business Ethics Chapter 2 BBA 2nd year by

Business Ethics

1. Chapter – 2 (5) Managing Business Ethics

2. Having completed this chapter you should be able to: ■ Explain the nature, evolution, and scope of business ethics management. ■ Explain why firms increasingly manage their overall social role rather than focusing primarily on just managing the ethical behaviour of employees. ■ Critically examine the role of codes of ethics in managing the ethical behaviour of employees. ■ Critically examine current theory and practice regarding the management of stakeholder relationships and partnerships. ■ Explain the role of social accounting, auditing, and reporting tools in assessing ethical performance. ■ Understand different ways of organizing for the management of business ethics.

3. Chapter Outline

4. 1. Introduction business ethics in the global economy is simply too important It is evident from ethical violations of different reputed companies. For example: Enron (2001) Violation: Accounting Fraud Enron used fraudulent accounting practices to hide its financial losses and inflate profits, leading to one of the largest corporate bankruptcies in history. Ethical Issue: Fraud, deception of shareholders. Impact: Loss of jobs, billions in shareholder value, and stricter regulations like the Sarbanes-Oxley Act. Nike (1990s) Violation: Sweatshop Labor Nike faced allegations of exploiting workers in sweatshops, including child labor and unsafe working conditions, in countries like Indonesia and Vietnam. Ethical Issue: Labor exploitation. Impact: Damage to reputation and pressure to improve labor practices.

5. 1. Introduction As a result, there have been numerous attempts, both theoretical and practical, to develop a more systematic and comprehensive approach to managing business ethics. indeed, this has given rise to a multi-million dollar international business ethics ‘industry’ of ethics managers, consultants, auditors, and other experts available to advise and implement ethics management policies and programmes in corporations across the globe. How then can companies actually manage business ethics on a day-to-day basis across the various national and cultural contexts that they may be operating in? Is it possible to control the ethical behavior of employees so that they make the right ethical decision every time? what kinds of management programmes are necessary to produce the level of information and impacts that various stakeholders demand? These are the kinds of questions that we will deal with in this chapter.

6. 2. What is business ethics management? What exactly we mean by managing business ethics. For our purposes though, the most relevant aspects of business ethics management are those that are clearly visible and directed specifically at resolving ethical problems and issues. Business ethics management: The direct attempt to formally or informally manage ethical issues or problems through specific policies, practices, and programmes . Business ethics management refers to the process of identifying, implementing, and overseeing ethical principles and standards in a business environment. It involves creating policies, procedures, and a culture that align with ethical practices, ensuring that the organization behaves responsibly toward stakeholders, society, and the environment. Example: A global firm like IBM enforces a strict policy against bribery and corruption. They provide employee training on how to handle situations involving conflicts of interest, conduct regular audits to identify potential violations, and have a clear reporting system for any ethical concerns.

7. 2.1 Components of business ethics management There are numerous management activities that could be regarded as aspects of business ethics management Figure 5.1 sets out the main components currently in place today,

8. 2.1.1 Mission or values statements These are general statements of corporate aims, beliefs, and values. Such statements have increasingly included social, ethical, and environmental goals of one kind or another (King et al. 2010). For example, the global social media company Facebook has the mission ‘to give people the power to share and make the world more open and connected’, Virtually all large and many small- and medium-sized organizations now have a mission statement of some kind, and it is clear they are important in terms of setting out a broad vision for where the company is going. However, in terms of business ethics, they often fail to set out a very specific social purpose, and there is little evidence to suggest that they have much impact on employee behavior (Bart 1997).

9. 2.1.2 Codes of ethics Sometimes called codes of conduct or simply ethics policies, these are explicit outlines of what type of conduct is desired and expected of employees from an ethical point of view within a certain organization, profession, or industry. For example: ABC Corporation Code of Ethics are as follows 1. Honesty and Integrity We will act honestly and with integrity in all business operations, building trust with our customers, employees, and stakeholders. Misrepresentation or deception is strictly prohibited. 2. Respect for People We treat everyone with dignity, respect, and fairness. We foster an inclusive environment where diversity is celebrated, and discrimination or harassment of any kind is not tolerated. And so on…..

10. 2.1.3 Reporting /advice channels Gathering information on ethical matters is clearly an important input into effective management. Providing employees with appropriate channels for reporting or receiving advice regarding ethical dilemmas can also be a vital means of identifying potential problems and resolving them before they escalate and/or become public Many organizations have therefore introduced ethics hotlines or other forms of reporting channels specifically for employees to notify management of ethics abuses or problems and to seek help and guidance on solutions. Example Use Case An employee at XYZ Corporation suspects that a manager is engaging in favoritism during the vendor selection process, possibly involving kickbacks. The employee calls the Ethics Hotline anonymously, explains the concern, and provides details. The report is then reviewed by the Ethics Office for investigation.

11. 2.2.4 Risk analysis and management Managing and reducing risk has become one of the key components of business ethics management, not least because awareness of potential reputational and financial risks has been one of the key drivers of increased attention to business ethics in recent years. Managing business ethics by identifying areas of risk, assessing the likelihood and scale of risks, and putting in place measures to mitigate or prevent such risks from harming the business has led to more sophisticated ways of managing business ethics. In Bangladesh, several laws and regulations are in place to prohibit unethical business practices and promote corporate integrity. For example: Consumer Rights Protection Act, 2009 Money Laundering Prevention Act, 2012

12. 2.1.5 Ethics managers, officers, and committees In some organizations, specific individuals or groups are appointed to co-ordinate and/ or take responsibility for managing ethics in their organization. Designated ethics officers are now fairly prevalent especially in the us where an ethics and compliance Officer association (ECOA), set up in 1992. A growing number of large corporations also now have an ethics committee, or a CSR committee, which oversees many aspects of the management of business ethics. In Bangladesh, various organizations have established ethics managers, officers, and committees to uphold ethical standards and ensure compliance with legal and moral guidelines. For examples: Bangladesh Bank's Ethics Committee: Bangladesh Bank, the central bank of the country, has an Ethics Committee responsible for promoting ethical behavior and integrity within the institution. The committee comprises senior officials, including Chairperson, two Members

13. 2.1.6 Ethics consultants Business ethics consultants have also become a small but firmly established fixture in the marketplace, and a wide range of companies have used external consultants rather than internal executives to manage certain areas of business ethics. At present, while there are numerous small ethics consultancy firms, the market is dominated by large professional service firms such as Ernst & Young, KPMG, and Deloitte, which offer management, risk, fraud, reporting, and assurance services, as well as leading niche specialists, such as Bureau Veritas, DNV-GL, good corporation and sustainability. In Bangladesh, several organizations and professionals offer ethics consulting services across various sectors. For examples: Institute of Management Consultants Bangladesh (IMCB) Established in May 1997, IMCB sets and maintains standards for the management consulting profession in Bangladesh.

14. 2.1.7 Ethics education and training With greater attention being placed on business ethics, education and training in the subject has also been on the rise. Provision might be offered either in-house or externally through ethics consultants, universities and colleges, or corporate training specialists. For example: University-Based Ethics Education: Several universities in Bangladesh, i.g. , University of Chittagong, include ethics as a part of their curriculum, particularly in disciplines such as business, law etc. Many academic writers have stressed the need for more ethics education among business people, not only in terms of providing them with the tools to solve ethical dilemmas, but also to provide them with the ability to recognize and talk about ethical problems more accurately and easily. For example : Grameenphone Limited : Grameenphone conducts regular workshops and training sessions on ethical business practices and anti-corruption policies for its employees.

15. 2.1.8 Stakeholder consultation, dialogue, and partnership programmes There are various means of engaging an organization’s stakeholders in ethics management, from surveying them to assess their views on specific issues to including them more fully in corporate decision-making. Stakeholder consultation, dialogue, and partnership are increasingly becoming accepted

16. 2.1.9 Auditing, accounting, and reporting Finally, we come to a set of closely related activities that are concerned with measuring, evaluating, and communicating the organization’s impacts and performance on a range of social, ethical, and environmental issues of interest to their stakeholders. Unlike most of the previous developments, these aspects of business ethics management have not been pioneered in the us but rather in Europe, with companies such as BT, the co-operative Bank and so on. However, there is rapid development in this field across the globe Several local and international organizations perform ethical audits in Bangladesh, such as: Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Accredited certification bodies like SGS, Bureau Veritas, and Intertek International Labour Organization (ILO) and various NGOs

17. 3. Setting standards of ethical behavior: designing and implementing codes of ethics Code of ethics : A voluntary statement that commits an organization, industry, or profession to specific beliefs, values, and actions and/ or that set out appropriate ethical behavior for employees. There are four main types of ethical codes: Organizational or corporate codes of ethics Professional codes of ethics. Industry codes of ethics. Programme or group codes of ethics. There has been a lot of research on codes of ethics, primarily focusing on four main issues: Prevalence of codes of ethics. Content of codes of ethics. Effectiveness of codes of ethics. Global codes of ethics

18. 4. Managing stakeholder relations It is important also to acknowledge the descriptive argument that managers do indeed appear to recognize distinct stakeholder groups and manage their companies accordingly. The recognition that not only businesses but organizations of all kinds, including charities, schools, universities, and governments, have a range of stakeholders whose interests might need to be taken into account in making decisions has given rise to a significant body of research dealing with the management of stakeholder relations. Let us look at some of the main themes addressed in this literature.

19. 4.1 Assessing stakeholder importance: an instrumental perspective Stakeholder management: The process by which organizations seek to understand the interests and expectations of their stakeholders and attempt to satisfy them in a way that aligns with the core interests of the company. Mitchell et al. (1997) suggest three key relationship attributes likely to determine the perceived importance or salience of stakeholders: Power. the perceived ability of a stakeholder to influence organizational action. Legitimacy. Whether the organization perceives the stakeholder’s actions as desirable, proper, or appropriate. Urgency. the degree to which stakeholder claims are perceived to call for immediate attention According to Mitchell et al. (1997), managers are likely to assign greater salience to those stakeholders thought to possess greater power, legitimacy, and urgency.

20. 4.2 Types of stakeholder relationship Until relatively recently, it had been generally assumed that relationships between businesses and their stakeholders tended to be somewhat antagonistic, even confrontational in nature. For example, companies might exploit consumers or downsize employees, while consumers might boycott the company’s products, and employees might initiate industrial action. similarly, suppliers can withhold credit, competitors might engage in industrial espionage, and pressure groups can employ aggressive direct action campaigns against companies. Increasingly however, it has been recognized that there might also be a place for co operation between stakeholders. Much of this development in broader stakeholder collaboration was pioneered in the field of environmental management

21. 4.3 Problems with stakeholder collaboration Potential problems with stakeholder collaboration are as follows: Resource intensity Culture clash Schizophrenia Co-ordination Co-potation Accountability Resistance

22. 5. Assessing ethical performance The effective management of business ethics relies to some extent on being able to assess and evaluate performance. What exactly is ethical performance? how can it possibly be measured? Etc. These are all vitally important questions to answer if we are to make any progress at all towards the effective management of business ethics. At present, there is a whole patchwork of initiatives that we might include within the umbrella of assessing ethical performance. These include ethical auditing, environ mental accounting, and sustainability reporting, as well as various other mixtures of terminology. With such a diversity of labels in use, there are obviously problems with distinguishing between different tools, techniques, and approaches. Given this confusion, we shall refer to social accounting as the generic term which encapsulates the other tools and approaches.

23. 5.1 What is social accounting ? Social accounting: The voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical, and environmental issues relevant to stakeholders Social accounting is related to, but clearly distinct from, conventional financial ac counting. the key factors that distinguish social accounting from financial accounting are: Its focus on issues other than (but not necessarily excluding) financial data. Its intended audience extending beyond (but not excluding) shareholders. Its status as a voluntary rather than a legally mandated practice (at least in most jurisdictions).

24. 5.1 What is social accounting ?

25. 5.1 What is social accounting ?

26. 5.2 Why do organizations engage in social accounting? As with many aspects of business ethics, there are both practical and moral reasons for taking up social accounting, but in essence, we can usefully reduce these to four main issues. Internal and external pressure. Identifying risks. Improved stakeholder management Enhanced accountability and transparency

27. 5.3 What makes for ‘good’ social accounting? The following eight issues have been proposed as the key principles of quality Inclusivity Comparability Completeness Evolution Management policies and systems Disclosure External verification Continuous improvement

28. 5.3 What makes for ‘good’ social accounting? Several important schemes are currently in place that seek to tackle specific aspects of social accounting. For example: Auditing and certifying the social accountability standard, SA 8000, is a global workplace standard launched in 1997 that covers key labor rights such as working hours, forced labor, and discrimination, and crucially it certifies compliance through independent accredited auditors. Reporting the global Reporting initiative (GRI) is an international multi-stakeholder effort to create a common framework for reporting on the social, economic, and environmental triple bottom line of sustainability. Reporting assurance the aa1000s assurance standard, launched in 2002, is the first attempt to provide a coherent and robust basis for assuring a public report and its underlying processes, systems, and competencies against a concrete definition and principles of accountability and stakeholder engagement. the standard is specifically designed to be consistent with the gRi sustainability reporting guidelines .

29. 6. Organizing for business ethics management If businesses are going to directly manage business ethics, then at some stage they are likely to face the question of how best to organize the various components and integrate them into the company in order to achieve their goals. In the us, it has become commonplace for business ethics specialists and textbooks to advocate formal ethics or compliance programmes , and such an approach has been taken up by many leading us corporations. However, due to a different regulatory environment, as well as significantly different business cultures in Europe, Asia, and elsewhere, such a formal approach to business ethics management has been much more rarely promoted or adopted outside North America .

30. 6.1 Formal ethics programmes According to treviño et al. (1999), there are four main ways of approaching the formal organization of business ethics management (see Figure 5.5)

31. 6.2 Informal ethics management: ethical culture and climate Two approaches Ethical culture change Improvements in ethical decision-making have been widely argued to require a managed transformation of the organization’s values in order to create a ‘more ethical’ culture. The us-based ethics Resource center, for example, concludes from its ongoing research of ethics in the workplace that ‘strong ethics cultures reduce both misconduct overall and the likelihood that a misdeed which does occur is a pervasive, ongoing issue’. Ethical cultural learning A somewhat different approach has therefore also been advocated that focuses more on ethical cultural learning. Rather than seeking conformity to a single set of values, the learning approach focuses on smaller subcultural groups within the firm and enabling employees to make their own ethical decisions.

32. 6.2 Informal ethics management: ethical culture and climate Clearly both approaches have their merits and problems. The ethical culture change approach may have only limited potential to effect real change, but it is considerably more attractive to many firms who not only may desire considerable control over the culture, but may also be worried about the potentially damaging effects of bringing out moral differences through the process of ethical cultural learning. Moreover, both pose significant challenges for company leaders in shaping a more appropriate context for ethical decision-making.

33. 6.3 Business ethics and leadership Whatever approach an organization might have to managing business ethics, whether it is formal or informal, compliance based or values based, minimal or extensive, the role of the organization’s leaders in demonstrating ethical leadership is going to be significant For Example: Companies such as Walmart or coca-cola , which over the years have faced a range of ethical criticisms, but have more recently undergone major turnarounds, primarily initiated by their CEOs at the time Similarly, the Unilever CEO Paul Polman is widely credited with instigating the company’s lauded sustainable Living Plan Ethical leadership : Describes the  role of senior managers in setting the ethical tone of the organization and fostering ethical behavior among employees.

34. 6.3 Business ethics and leadership Two very different modes of ethical leadership. Under the culture change approach , the leader’s role is to articulate and personify the values and standards that the organization aspires to, and then to inspire and motivate employees to follow their lead. From the cultural learning perspective , the role of leadership is more one of participation and empowerment in order to foster moral imagination and autonomy. thus, employees are encouraged ‘to think independently, to be able to make reasoned, responsible evaluations and choices on their own; to be, in short, free moral agents.