ACT1110

Governance, Business Ethics,

Risk Management and Internal
Control
Business Ethics
1. The Importance of Business Ethics
2. Stakeholder Relationships and Corporate
Governance
3. Emerging Business Ethics Issues
4. Ethical Decision Making
The Importance of Business Ethics
Learning Objectives
• Explore conceptualizations of business ethics from an
organizational perspective (business ethics in the eyes of the
organization)
• Provide evidence that ethical value systems support business
performance (prove that applying business ethics helps the
business achieve its objectives)
Background – The need for Business Ethics
• The ability to recognize and deal with complex business
ethics issues has become a significant priority in 21st century
companies.
• In recent years, a number of well-publicized scandals (e,g.
ENRON SCANDAL) resulted in public outrage about
deception and fraud in business and a demand for improved
business ethics and corporate responsibility.
Background – The need for Business Ethics
• In response to this crisis, business decisions and activities
have come under greater scrutiny by many different
constituents, including consumers, employees, investors and
regulators.
• In addition, new legislation and regulations (e.g. Sarbanes
Oxley Act of 2002) designed to encourage higher ethical
standards in business have been put in place.
Quick look at Sarbanes Oxley
• The U.S. Sarbanes-Oxley Act of 2002 was passed by the U.S.
Congress to protect investors from the possibility of
fraudulent accounting activities by corporations. Every
organization is required to use a recognized internal controls
framework for its Sarbanes-Oxley program.

• Section 404 of said law mandates that all publicly traded

companies must establish internal controls and
procedures for financial reporting and must document,
test, and maintain those controls.
Background – The need for Business Ethics
• The field of business ethics deals with questions about
whether specific business practices are acceptable. For
example,
• Should a salesperson omit facts about a product’s poor safety
record in a sales presentation to a client?
• Should an accountant report inaccuracies that he discovered in an
audit of a client, knowing that the auditor will probably be fired by
the client for doing so?
• Should an automobile tire manufacturer intentionally conceal
safety concerns to avoid a massive and costly tire recall?
Background – The need for Business Ethics
• Regardless of the legality of these questions, others will
certainly judge the actions taken in such situations as right
or wrong, ethical or unethical.

• By its very nature, the field of business ethics is

controversial, and there is no universally accepted approach
for resolving its issues.
Background – The need for Business Ethics
•The goal is to help you recognize and
understand ethical issues and use your current
values and convictions when making business
decisions so that you think about the effects of
those decisions on business and society.
The Basic Concepts in Business Ethics (1 of 2)
• Morals: Personal philosophies that define right and wrong.
• Business ethics: Organizational principles, values, and norms
that may originate from individuals, organizational statements, or
from the legal system that primarily guide individual and group
behavior in business.
• Principles: Specific boundaries for behavior that often become
the basis for rules (human rights, freedom of speech).
• Values: Enduring beliefs and ideals that are socially enforced
(trust and integrity, accountability).
The Basic Concepts in Business Ethics (2 of 2)
• Moral dilemma: Two or more morals in conflict with one another.
• Value dilemma: Two or more beliefs/ideals in conflict with one
another.
• Ethical culture: Organizational principles, values, and norms that
are adhered to by the company and its personnel.
• Corporate social responsibility: Actions associated by firms with
various stakeholder interests as a priority (other than investors).
• Sustainability: Relates specifically to the environment (air, land,
and water).
Bottom Line for Business Ethics
(business ethics help:)
• Firm survival
• Profitability, revenues, sales
• Stakeholders: customers, employees, channel members
(manufacturers, wholesalers, retailers)
• Contribute to societal goals: community, country, world
Why Study Business Ethics?
• Identify ethical issues.
• Recognize approaches for resolving ethical issues.
• Cope with conflicts between your own personal values and those
of the organization in which you work.
• Gain knowledge to make more ethical business decisions.
The Benefits of Business Ethics
• The field of business ethics continues to change rapidly as more firms
recognize the benefits of improving ethical conduct and the link
between ethics and financial performance.

• Research and examples from the business world demonstrate that

building an ethical reputation among employees, customers, and the
general public pays off.
The Benefits of Business Ethics (1 of 4)
• Ethics Contributes to Employee Commitment
• Willingness to sacrifice for the organization. (OTY)
• Increases group creativity and job satisfaction; decreases turnover.
• Less pressure to compromise ethical standards,
• Greater absence of misconduct.
• Strong community involvement increases loyalty and positive self
identity.
• The more a company is dedicated to taking care of its employees (ethics), the more
likely is that the employees will take care of the organization.
The Benefits of Business Ethics (2 of 4)
• Ethics Contributes to Investor Loyalty
• Provides a foundation for efficiency, productivity, and profits.
• Negative publicity, lawsuits, and fines can lower stock prices, diminish
customer loyalty, and threaten a company’s long-term viability.
• Demand for socially responsible investing is increasing.
• Ethical conduct results in investor loyalty and can contribute to success that
supports even broader social causes and concerns.
The Benefits of Business Ethics (3 of 4)
• Ethics Contributes to Customer Satisfaction
• High levels of perceived corporate misconduct decreases customer trust.
• Companies viewed as socially responsible increase customer trust and
satisfaction.
• Consumer respondents stated they would pay more for products from
companies that give back to society in a socially responsible and
sustainable manner.
• When an organization has a strong ethical environment, it usually focuses on the
core value of placing customer’s interests first.
The Benefits of Business Ethics (4 of 4)
• Ethics Contributes to Profits
• Better business performance.
• Part of strategic planning toward obtaining the outcome of higher
profitability.
• Business ethics is becoming more than just a function of compliance; It’s
becoming an integral part of management’s efforts to achieve
competitive advantage.
The Benefits of Business Ethics
Employee
Commitment
and Trust

Investor Loyalty
Ethical Culture Profits
and Trust

Customer
Satisfaction
and Trust
Practice Test – Yes or No
1. Business ethics focuses mostly on personal ethical issues
2. Business ethics deals with right or wrong behavior within a particular
organization.
3. An ethical culture is based upon the norms and values of the
company.
4. Business ethics contributes to investor loyalty.
5. The trend is away from cultural or ethically based initiatives to legal
initiatives in organizations
6. Investments in business ethics do not support the bottom line
Practice Test – Yes or No
1. No. Business ethics focuses on organizational concerns (legal and ethical – employees,
customers, suppliers and society).

2. Yes. That stems from the basic definition.

3. Yes. Norms and values help create an organizational culture and are key in supporting or
not supporting ethical conduct.

4. Yes. Many studies have shown that trust and ethical conduct contribute to investor loyalty.

5. No. Many businesses are communicating their core values to their employees by creating
ethics programs and appointing ethics officers to oversee them. (e.g. BestBuy)

6. No. Ethics initiatives cause consumer, employee, and shareholder loyalty and positive
behavior that contributes to the bottom line.
5-minute break
Stakeholder Relationships and
Corporate Governance
Learning Objectives
• Identify stakeholders’ roles in business ethics
• Explore the role of corporate governance in structuring ethics in
business
Relationships and Business (1 of 2)
• Business ethics issues, conflicts, and success revolve around
relationships.

• Building effective relationships is considered one of the more

important areas of business today

• A business exists because of relationships among employees,

customers, shareholders or investors, suppliers and managers who
develop strategies to attain success.
Relationships and Business (1 of 2)
• In addition, an organization usually has a governing authority (BOD)
that provides oversight and direction to make sure that the
organization stays focused on objectives in an ethical, legal, and
socially acceptable manner.

• When unethical acts are discovered in organizations, it is often found

that in most instances, there is knowing cooperation or compliancy
that facilitates the acceptance and perpetuation of unethical conduct.

• Therefore, relationships are not only associated with organizational

success but also in organizational misconduct.
Relationships and Business (1 of 2)
• Relationships are associated with both organizational success and
misconduct.
• Businesses exist because of organizational relationships between
employees, customers, shareholders, and the community.
Relationships and Business (2 of 2)
• Stakeholder framework identifies the internal stakeholders (board of
directors, managers and employees) and the external stakeholders
(customers, special interest groups and regulators) who agree,
collaborate, and engage in confrontations on ethical issues.

• Most ethical issues exist because of conflicts about what is right and
wrong among and within stakeholder groups.

• This framework Allows organizations to identify, monitor, and respond to

the needs and expectations of stakeholder groups.
Stakeholders Define Ethical Issues in
Business (1 of 3)
• Approaches to stakeholder theory:
1. Normative: Identifies ethical guidelines that dictate how firms should
treat stakeholders. Principles and values provide direction for normative
decisions.

2. Descriptive: Focuses on the firm’s behavior; addresses how decisions

are made for stakeholder relationships.

3. Instrumental: Describes what happens if firms behave in a particular

way. This approach is useful because it examines relationships involved
in the management of stakeholders including the processes, structures,
and practices that implement stakeholder relationships within an
organization.
Stakeholders Define Ethical Issues in
Business (2 of 3)
• In business context, customers, investors and shareholders,
employees, suppliers, Government agencies, communities, and
many others who have a “stake” or claim in some aspect of a
company’s products, operations, markets, industry, and outcomes are
known as stakeholders.

• These groups are influenced by business, but they also have the ability to
influence businesses, thus, the relationship between companies and their
stakeholders is a two-way street.
Stakeholders Define Ethical Issues in
Business (3 of 3)
We can identify 2 different types of stakeholders.
• Primary stakeholders
• Those whose continued association and resources are absolutely
necessary for a firm’s survival (customers, shareholders, employees,
suppliers).
• Secondary stakeholders
• Those who are not typically engaged directly in transactions with a
company and are therefore not essential to its survival (government
agencies and communities).
Corporate Governance Provides Formalized
Responsibility to Stakeholders
• Most businesses operate under the belief that the purpose of business
is to maximize profits for shareholders. A business exists for the profit
of shareholders and the Board should focus on that objective.

• On the other hand, The stakeholder model places the board of

directors in the position of balancing the interests and conflicts of a
company’s various constituencies.
Corporate Governance Provides Formalized
Responsibility to Stakeholders

• External control of the corporation resides not only with government

regulators but also with key stakeholders which exert pressure for
responsible conduct. (role of government)

• Social responsibility activities have a positive impact on consumer

identification.
Views of Corporate Governance
• Classic agency problem: Ownership (investors) and control
(managers) are separate.
• Managers act as agents for investors, whose primary goal is increasing
the value of the stock.
• Investors and managers are distinct parties with unique insights, goals,
and values.
• Corporate governance mechanisms are needed to align investor and
management interests.
5-minute break
Emerging Business Ethics Issues
Learning Objectives
• Define ethical issues in the context of organizational ethics
• Examine ethical issues as they relate to the basic values of
honesty, fairness, and integrity
• Delineate misuse of company resources, abusive and
intimidating behavior, lying, conflicts of interest, bribery, corporate
intelligence, discrimination, sexual harassment, fraud, financial
misconduct, insider trading, intellectual property rights, and
privacy as business ethics issues
Ethical Awareness

• People make ethical decisions when they find an ethical component

in a particular issue or situation. Thus, the FIRST STEP toward
understanding business ethics is to develop ethical issue
awareness.

• Ethical issues typically arise because of conflicts among individual’s

personal moral philosophies and values, the values and culture of
the organization in which they work, and those of the society in
which they live.
Ethical Awareness

• The business environment presents many potential ethical

conflicts. For example,
• A company’s efforts to achieve its organizational objectives may collide
with its employees’ endeavors to fulfill their own personal goals.
• Consumers’ desires for safe and quality products may conflict with a
manufacturer’s need to earn adequate profits.
• The ambition of top executives to secure sizable increases in
compensations may conflict with the desires of shareholders to control
costs and increase the value of the corporation
Ethical Awareness
• Characteristics of the job, the culture of the organization, and the
society in which one does business can also create ethical issues.

• Gaining familiarity with the ethical issues that frequently arise in the
business world will help you identify and resolve them when they
occur.

• Failure to acknowledge or be aware of ethical issues is hazardous to

an organization.
• Ethical issues involve a situation, a problem, or even an opportunity
that requires introspection (thought), discussion and investigation
before a decision can be made.
Foundational Values for Identifying Ethical
Issues What are the universal ethical concepts that pervade business ethics?
• Integrity: Integrity is one of the most important and often-cited terms
regarding virtue. It refers to being whole, sound, and in an
unimpaired condition.

• In an organization, it means uncompromising adherence to ethical

values.
• Element of virtue, an unimpaired condition. Integrity relates to
product quality, open communication, transparency, and
relationships.
Foundational Values for Identifying Ethical
Issues What are the universal ethical concepts that pervade business ethics?
• Honesty: Truthfulness or trustworthiness. To tell the truth to the best
of your knowledge without hiding anything.
• Confucius defined an honest person as junzi (gentleman; superior
person; the model of an ideal person) , or one who has the virtue Ren
(deepest level of honesty which is based on an understanding of and
empathy towards others).

• Confucius was a Chinese philosopher and politician. The philosophy of Confucius,

also known as Confucianism, emphasized personal and governmental morality,
correctness of social relationships, justice, kindness, and sincerity.
Foundational Values for Identifying Ethical
Issues
• Fairness: is the quality of being Just, equitable, and impartial.
• There are Three fundamental elements that motivate people to be
fair:
1. Equality: The distribution of benefits and resources. It is about how
wealth or income is distributed among employees within a company, a
country, or across the globe.
2. Reciprocity:
3. Optimization:
Foundational Values for Identifying Ethical
Issues
Element of fairness
2. Reciprocity: is An interchange of giving and receiving in social
relationships. This occurs when an action that has an effect upon
another is reciprocated with an action that has an approximately equal
effect upon another. Reciprocity is the return of small favors that are
approximately equal in value.

For example, reciprocity implies that workers be compensated with

wages that are approximately equal to their effort. An ethical issue
regarding reciprocity for business is the amount CEOs and other
executives are paid in relation to their employees.
Foundational Values for Identifying Ethical
Issues (2 of 2)
• Element of fairness
3. Optimization: Trade-off between equity (equality) and efficiency
(maximum productivity).

For example, discriminating on the basis of gender, race, or religion is

generally considered to be unfair because these qualities have little
bearing upon a person’s ability to do a job. The optimal way is to
choose the most talented, most proficient, most educated, and most
able.
Ethical Issues in Business
What are the emerging ethical issues?

• Misuse of Company Time and Resources (Using company computer

software and Internet services for personal business)
• Abusive or Intimidating Behavior (physical threats, false accusations,
profanity, insults, yelling, harshness, being annoying)
• Lying (Commission Lying – creating a perception by words that
intentionally deceive the receiver of the message; Omission Lying –
intentionally not informing about problems, safety warnings, negative issue)
• Conflicts of Interest
• Bribery (offering something (usually money) in order to gain an illicit
advantage)
• Corporate Intelligence Related (Hacking)
Ethical Issues in Business
• Discrimination (race, color, religion, sex, marital status, age, disability)
• Sexual Harassment (any repeated, unwanted behavior of a sexual
nature perpetrated upon one individual by another)
• Fraud (Any purposeful communication that deceives, manipulates, or
conceals facts in order to create a false impression)
• Insider Trading (Illegal insider trading – illegal practice of trading on the
stock exchange to one’s own advantage through having access to
confidential information)
• Intellectual Property Rights (music, books, movies; digital theft;
copyright infringement)
Ethical Decision Making
Learning Objectives
• Provide a comprehensive model for ethical decision making in business
• Examine ethical issue intensity as an important element in the ethical
decision making process
• Introduce individual factors that influence business ethical decision
making
• Introduce organizational factors that influence business ethical decision
making
• Explore the role of opportunity in ethical decision making in business
A Framework for Ethical Decision Making in
Business (1 of 2)
• To improve ethical decision making in business, one must first
understand how individuals make ethical decisions in an
organizational environment.

• Although it is impossible to describe exactly how any one

individual or group might make ethical decisions, there are
generalizations about typical behavior patterns within
organizations. These generalizations are based on studies and
models widely accepted by academics and practitioners.
Framework for Understanding Ethical Decision Making in
Business
A Framework for Ethical Decision Making in
Business
• Ethical awareness: The ability to perceive whether a situation or
decision has an ethical dimension.
1. Ethical issue intensity: The relevance or importance of an event or
decision in the eyes of the individual, work group, and/or
organization. (ethical sensitivity; is this an ethical issue?)
• Personal and temporal in character to accommodate values, beliefs,
needs, perceptions, the special characteristics of the situation, and the
personal pressures prevailing at a particular place and time.
• Moral intensity: Individuals’ perceptions of social pressure and the harm they
believe their decisions will have on others.
A Framework for Ethical Decision Making in
Business
2. Individual Factors
• Research regarding individual factors that affect ethical awareness,
judgment, intent and behavior include gender, education and
nationality.

• Gender: In many aspects there are no differences between men

and women with regard to ethical decision making. But when
differences are found, women are generally more ethical than men.
By ”more ethical,” we mean that women seem to be more sensitive
to ethical scenarios and less tolerant of unethical actions.
A Framework for Ethical Decision Making in
Business (2 of 2)
• Education: Those more familiarized with the ethical decision making
process due to education or experience are likely to spend more time
examining and selecting different alternatives to an ethics issue.

• Nationality: Affect ethical decision making but the true effect is

somewhat hard to interpret due to cultural differences. Impossible to
state that ethical decision making in an organizational context will
differ significantly among individuals of different nationalities.
A Framework for Ethical Decision Making in
Business
3. Organizational Factors
• In the workplace, the organization’s values often have greater influence
on decisions than a person’s own values.
• Employees approach ethical issues on the basis of what they have
learned not only from their own backgrounds but also from others in the
organization.
• An organization’s culture and structure operate through the
relationships of its members to influence their ethical decisions.
A Framework for Ethical Decision Making in
Business
4. Opportunity
• Opportunity describes the conditions in an organization that limit or
permit ethical or unethical behavior.
• The opportunity that employees have for unethical behavior in an
organization can be eliminated through formal codes, policies, and
rules that are adequately enforced by management.
Framework for Understanding Ethical Decision Making in
Business
Reference
Chapter 1 - The Importance of Business Ethics
Chapter 2 - Stakeholder Relationships and Corporate Governance
Chapter 3 - Emerging Business Ethics Issues
Chapter 5 - Ethical Decision Making
Thank you