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No. 1. PARTICULARS ETHICS 1.1 Introduction 1.2 Definition of Ethics 1.3 Why Ethics is important? CONCEPT OF ETHICS BUSINESS ETHICS 3.1 Introduction 3.2 What are Business Ethics? 3.3 Factors of Business Ethics 3.4 Role of Ethics in business 3.5 Need of Ethics in business APPROACHES TO ETHICAL DECISION-MAKING 4.1 Teleology 4.2 Egoism 4.3 Utilitarianism 4.4 Deontology 4.5 Justice 4.6 Relativism INDIVIDUAL ETHICAL DECISION-MAKING 5.1 Ethical Issue Recognition 5.2 Ethical (Moral) Judgement 5.3 Ethical (Moral) Intent 5.4 Ethical (Moral) Behaviour 5.5 FACTORS AFFECTING ETHICAL DECISION-MAKING 6.1 Individual difference factors 6.2 Situational (Organizational) factors 6.3 Issue-Related factors ETHICS IN FINANCE 7.1 Ethical Violations 7.2 Ethical Codes 7.3 Towards a paradigm shift ACCOUNTING SCANDALS PAGE No.
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1.ETHICS
1.1 Introduction:
Ethics is the branch of study dealing with what is the proper course of action for man. It is the study of right and wrong in human endeavours. At a more fundamental level, it is the method by which we categorize our values and pursue them. The field of ethics (or moral philosophy) involves systematizing, defending, and recommending concepts of right and wrong behaviour. The term Ethics is derived from the Greek word ethos which refers to character. The term ethics refers to a code of conduct that guides an individual while dealing with others. It relates to social rules and cardinal values that motivate people to be honest in dealing with others. Ethics direct human behaviour and also differentiate between good and bad, right and wrong fair and unfair human behaviour or actions. Philosophers today usually divide ethical theories into three general subject areas: Meta ethics, normative ethics, and applied ethics.
Ethics can be defined as the critical, structured examination of how we should behave in particular, how we shouldconstrain the pursuit of self-interest when our actions affect others.
2. CONCEPT OF ETHICS
Webster's Collegiate Dictionary defines "ethics" as the "discipline dealing with what is good and bad and with moral duty and obligation," "a set of moral principles or value" or "a theory or system of moral values." Ethics assists individuals in deciding when an act is moral or immoral, right or wrong. Ethics can be grounded in natural law, religious tenets, parental and family influence, educational experiences, life experiences, and cultural and societal expectations. Ethics in business, or business ethics as it is often called, is the application of the discipline, principles, and theories of ethics to the organizational context. Business ethics have been defined as "principles and standards that guide behavior in the world of business." Business ethics is also a descriptive term for the field of academic study in which many scholars conduct research and in which undergraduate and graduate students are exposed to ethics theory and practice, usually through the case method of analysis. Ethical behavior in business is critical. When business firms are charged with infractions, and when employees of those firms come under legal investigation, there is a concern raised about moral behavior in business. Hence, the level of mutual trust, which is the foundation of our free-market economy, is threatened. Although ethics in business has been an issue for academics, practitioners, and governmental regulators for decades, some believe that unethical, immoral, and/or illegal behavior is widespread in the business world. Numerous scandals in the late 1990s and early 2000s seemed to add credence to the criticism of business ethics. Corporate executives of WorldCom, a giant in the telecommunications field, admitted fraud and misrepresentation in financial statements. WorldCom's former CEO went on trial for alleged crimes related to this accounting ethics scandal. A similar scandal engulfed Enron in the late 1990s and its former CEO, Ken Lay, also faced trial. Other notable ethical lapses were publicized involving ImClone, a biotechnological firm; Arthur Andersen, one of the largest and oldest public accounting firms; and Healthsouth, a large healthcare firm located in the southeast United States. These companies eventually suffered public humiliation, huge financial losses, and in some cases, bankruptcy or dissolution. The ethical and legal problems resulted in some corporate officials going to prison, many employees losing their jobs, and thousands of stockholders losing some or all of their savings invested in the firms' stock. Although the examples mentioned involved top management, huge sums of money, and thousands of stakeholders, business ethics is also concerned with the day-to-day ethical dilemmas faced by millions of workers at all levels of business enterprise. It is the awareness of and judgments made in ethical dilemmas by all that determines the overall level of ethics in business. Thus, the field of business ethics is concerned not only with financial and accounting irregularities involving billions of dollars, but all kinds of moral and ethical questions, large and small, faced by those who work in business organizations. The discussion that follows is organized into three parts: (1) the major theories or "moral philosophies" that are applied to business ethics; (2) a well-established model of ethical decisionmaking in business; and (3) the factors that affect individual ethical decision-making in the business context.
3. Business Ethics
3.1 Introduction:
Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. In concept, business ethics is the applied ethics discipline that addresses the moral features of commercial activity. In practice, however, a dizzying array of projects is pursued under its rubric. Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have redefined their core values in the light of business ethical considerations (e.g. BP's "beyond petroleum" environmental tilt).
2. Moral and social values: - it is based on well accepted moral and social values. It suggests moral principles/rules of conduct for businessmen. They include self-control, service t society, fair treatment to social groups and not to harm/exploit others. 3. Protection of social groups: - business should give priority to social interest or social good. Such ethical approach creates good name and status to business and facilitates its expansion. 4. Provides basic framework: - it provides basic framework within which business should be conducted. It suggests legal, social, moral, economic and cultural limits within which business is to operate. It suggests what is god and what is bad in business. 5. Needs willing acceptance for enforcement: - it cannot be enforced by law or by any other force. It must be accepted as self-discipline by businessmen. It should come from within. 6. Education and guidance required for introduction: - businessmen should be given proper education, guidance and training in order to motivate them to follow ethical business practices. 7. Not against profit making: - it is not against profit making. However, it is against profiteering by cheating and exploiting consumers, employees or investors. It supports expansion of business activities but by fair means and not through illegal activities or corrupt practices. 8. Act as summum bonum of human life: - it passes judgments of value upon human actions with reference to the moral values. Judgments of value are judgment of what ought to be. Such judgments may be different from the judgments of facts as they are judgment of what is.
3.4 Role of Ethics in business:Good Ethics is good business, this quotation/slogan/observation suggests the importance of ethics in business. It provides protection, justice and fair treatment to all social groups. In addition, ethical business expansion and growth. Ethical business is equally profitable. Businessmen should therefore support the concept of business ethics. It is always desirable to strike a balance between economic performance and social performance of a business unit. Business ethics facilitates such balance. Businessmen should decide what is socially good and what is socially undesirable and act beneficial to them and to the society at large. Business also gets public support when it is conducted in a fair manner. Business ethics is important as it has wider social significance. It is important as it offers advantages to businessmen, consumers and employees. It provides advantages to businessmen/management like it provides favourable social image, guidance to businessmen, social consciousness, fair business etc. and advantages to consumers like consumer protection, control of business practices, protection to environment etc. it also provides advantages to employees such as fair deal, fair wages, fair treatment, benefit of profit sharing etc.
4.1 TELEOLOGY.
Teleological theories of ethics focus on the consequences caused by an action and are often referred to as "consequentalist" theories. By far the most common teleological theories are egoism and utilitarianism.
4.2 EGOISM.
Egoism defines right and wrong in terms of the consequences to one's self. Egoism is defined by self-interest. An egoist would weigh an ethical dilemma or issue in terms of how different courses of action would affect his or her physical, mental, or emotional well being. Thus, an egoist, when faced with a business decision, would tend to choose the course of action that he or she believes would best serve self-interest. Although it seems likely that egoism would potentially lead to unethical and/or illegal behavior, this philosophy of ethics is, to some degree, at the heart of a free-market economy. Since the time of political economist Adam Smith, advocates of a free market unencumbered by governmental regulation have argued that individuals, each pursuing their own self-interest, would actually benefit society at large. This point of view is notably espoused by the famous economist Milton Friedman, who suggested that the only moral obligation of business is to make a profit and obey the law. However, it should be noted that Smith, Friedman, and most others who advocate unregulated commerce, acknowledge that some restraints on individuals' selfish impulses are required. Teleological Egoism Actions are judged as ethical or unethical based on their results. Actions are judged as ethical or unethical based on the consequences to one's self. Actions that maximize self-interest are preferred. Actions are judged as ethical or unethical based on the consequences to "others." Actions that maximize the "good" (create the greatest good for the greatest number) are preferred. Actions are judged as ethical or unethical based on the inherent rights of individual and the intentions of the actor. Individuals are to be treated as means and not ends. It is the action itself that must be judged and not its consequences. Actions are judged as ethical or unethical based on the fairness shown to those affected. Fairness may be determined by distributive, procedural, and/or interactional means. Actions are judged as ethical or unethical based on subjective factors that may vary from individual to individual, group to group, and culture
Utilitarianism
Deontological
Justice
Relativism
to culture.
4.3 UTILITARIANISM.
In the utilitarian approach to ethical reasoning, one emphasizes the utility, or the overall amount of good, that might be produced by an action or a decision. For example, companies decide to move their production facilities from one country to another. How much good is expected from the move? How much harm? If the good appears to outweigh the harm, the decision to move may be deemed an ethical one, by the utilitarian yardstick. This approach also encompasses what has been referred to as cost-benefit analysis. In this, the costs and benefits of a decision, a policy, or an action are compared. Sometimes these can be measured in economic, social, human, or even emotional terms. When all the costs are added and compared with the results, if the benefits outweigh the costs, then the action may be considered ethical. One fair criticism of this approach is that it is difficult to accurately measure costs and benefits. Another criticism is that the rights of those in the minority may be overlooked. Utilitarianism is like egoism in that it advocates judging actions by their consequences, but unlike egoism utilitarianism focuses on determining the course of action that will produce the greatest good for the greatest number of people. Thus, it is the ends that determine the morality of an action and not the action itself (or the intent of the actor). Utilitarianism is probably the dominant moral philosophy in business ethics. Utilitarianism is attractive to many business people, since the philosophy acknowledges that many actions result in good consequences for some, but bad consequences for others. This is certainly true of many decisions in business.
4.4 DEONTOLOGY.
Deontological theories of ethics focus on (1) the rights of all individuals and (2) the intentions of the person(s) performing an action. Deontological theories differ substantially from utilitarian views on ethics and would not allow, for example, the harming of some individuals in order to help others. To the deontologist, each person must be treated with the same level of respect and no one should be treated as a means to an end. Deontology proposes that the principles of ethics are permanent and unchangingand that adherence to these principles is at the heart of ethical behavior. Many deontologists believe that the rights of individuals are grounded in "natural law." Deontology is most closely associated with the German philosopher Immanuel Kant.
4.5 JUSTICE.
Justice-based theories of ethics concern the perceived fairness of actions. A just (ethical) action is one that treats all fairly and consistently in accord with ethical or legal standards. Justice theories of ethics are closely associated with the philosopher John Rawls. To determine the fairness of an action, one often appeals to distributive, procedural, and/or interactional rules. Distributive fairness is based on the outcomes received by individuals and their perceptions of these outcomes. Procedural fairness is based on the processes (policies, procedures, rules) employed to reach decisions. Individuals evaluate the fairness of these processes in addition to (or instead of) the outcomes received.
Finally, interactional fairness relates to the personal treatment one receives in the administration of a decision-making process. Interpersonal fairness has to do with the respect and consideration shown in the administration of decisions. Informational fairness has to do with the explanations and accounts provided for the decisions made. The study of organizational justice has become a major field within organizational behavior. To date, however, there has not been a complete integration between justice perceptions and ethical theory.
4.6 RELATIVISM.
Teleological, utilitarian, and justice theories of ethics are all "universal" theories, in that they purport to advance principles of morality that are permanent and relatively enduring. Relativism states that there are no universal principles of ethics and that right and wrong must be determined by each individual or group. The relativist believes that standards of right and wrong change over time and are different across culturesand does not accept that some ethical standards or values are superior to others. The concept of relativism can probably be summarized as "What's right for one may not be right for another," or "When in Rome, do as the Romans do."
that influence the individual ethical decision-making process, as outlined above, are presented in the final section of this essay.
include the work group, the supervisor, organizational policies and procedures, organizational codes of conduct, and the overall organizational culture. Each of these factors, individually and collectively, can cause individuals to reach different conclusions about ethical issues than they would have on their own. This section looks at one of these organizational factors, codes of conduct, in more detail. Codes of conduct are formal policies, procedures, and enforcement mechanisms that spell out the moral and ethical expectations of the organization. A key part of organizational codes of conduct are written ethics codes. Ethics codes are statements of the norms and beliefs of an organization. These norms and beliefs are generally proposed, discussed, and defined by the senior executives in the firm. Whatever process is used for their determination, the norms and beliefs are then disseminated throughout the firm. An example of a code item would be, "Employees of this company will not accept personal gifts with a monetary value over $25 in total from any business friend or associate, and they are expected to pay their full share of the costs for meals or other entertainment (concerts, the theater, sporting events, etc.) that have a value above $25 per person." Hosmer points out that the norms in an ethical code are generally expressed as a series of negative statements, for it is easier to list the things a person should not do than to be precise about the things a person should. Almost all large companies and many small companies have ethics codes. However, in and of themselves ethics codes are unlikely to influence individuals to be more ethical in the conduct of business. To be effective, ethics codes must be part of a value system that permeates the culture of the organization. Executives must display genuine commitment to the ideals expressed in the written codeif their behavior is inconsistent with the formal code, the code's effectiveness will be reduced considerably. At a minimum, the code of conduct must be specific to the ethical issues confronted in the particular industry or company. It should be the subject of ethics training that focuses on actual dilemmas likely to be faced by employees in the organization. The conduct code must contain communication mechanisms for the dissemination of the organizational ethical standards and for the reporting of perceived wrongdoing within the organization by employees. Organizations must also ensure that perceived ethical violations are adequately investigated and that wrongdoing is punished. Research suggests that unless ethical behavior is rewarded and unethical behavior punished, that written codes of conduct are unlikely to be effective.
they may assist the businessperson to steer toward the most ethical decision possible under a particular set of circumstances.
7. ETHICS IN FINANCE
Ethics in general is concerned with human behavior that is acceptable or "right" and that is not acceptable or "wrong" based on conventional morality. General ethical norms encompass truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all aspects of life, including business and finance. Financial ethics is, therefore, a subset of general ethics. Ethical norms are essential for maintaining stability and harmony in social life, where people interact with one another. Recognition of others' needs and aspirations, fairness, and cooperative efforts to deal with common issues are, for example, aspects of social behavior that contribute to social stability. In the process of social evolution, we have developed not only an instinct to care for ourselves but also a conscience to care for others. There may arise situations in which the need to care for ourselves runs into conflict with the need to care for others. In such situations, ethical norms are needed to guide our behavior. As Demsey (1999) puts it: "Ethics represents the attempt to resolve the conflict between selfishness and selflessness; between our material needs and our conscience." Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the conceptual framework of modern financial-economic theory and the widespread use of a principal-agent model of relationship in financial transactions. The financial-economic theory that underlies the modern capitalist system is based on the rational-maximizer paradigm, which holds that individuals are self-seeking (egoistic) and that they behave rationally when they seek to maximize their own interests. The principal-agent model of relationships refers to an arrangement whereby one party, acting as an agent for another, carries out certain functions on behalf of that other. Such arrangements are an integral part of the modern economic and financial system, and it is difficult to imagine it functioning without them. The behavioral assumption of the modern financial-economic theory runs counter to the ideas of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the traditional principal-agent relationship. The traditional concept of agency is based on moral values. But if human beings are rational maximizers, then agency on behalf of others in the traditional sense is impossible. As Duska (1992) explains it: "To do something for another in a system geared to maximize self-interest is foolish. Such an answer, though, points out an inconsistency at the heart of the system, for a system that has rules requiring agents to look out for others while encouraging individuals to look out only for themselves, destroys the practice of looking out for others". The ethical dilemma presented by the problem of conflicting interests has been addressed in some areas of finance, such as corporate governance, by converting the agency relationship into a purely contractual relationship that uses a carrot-and-stick approach to ensure ethical behavior by agents. In corporate governance, the problem of conflict between management (agent) and stockholders (principal) is described as an agency problem. Economists have developed an agency theory to deal with this problem. The agency theory assumes that both the agent and the principal are self-interested and aim to maximize their gain in their relationship. A simple example would be the case of a store manager acting as an agent for the owner of the store. The store manager wants as much pay as possible for as little work as possible, and the store owner wants as much work from the manager for as little pay as possible. This theory is value-free because it does not pass judgment on whether the maximization behavior is good or bad and is not concerned with what a just pay for the manager might be. It drops the ideas of honesty and loyalty from the agency relationship because of their incompatibility with the fundamental assumption of rational maximization. "The job of agency theory is to help devise techniques for describing the conflict inherent in the principal-agent relationship and controlling the situations so that the agent, acting from self-interest, does as little harm as
possible to the principal's interest" (DeGeorge, 1992). The agency theory turns the traditional concept of agency relationship into a structured (contractual) relationship in which the principal can influence the actions of agents through incentives, motivations, and punishment schemes. The principal essentially uses monetary rewards, punishments, and the agency laws to command loyalty from the agent. Most of our needs for financial services management of retirement savings, stock and bond investing, and protection against unfore-seen events, to name a feware such that they are better entrusted to others because we have neither the ability nor the time to carry them out effectively. The corporate device of contractualization of the agency relationship is, however, too difficult to apply to the multitude of financial dealings between individuals and institutions that take place in the financial market every day. Individuals are not as well organized as stockholders, and they are often unaware of the agency problem. Lack of information also limits their ability to monitor an agent's behavior. Therefore, what we have in our complex modern economic system is a paradoxical situation: the ever-increasing need for getting things done by others on the one hand, and the description of human nature that emphasizes selfish behavior on the other. This paradoxical situation, or the inconsistency in the foundation of the modern capitalist system, can explain most of the ethical problems and declining morality in the modern business and finance arena.
8. ACCOUNTING SCANDALS
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence ofliabilities, sometimes with the cooperation of officials in other corporations or affiliates. In public companies, this type of "creative accounting" can amount to fraud and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States. Scandals are often only the 'tip of the iceberg'. They represent the visible catastrophic failures. Note that much abuse can be completely legal or quasi legal. For example, in the domain of privatization and takeovers: It is fairly easy for a top executive to reduce the price of his/her company's stock - due to information asymmetry. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (eg. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts). There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates. A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private) - at a dramatically lower price - the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce share price. This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives). Similar issues occur when a publicly held asset or non-profit
organization undergoes privatization. Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis - this
reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell. It can also contribute to a public perception that private entities are more efficiently run reinforcing the political will to sell off public assets. Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years. All accounting scandals are not caused by top executives. Often times managers and employees are pressured or willingly alter financial statements for the personal benefit of the individuals over the company. Managerial opportunism plays a large role in these scandals. For example managers who would be compensated more for short term results would report inaccurate information since short term benefits outweigh the long-term ones such as pension.