CRG 520

BUSINESS ETHIC AND

CORPORATE GOVERNANCE

OCTOBER 2006

NUR LIYANA BTE ONN 2009818152

NUR SYAFIQA BTE AZMAN 2009207214

NUR SHAHIRA BTE AZIS 2009612548

NURUL SYAFIQAH BINTI MOHD HISHAM 2009852012

NUR NARLISA ATIQAH BTE MOHD LOKMAN 2009886842

QUESTION 1

a) Lisa Newton in an article entitled 'The Internal Morality of the Corporation" (1986)argues that a corporation can be seen as much more than a profit machine, it is infact an ongoing human society.

Discuss three (3) implications of Lisa Newton's 'new view' on business ethics.(12 marks)

The three (3) implications of Lisa Newton’s ‘new view’ on business ethics are:

1. Development of Ethical Corporate Culture

There is development of ethical culture in the organization such as cognitive framework, consisting of attitudes, values, behavioural norms, and expectations shared by organization member. This ethical culture has bring many benefits to the corporation because the ethical culture combines formal and in formal elements to guide employee thought and action. In order to ensure commitment to the ethical principles or values considered appropriate for the organization, it must be evident to the members of the organization that top management is fully supportive and that such support is evident throughout the organization’s governance system.

2. Implementation of Corporate Code of Conduct

An effective code is embodiment of an organization’s values. It represents the major organizational structure in which to implement ethical policy and to signal and communicate behavioural expectation and culture, as well as to provide strategic and legal positioning for the organization. The implementation of the code is important because it it can encourage the employees behaviour.

3. Ethical Leadership

The top management become more ethical in conducting the business. They also become more responsible towards the stakeholder of the organization especially to the employees. This is depends upon how ell and extensively an executive promote his or her support for the corporation’s ethics and values agenda. This leadership will greatly reinforce the corporation’s ethics program and its attempt to develop and maintain an ethical corporate culture.

b) Occasionally people object to the view that ethical standards should be applied to thebehavior of people in business organizations.Explain two (2) of these objections.

(8 marks)

The objections are:

First, they argue that the pursuit of profit in perfectly competitive free markets will, by itself, ensure that the members of a society are served in the most socially beneficial ways. Of course, the assumption that industrial markets are perfectly competitive is highly suspect. Even more, there are several ways of increasing profits that will actually harm society. Producing what the buying public wants may not be the same as producing what the entirety of society needs. The argument is essentially making a normative judgment on the basis of some assumed but unproved moral standards ("people should do whatever will benefit those who participate in markets"). Thus, although the argument tries to show that ethics does not matter, it can do this only by assuming an unproved moral standard that at least appears mistaken.

Second, they claim that employees, as "loyal agents," are obligated to serve their employers single-mindedly, in whatever ways will advance the employer's self-interest. As a loyal agent of his or her employer, the manager has a duty to serve his or her employer as the employer would want to be served (if the employer had the agent's expertise). An employer would want to be served in whatever ways will advance his or her self-interests.Therefore, as a loyal agent of his or her employer, the manager has a duty to serve his or her employer in whatever ways will advance the employer's self-interests.But this argument itself rests on an unproven moral standard that the employee has a duty to serve his or her employer and there is no reason to assume that this standard is acceptable. An agent's duties are defined by what is called the law of agency, (i.e., the law that specifies the duties of persons [agents] who agree to act on behalf of another party and who are authorized by the agreement so to act). Also, agreements to serve another do not automatically justify doing wrong on another's behalf.

QUESTION 2

a) One of the significant threats to good governance and accountability is conflicts of interest. Explain the term 'conflicts of interest' and discuss how it impacts the role of employees, executives, directors and professional accountants. Give an appropriate example of situations involving conflicts of interest for each group mentioned above.

(12 marks)

Conflict of Interest occurs when the independent judgment of the person is or might be swayed, from making decisions in the best interest of others who are relying on that judgment. The conflict of interest will give the effects toward the role of:

(i) Employee Employees are expected to make judgment in the best interest of the company. For an example, an employee who worked in the purchasing department, need to choose the best price from the best seller to buy an equipment that need to be purchased by the company. However, the employee could choose from the seller with a higher price because the seller is his brother in law. Therefore, the conflict of interest would rise in this situation whether the employee choose for the best interest of the company or for himself. Thus, the employee need to give priority and choose for the best interest of the company even there are no best of interest in himself.

(ii) Executive Executives are expected to make judgment in the best interest of the company. For an example, the executive in Company A have a conflict interest whether wants to receive a bribe from company B in order to give the tender to them or not. However, the executive of the company A need to choose the best interest for the company and avoid from any conflict of interest in making effective decision.

The executive need to make an independent decision without interfering of neither any other people interest nor himself. Thus, the executive in the company A need to analyzed whether the company B really deserve to get the tender or not.

(iii) Directors A director is legally expected to make judgment in the best interest of the company and its shareholders, and to do so strategically so that no harm and perhaps some benefit will come to other stakeholders and the public interest. The director of the company needs also to consider other stakeholder interest such as employee rather than not only shareholder’s interest.

For an example, the Human Resource (HR) Director needs to investigate about the charged of sexual harassment made by one of the employee against the

other supervisor whom are his relative. Thus the HR director only uses an internal resources that she can control rather than check through external resources such as using CCTV. The HR Director need not have a conflict of interest in order investigating and protect employees of the company rights’.

(iv) Professional Accountant A professional accountant is expected to make judgments that are in public interest. A professional accountant should provide a true and fair view of financial statement of the company. The professional should not have any conflict of interest that might rise in bias financial statement.

For an example, is a familiarity threat, when a professional accountant, due to a close relationship, becomes too sympathetic to the interests of other. The professional accountant needs to remove or eliminate the threat in order to avoid from any conflict of interest and from producing a bias and undue influence of Financial Statement of the company.

b) A code of conduct for an organization is essential in ensuring its development and success. Codes not only should be drafted effectively but it also must be implemented well. Explain briefly four (4) ways by which this can be done to ensure effective implementation of the codes of conduct.

(8 marks)

This may refer to the guideline of code of conduct:

(i) Distribution of code should be to all employees

To ensure the effectiveness of the code of conduct, the company need to distribute the code of conduct to all of the employees that none will be claim they were not told how to behave. It is surprisingly that many company believe their line-workers don’t have responsibility for environmental acts, or for actions toward fellow worker, and so on.

(ii) Training in support of the code is essential

This training should focus on the awareness of issues, interpretation of the code in accord with top management wishes, approaches to ethical analysis to enable decisions beyond the code, and on legitimizing the discussion of ethical issues and whistle-blowing.

(iii) Reinforcement of and compliance with the code

The reinforcement of and compliance with the code should be furthered by mechanisms of encouragement, monitoring, and facilitation of the reporting of wrongdoing. These issues should not be left to chance, otherwise the organization miss an opportunity to head off a disaster or to accomplish an ethical performance objective.

(iv) The Board of Director (BOD) should actively review and monitor

The BOD should actively review and monitor whistle-blower concerns on financial and nonfinancial matters, and ethics program activities and feedback. This will ensure the board is aware of problems and can take appropriate action before the company’s reputation, activities, or stakeholders are compromised.

Question 3

a) 1.Distributive justice

This theory is concern about the fair and proper distribution of public or group benefits

and burdens. The clearest cases occur when a family has some benefit or burden to

distribute among its members or parts.

Formal principle of distributive obtains when a person who are similar in all respects

relevant to the treatment in questions are given similar benefits and burdens, and

individuals dissimilar in relevant respects are treated dissimilarly.

This principle is often stated with a proportionality clause. Dissimilar individuals are

treated in proportion to their dissimilarity.

2. Compensatory justice

This theory is the kind of justice that responds to an injury to a person or social unit by

some sort of action or payment that tries to repair the injury and restore wholeness.

For example is personal liability for automobile accidents. If someone damage your car

through no fault of your own, that person (Or her insurance company that she has hired

when she took out insurance) has the duty to pay for the restoration of the wholeness of

the car. Even if the person happened to violate a rule when she caused damage of your

car her paying for damages represent restorative justice not retributive justice.

b) 1. Egalitarian Theory

This theory state that all human are equal in some fundamental respect and each person

has an equal claim to society’s goods and services. This theory implies that goods and

services should be allocated in equal portions regardless of people’s individual

differences.

The radical egalitarian is distribution of benefits and burdens are considered just to the

extent they are equal. The only relevant property is the simple possession of humanity in

determining the justice of distribution.

2. Libertarian theory

This theory state that people do not deserve equal economic returns since they do not all

make the same contribution. This theory makes human are free to choose the kind of

contribution they want to make to the economic systems. Human are free to act

according to their own. Reward compensated with effort. If the person work harder, they

will get more reward compare to the person who does not work as lot as him/her.

3. Marxist theory

Not in syllabus

Question 4

a) i) Benevolence

- Benevolence (ikhsan) or kindness to others is defined as “an act which benefits

persons other than those from whom the act proceeds without any obligation.”

Kindness is encouraged in Islam. The benevolence axiom to business ethics

according to al Ghazzali are as follows:

I. If a person needs a thing, one should give it to him, making as little as

possible. If the giver forgoes the profit, it will be better for him.

II. If a man purchases anything from a poor person, it will be more graceful on

his part to suffer a little loss by paying him more than what he considers to be

the proper price.

III. In realizing one’s dues and loans one must benevolently by giving the debtors

more time to pay than is due and, if necessary, one should make reductions

in loans to provide relief to the debtors.

IV. It is only proper that people who want to return the goods they have

purchased should be permitted to do so as matter of benevolence.

V. It is a graceful act on the part of a debtor if he pays his debts without being

asked to do so, if possible long before they are due.

VI. When selling things on credit one should be generous enough, not to press

for payment when people are not able to pay on the stipulated terms.

ii) Responsibility

- Responsibility in Islam is multi-layered and focuses at both the micro (individual) level

and the macro (organizational and societal) level. The application or the responsibility

axiom to business ethics are as follows:

I. A Muslim business person cannot blame his actions on the pressures of

business or on the fact that everybody else is behaving unethically.

II. All obligations must be honoured unless morally wrong.

III. Once a Muslim has given his word or engaged in a legitimate contract, he

must see it through.

b) Al-Ghazzali wrote that knowledge can either be innate or acquired. He divided innate

knowledge into phenomenal, (material world) and spiritual (related to God and soul), and

divided acquired knowledge into imitation, logical reasoning, contemplation and intuition. He

also argued that there are four elements in human nature. These elements are the sage

(intellect and reason), the pig (lust and gluttony), the dog (anger), and the devil (brutality). He

argued that the latter three elements are in conflict with the former element and that

“different people have such power in different proportions”.

In innate knowledge, every human needs material world to satisfy their need and maximize

their satisfaction. Then, human will try harder in various ways to achieve their vision and

mission. This will show how human being hardworking to succeed. Meanwhile, in spiritual

shows the relationship between human and God. Human needs God as their guidance to the

path of life. So, this will lead to the loyalty of human following all the rules in religion.

However, this is does not means that logical reasoning and others cannot be used. If human

can differentiate between wrong and good, every new element in life like logical thinking can

be accepted. Thus, this will make human to think critically.

Otherwise, human can be categorised to three elements which are sage, pig and dog. If a

person does not have sage in themselves, they cannot control their lust and anger as well as

brutality as the final stage which it shows the worst condition. A good character of a human

should use the intellect and reason in life, can control lust and gluttony, anger and avoiding

devil attitude. If human can understand all these elements, they will encourage themselves

to show a good manner.

PART B

Question 1

a) i) Captain of Garuda, Mr. Rubin

- He responsible for the accident because he had drunk on the ship.

ii) Mr. Brown

- He responsible for the accident because he continues handle the ship even though he

never on charge of the ship before.

iii) Tycoon Oil Company

- The company responsible for the accident because the Garuda had not been upgrade

for its navigation system for long time.

iv) Mr.Smith, CEO of company

- He was responsible too because only think about the profit and do not care about the

oil tanker that do not safely being travel.

b) 1) deals with matters that are or thought to be serious consequences to human being.

- In this case, the action of Captain who had drunk heavily and easily leaving the navigation

of the ship to his assistant is not ethical. It is because, because of his action, the accident

occurred. It is not Mr. Brown fault because he does not know how to manage the ship and

the he is not responsible to in charge the navigation. Because of the captain action, the oil

spread into the sea, and it can give bad consequences to human being.

2) Cannot be established or changed by the decisions of particular authoritative bodies.

- From laws, Mr Rubin should not be drunk in the ship but he does so. So, it is ethical.

According to the moral standard, he is guilty because he does not have any logical reason

why he drunk.

3) Moral standards are supposed to override self interest.

- if a person has moral responsibility, that person is supposed to do it even if not person’s

own interest to do so. In this case, whatever reason the captain drunk, he does not

supposed to do it because he must not ignore others when he makes decision. Supposed,

he must not drink and ignore his interest because the safety of other person must be the

priority.

4) Moral standard are based on impartial consideration

- In this case, the personal interest has to be ignored and the moral standard must goes

beyond it. Supposed, the captain act to give equal benefit for others. However, when he

drunks, he cause trouble to others and not giving any benefit for others.

5) Moral standards are associated with special emotions

- In this case, supposed the captain have to feel guilty in it. He must thinks before he

takes an action. The must not drunks because he should know, if he drunk, he can

not manage the ship and the assistant does not know how to manage the ship. So,

personally, he must feel guilty and say, if I drunk, I will cause a big problem to another

people. I cannot be selfish.

c)

1. It will raise the bad damage of Tycoon Oil Company as the customers want to cancel

their Tycoon Oil credit cards in a present.

2. Government also will sue to company because hiring worker who are not fit the job. For

example, captain Rubin who are arrested on two drunk driving.

3. Government will sue the company because they provide small amount of money to clean

up.

Question 2

a) Whether or not to spend money on a new technology that will reduce the level of toxin

(poisonous waste) in the wastewater that flows out of the back of the factory and into a

nearby lake and river.

b) i) Kamaludin Zakaria

- The installation of a new technology would put Kamaludin’s department ovet budget.

ii) Company – The Plastics Berhad

- The installation of a new technology could jeopardize the company’s ability to show

profit this year.

iii) Public

- The water and fish from the water can be safely used by the public.

c) The alternatives available for Kamaludin are:

i) Spend money on a new technology that will reduce level of toxin for the sake of

Corporate Social Responsibility (CSR).

- All companies have CSR and responsibility to the safety of public.

ii)Find supplier that will give lower price on the new technology and prepare some

budget.

- The company can look for the supplier that can give lower price or negotiate

with them in giving the price.

iii) Reduce the production so that can reduce waste water flow into nearby river

and lake.

- increasing production lead to the increasing of toxin, thus by reduce it the

company can save the environment.

iv) Do not engage self-regulation until government and public force them.

- waiting until the government ask the company to do so, then they will do it.