Ethics and Corporate Governance

Kohlberg's six levels of Moral development and moral reasoning Level one-Pre conventional stage - (self orientation) Stage I. Punishment and Obedience Orientation (punishment avoidance)apply rules of social expectations , avoid breaking rules concepts like good, bad ,right, wrong are abstract. Very little awareness of other s needs Stage II .Instrument and Relativity Orientation (reward seeking) recognize others in the environment and learn to defer to them for getting ones needs addressed. Person is aware of other s needs. Right/wrong are still abstract concepts Level Two- Conventional stage (other s orientation) Stage III .Interpersonal Concordance OrientationDoing what is right motivated by need to conform .. be seen as a GOOD performer focus on others acceptance as a GOOD PERSON Stage IV . Law and order OrientationRight or wrong determined by the larger society, Nation. LAWS are to be OBEYED. Can now separate norms of the system from personal relationships and motives Level Three. Postconventional,Autonomus, or principled stages (Universal orientation) Stage V Social contract orientationthere can be conflicting views, and emphasis is on conflict resolution .realises that all norms and values are relative and learns to tolerate Stage VI Universal ethical principles orientationIn this final stage, right action comes to be defined in terms of moral principles due to their logical comprehensiveness, universality, and consistency. Abstract principles of justice, society s welfare, equality of human beings ,respect, dignity etc. take precedence over even democratic consensus 1. 2. 3. 4. 5. 6. Obedience- expected rewards and punishment Instrumental egoism- self interest and fairness for themselves Interpersonal concordance- living up to expectations of peers and superiors Law and duty more broad than 3 Social contract- consensus building around societal values Universal ethical principles - one s own values ,driven by much larger universal principles , locus of control firmly internal

Some costs of unethical decisions for corporates

Law suits, settlements, thefts, Penalties particularly financial, Deterioration of relationships, Damage to reputations, Declining productivity, creativity, loyalty, Gossip,rumours, absenteeism, Recruitment and retention very difficult

Often being ethical is limited to corruption-both political and personal Ethics is larger and more relevant than that This is about you, me, the Corporation, and the society at large This course is about taking decisions which are RIGHT, RELEVANT, consistent, and fair based on universal ethical principles-stage 6 Can we reach this stage ?

Values

Each individual has certain underlying values that contribute to his/her valuesystem. Integrity in the application of value ensures its continuity Continuity separates a value from beliefs, opinion and ideas. Continuity reinforces belief Help us shape our self image and our perception of others We judge the importance of other people in relation to the values we have established for our selves This value congruency helps determine priorities in situations where our interest conflicts with the interest of others Influence personal and professional goals and objectives Help to determine which goals to be pursued and procedures for achieving them. Help determine what an appropriate social order should look like by shaping our definition of justice and equity Helps influence how we structure our society and its social institutions Help in establishing rules of conduct that protect the interests of all participants in the social order Help spell out rights and obligations of people towards each other Help influence how a society deals with those who violate. Imbibing values means we have reasoned that what we have come to believe are the values to have. They may reinforce the values that we have and /or accept that they are the ones to have.Reinforcement or creating the belief Values are personal Moral standards the norms of behaviour expected by the society at large from an individual. These norms may or may not from part of an individual s Value system. Norms of behaviour may require one to conform to the moral standards despite personal reservations

Your shadow self

- We can harm as well as do good. - Harm mainly due to aggressive behaviour, discrimination - Anger, Jealousy, rage, insecurity, pride. This is our shadow self - the side we know/do not know, and do not want others to know

Shadow side is not all bad It helps us in creativity, spontaneity If shadow self is curbed, ROBOT?? Is suppression of the shadow self the answer?? Shadow self surfaces when under stress The Veneer wears off Our shadow gets projected on others We may be the reason why other apples have become rotten Accepting feed back from role set, EGO? Keep your self out of harm s way

- Is the shadow creating issues in your environment, Role set? - are you able to overcome your shadow. - inability to manage shadow can cause AGGRAVATION, STRESS. - If so, may be look for another job Three criteria for Ethical reasoning

Moral reasoning must be logical - assumptions/premises made to decide should be known and explicit Factual evidence cited accurate, relevant & complete Ethical standards used should be consistent

Theories in Ethics
teleological (ends)

Ethical relativism Utilitarianism Deontological (means)

Rawl s theory of justice Universalism-Kant

Rights theory Ethical Relativism.No universal standards /rules can be used to guide or evaluate the morality of an act. What is right for you may be wrong for me. Only individual s self interest and values are relevant NAIVE RELATIVISM. Cultural relativism in the same class. what about cultural imperialism Ethics of convenience ??? Teleological systems /Theories - ends justify means Ethical Relativism More Teleological Deontological systems /Theories - Process of Decision making more relevant not just ends - Interest of other stake holders also get focused

UtilitarianismAction morally right greatest good for the greatest number affected by it.Net benefits over costs are greatest for all affected (compared among the alternatives). What is a small lie if it is for greater good . Emphasis on achieving the ends Problems of measurement - Can your utility and mine be the same. How to measure values of intangibles like life, freedom, health, pollution. Many of the cost and benefits cannot be predicted reliably. Costs understated/benefits overstated. Cost of benefits are subject to different evaluation by different stakeholders. Are all benefits tradable ?? Rawls theory of justice
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An attempt at distributive justice acceptable to all rational persons(i) Each person has an equal right to themost extensive basic liberties compatible with similar liberties for all (Principle of equal liberty ) (ii) Social and economic inequalities are so arranged that they are both ( difference principle) (a) to the greatest benefit of the least advantaged person (b) Attached to positions and offices which are open to all under conditions of fair equality of opportunities According to Rawls Principle 1 - principle of equal liberty takes priority over principle 2. within principle 2 - the difference principle part( b )takes precedence over part (a)

SEVEN STEPS MODEL for ethical decision making

1. Determine the relevant facts 2. Identify the ethical issues

3. Develop alternatives for resolving the issues. 4. Define the stakeholders for each alternative 5. Evaluate the ethics of each alternative 6. Take stock of the practical constraints 7. Decide on and plan implementation of the appropriate alternative

Corporate Governance
What is Corporate Governance?Corporate governance is the system by whichcompanies
are directed and controlled (Cadbury,1992). Corporate governance is about nurturing anenterprise while ensuring accountability in the exercise ofpower and patronage by firms (world Bank, 1999) Modern public corporation form leads to efficient specialization of tasks:

Risk bearing by shareholders Strategy development and decision making by managers The vital link between shareholders and the managers THE BOARD. The task-- strategy, directions ,control. One major issue. Does the board represent only the share holders or all stakeholders? Do they represent only the dominant share holder(s) or all the share holders ?

Agency Relationship Problems

Principal and agent have divergent interests and goals Shareholders lack direct control of large, publicly traded corporations Agent makes decisions that result in the pursuit of goals that conflict with those of the principal It is difficult or expensive for the principal to verify that the agent has behaved appropriately Agent falls prey to managerial opportunism

Managerial Opportunism

The seeking of self-interest with guile (cunning or deceit)

Managerial opportunism is:(i) An Attitude (inclination) (ii) A set of behaviors (specific acts of self-interest)

Managerial opportunism prevents the maximization of shareholder wealth (the primary goal of owner/principals)

Internal Governance Mechanisms

Ownership Concentration - Relative amounts of stock owned by individual shareholders and institutional investors Board of Directors - Individuals responsible for representing the firm s owners by monitoring top-level managers strategic decisions Executive Compensation - Use of salary, bonuses, and long-term incentives to align managers interests with shareholders interests Market for corporate Control- Purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness

Corporate social responsibility

Why have apex business bodies emerged to promote CSR? It functions as a form of business self-regulation To understand this, we have to examine changes in key structures which related to what we generally call globalization CSR was a strategy of corporate leaders to preserve the basic neo-liberal form of globalization * No binding international regulation. * No international regulatory bodies Promote self-regulatory initiatives which are - *voluntary, * do not have hard targets, * but give the impression that business can be responsible Need to account for how CSR initiative function in the international political economy

justify lack of binding regulation justify limited role for the state in redistribution and social service provision

At this level (apex bodies) there is little or no ethical or moral motivation by business
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pragmatic motivation to avoid binding international regulation individual firms and foundations (Gates foundation) may have some ethical motivation, but they function to support this non-regulatory system.

CSR is not just the practice of individual firms, but can be understood as a particular policy paradigm. * It can be understood as an approach to non-state regulation which promotes business self-regulation * In this model, CSR activities serve to justify less government regulation: - Less government regulation greater growth - Business can be trusted not to take advantage of such freedom

Goals of CSR Strategy

Improving business performance - * silencing critics, managing public relations * getting information, new marketing opportunities, new products, etc.

Bringing business in line with company values - * Moving beyond CSR programs to looking at core business strategies Addressing concerns/aspirations of stakeholders

Sustainable DevelopmentDevelopment that meets the needs of the present without compromising the ability of future generations to meet their own needs Important Dimensions Efficiency Increase Technology Improvements Resource (capital) Management Equity Increase Sustainability Approaches -Prevent reductions in NC stock below Safe Minimum Standards identified, specially when damage costs uncertain. Why Stratagists Should Care?

Pressures Legitimacy Risk & Liability Competitive Advantage

Nonmarket Environment Analysis of Firm/Industry

Issues Interests:
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Organized Interests Unorganized Interests *Activist, Advocacy, and Watchdog Groups

Institutions:
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Legislative Regulatory & Administrative Agencies Judicial

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International Nongovernmental

Information

The Sustainable Business:Internalizes, accounts for & maximizes social, environmental & economic, value. Seeks a long-term view of prosperity believing that the benefits will flow from responsible business practices to current and future stakeholders.

General Behavioral models for ethical decision making

Individual Influence

Ethical situation

Ethical Sensitivity

Ethical Judgment

Ethical theory/

Ethical Behavior

Environmental Influence