MDAKT

Understanding Business Ethics

CRG650
 Understand the factors affecting public
expectation for business behaviour

 Understanding on the new expectation for

business behaviour

 Understand the Milton Friedman’s Theory

 Fiduciary role & ethics environment for

professional accountants
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Ethics is all about right and wrong.
Business Ethics is about right and wrong or
appropriate and inappropriate behavior in the
business.
Governance is about setting appropriate
strategies, objectives & policies, to ensure
appropriate achievement & reporting towards
stakeholders as a continuing support.

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 Economic Stability
 Stakeholder support for corporations
 Reputation management
 Risk management
 Compliance – SOX, governance guidelines,
MCCG 2007

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Growing Awareness …
 Pollution
 Oil spills – Exxon Valdez,
BP
 Equity for women: pay, fair
 Fair treatment of
minorities
 Oppressive regimes
 Child labour
 Harmful practices &
products
 Scandals
…that corporations can
make a difference
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Unbridled
Physical Moral
greed

Financial
Economic Accountability
scandals

Governance Institutional
Competition
failures reinforcement

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 Governance failure at the Board level
◦ Too much trust
◦ Incompetence - awareness and/or
understanding of role, control & reporting
systems
◦ Lack of motivation, conflicts of interest
 Dishonest management, conflicts of interest
 Culture of deception, self-interest, not
integrity
 Manipulation of accounting and disclosure
 Poor standard setting
 Auditor deficiencies
 Regulatory short-sightedness
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 Leads to The Sarbanes-Oxley Act (SOX)
Enron – Dec. 2, 2001
Arthur Andersen – Winter/Spring 2002
WorldCom – June 25, 2002
SOX – July 30, 2002
 Crisis of credibility exposes
governance failures & erodes SEC+
investor confidence. NYSE .
 Leading to stock market crash.
 SOX & other governance
reforms restore confidence.
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 Independence of Director
 Clarification of responsibilities of
Directors, Officers, Auditors
 Greater accountability & transparency
 Specific criminal liability
 Independence of Auditors
 Whistleblower systems

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1) “Profit-only focus” does not mean
profit will fall
2) Profit is recognized as incomplete
measure of corporate performance &
inaccurate resource allocation
3) Company performance would be within
the law and ethical custom

e.g. CORPORATE SOCIAL

RESPONSIBILITY!!!
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 Focus on primary loyalty to the public best
interest in preparing Financial Statement
information (Role & Conduct)
 Adopt main principles such as
independence of judgment, objectivity,
integrity & reporting (Governance)
 To protect future investor’s interests and
other stakeholders

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 Anyone who is affected by or can affect the
objectives of the organization
(Freeman, 1984)

An organization must have

the support of its primary stakeholders,
to optimally achieve its strategic objectives

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 Success/Wealth Creation Depends On
Relationships with (accountability to)
Stakeholders
Relationships depend upon
◦ Reputation
◦ Governance
◦ Values or hypernorms for most cultures
Organizations cannot achieve their strategic objectives on a
sustained basis unless they have the support of their key
stakeholders.
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How should the Board discharge its responsibility?
What are the red flags that should be watched for?

SHAREHOLDERS

BOARD OF
DIRECTORS

STAKEHOLDERS

Legally

Strategically
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 What makes a good reputation?

Reliability Responsibility

Credibility Trustworthiness

Corporate
Reputation

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 Value that is almost universally respected by
stakeholder groups
 If the company’s activities respect hypernorms,
likely to be respected by stakeholders will
encourage more support to company’s activities
Hypernorms
Honesty, Fairness, Compassion,
Integrity, Predictability, Responsibility
+ other values
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 Public pressure can help change
corporate behaviour
 Stakeholders support & Ethical
behaviour is essential
 Reputations are at stake
 Good governance is based on good
ethics and it does not just happen on
their own – ethical leadership

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