
Discrimination
Vulnerability – e.g. sweatshops using immigrant labour (harvesting crops in southern England using illegal immigrants from eastern Europe). It is not just a third world issue.
It is very important to map your supply chain to know what happens where.
If you identify issues, they can be classified as:
company-specific. In which case you can choose to change the company that supplies you.
Industry-specific. It is difficult to change the whole industry by yourself.
Country-specific. You need to take a long-term view.
Communication about what you are doing is very important, e.g. if you are auditing local companies. Auditing is well received because auditors say what is going well, as well as what needs improvement.
Relationships with campaigning NGOs are beginning to become more positive, and are moving away from the confrontational stance of recent years.
Money-laundering
We all know what it is – or do we?
Ask for definitions and come up with a group definition.
Banks have a responsibility to detect and prevent.
The ethical issue for the banks is whether or not to comply with legal requirements or to go beyond this level to show good faith.
Issues to consider are what are the social benefits of going ahead with a deal despite risks of money laundering, then deciding how to mitigate those risks.
Conflicts of interest. What is necessary, whatever the conflict of interest, is to DISCLOSE AND DISCUSS.
Conflicts of interest could happen in any of the stakeholder relationships.
Source: Philippa Back, Institute of Business Ethics

36. Why are companies engaging in business ethics?
Personal motives of CEO or company founder or owners:
Religious values
Humanistic ideals
Political convictions
Ecological concerns
Business case for ethics:
Improves trust and morale internally
Helps to ensure consistent conduct
Reduces ‘integrity’ and operational risks
Strengthens external reputation
Over the long term will benefit the bottom line

37. Ethical behaviour and interdependence
Albert Carr said in the Harvard Business Review in 1968 : “As long as the company does not transgress the rules of the game set by law, it has the legal right to shape its strategy without reference to anything but its profits.” However, a company is interdependent with a wider political, social and cultural environment. Just as senior executives have their own ethical standards, a company cannot ignore the ethical standars of business partners, employees, investors, customers, etc.

38. Ethical behaviour and company performance (1)
Demonstrates the company’s concern for values & ethics
Lessens risk
impacts staff behaviour & corporate culture
Company creates & embeds their code of ethics
Increases trust
Why have one (IBE survey results? ) ?
essential ingredient to corporate governance
risk management – encourages the exploring of issues before they happen.
guidance to employees on shared obligations and responsibilities
encourages consistent and confident behaviour
raises awareness of systems in place – whistle blowing hotline, register of gifts etc
public and investor confidence – Does Ethics Pay!
A code sets out:
Levels of commitment
Non-negotiables and aspirations
Businesses have a code of ethics because this is a high-risk area, where it is easy to tarnish reputation through behaviour mistakes.
If you do the right thing you will be a hero for 15 minutes. If you do the wrong thing you will be a villain for life. [origin of quote?]
Nestle knows all about being labelled a villain. The label still stick, nearly 25 years after the original behaviour was revealed.
IBE has an Illustrative Code but companies need to have the confidence to develop their own.
Enhances financial performance
Provides guidance to staff
Source: Philippa Back, Institute of Business Ethics

39. Ethical behaviour and company performance (2)
There is empirical evidence based on academic studies that large companies with codes of ethics:
are consistently more admired by their peers.
are rated higher than those without codes on their ability to reduce non-financial risks.
perform better financially than companies that do not have codes of ethics.
Should such business arguments enter ethical considerations?