Module 3- Business Ethics

Ethical issues in Strategic Management

STRATEGIC MANAGEMENT, TERMS & CONCEPTS, BUSINESS ETHICS

Those actions (or by default, inactions) which determine the long term future of an organization.

THREE KEY QUESTIONS

1. Where is the organization today?

2. Where do we want it to be in the future?

3. What needs to be done to get there?

Strategy Implementation

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WHAT IS THE PURPOSE OF A BUSINESS?

Profit?Revenue?Jobs?Meet societys needs?Something else?

THE CONCEPT OF STAKEHOLDER

Old view: maximize stockholder valueNew view: one maximizes stockholder value over the long run by balancing the benefits to all stakeholders:

customersneighbors

employeesstockholders

managementvendors

governmentcompetitors

& more . . .

Some examples . . .

STRATEGIC DECISION MAKERS

Boards of DirectorsSenior managementRoles, skills, tasksElected by shareholdersMission:Protect interests of ownersHire -- and fire -- top managementApprove management initiativesTrends:Codetermination-GER/SWEDBoard responsibility-CONFLICT OF INTERESTBoard activism-Share Activisim-Carl Ichan-EbayStrong owners, e.g., mutual funds(FIDELITY)

BUSINESS ETHICS

Is this just something taught in schools?Some real life cases:Fords PintoManvilles asbestosInternational Fabricating CorporationImpacts? Financial? People?

The stories are always slightly different; but they have a lot in common since

theyre full of the oldest questions in the world, questions of human behavior and

human judgment applied in ordinary day-to-day situations.

we have to ask how usually honest, intelligent, compassionate human

beings could act in ways that are callous, dishonest, and wrongheaded.

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HPs CEO Mark Hurd Resigns amid Ethics Scandal

Mark HurdCEO of HP after Carly FiorinaLow profile, no-nonsense, strategy execution forteHighly successful Increasing market shares for computers and printers Stock rose 110% (well above that of NASDAQ)2010 sexual harassment scandalForced to resignWith $45 million severance packageHired by Oracle

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Manville Corporation

A few years ago, Manville (then Johns Manville) was solid enough to be included among the giants of American business.Manville turned over 80%of its equity to a trust representing people who have sued or plan to sue it for liability in connection with one of its principal former products, asbestos. For all practical purposes, the entire company was brought down by questions of corporate ethics.

WHY BE ETHICAL?

1. Moral reasons

2. Self-interest

3. Financial well-being

Retain autonomy

An ethical strategy is a strategy, or course of action, that does not violate these accepted principles.

four rationalizations that people have relied on through the ages to justify questionable conduct:

believing that the activity is not really illegal or immoral; that it is in the individuals or the corporations best interest; that it will never be found out; or that because it helps the company the company will condone it.

Personal Society Ethics and law

In society many ethical principles are codified into lawprohibitions against murder, stealing, and incest, Many others--no !such as the principle that an author should not plagiarize anothers workt,., but it is unethical.Researchers who claim their idea was stolen by an unscrupulous colleague for his own personal gain before the originator had the chance to file for a patent or publish the idea himself. Such behavior is not illegal, but it is obviously unethical.

Ethics and Business Society

Originally, ethical issues probably did not enter into the companys decision-making calculus.how ethical issues can and should be incorporated into decision making

Business Ethics in the Global Community

Some notions of right and wrong are universal while others are not (universalism vs. relativism- Gifting considered right and proper behavior in many Asian cultures, some Westerners view the practice as a form of briberyCross-culture variability in ethical standards- )- In the United States, it is considered acceptable to execute murderers, but in many cultures this is not acceptableexecution is viewed as an affront to human dignity and the death penalty is outlawedDetermining what is ethical when local standards vary-American executive and child labourManagers have to figure out how to navigate the gray zone when cross-culture ethics differ-example..\Asbestos.docxShould adhere to higher standard(s) Schools of ThoughtEthical UniversalismEthical Relativism

nature of ethical dilemmas they are situations in which none of the available alternatives

seems ethically acceptable

Had the visiting American understood the gravity of the girls situation, would he still have requested her replacement? Perhaps not! Would it have been better, therefore, to stick with the status quo and allow the girl to continue working? Probably not, because that would have violated the reasonable prohibition against child labor found in the companys own ethical code. What then would have been the right thing to do? What was the obligation of the executive given this ethical dilemma?

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Ethical Issues in Strategy

Ethical issues are due to a potential conflict between the goals of the enterprise, or the goals of the individual managers, and the rights of important stakeholders:

Self-dealing

Managers feather their nest with corporate monies

Information manipulation

Distort or hide information to enhance competitive or personal situation

Anticompetitive behavior

Actions aimed at harming actual or potential competitors

Opportunistic exploitation

Of other players in the value chain in which the firm is embedded

Substandard working conditions

Underinvest in working conditions or pay below market wages

Environmental degradation

Directly or indirectly take actions that result in environmental harm

Corruption

Companies pay bribes to gain access to lucrative business contracts.

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Misleading advertising

Misleading labeling

Harm to the environment

Insider trading

Dumping flawed products on foreign markets

Poor product or service safety

Padding expense accounts

Ethical Issues in Operatinal Strategy

The Roots of Unethical Behavior

Why do some managers behave unethically?

No simple answers, but some generalizations:

Personal ethics code: will have a profound influence on behavior as a businessperson

Do not realize they are behaving unethically: by failing to ask the right questions

Organizations culture: de-emphasizes ethics and considers primarily economic consequences

Unrealistic performance goals: encouraging and legitimizing unethical behavior

Unethical leadership: that encourages and tolerates behavior that is ethically suspect

1.business ethics are not divorced from personal ethics

3.an organizational culture that deemphasizes business ethics, reducing all decisions to the purely economic.

2.processes that do not incorporate ethical considerations into business decision making

4.a pressure-cooker culture with a myopic focus on short-run performance

5.leaders do not behave in an ethical manner

Philosophical underpinnings of business ethics that can provide managers with a moral compass to help navigate through difficult ethical issues:

The Friedman Doctrine

Milton Friedmans basic position is that the only social responsibility of business is to increase profits, as long as the company stays within the law and the rules of the game without deception or fraud.

Utilitarian and Kantian Ethics

The moral worth of actions is determined by its consequences leading to the best possible balance of good versus bad consequences. Committed to the maximization of good and the minimization of harm.

People should be treated as ends and never purely as means to the ends of others. People are not instruments, like a machine. People have dignity and need to be respected as such.

Rights Theories:

Recognizes that human beings have fundamental rights and privileges that transcend national boundaries and cultures. These rights establish a minimum level of morally acceptable behavior

Justice Theories

Focus on the attainment of a just distribution of economic goods and services that is considered to be fair and equitable. It is a decision is just and ethical if people would allow for it when designing a social system under a veil of ignorance

Philosophical Approaches to B-Ethics

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To make sure that ethical issues are considered in business decisions, managers should:

Favor hiring and promoting people with a well-grounded sense of personal ethics.

Build an organizational culture that places a high value on ethical behavior.

Make sure that leaders not only articulate but also act in an ethical manner.

Put decision-making processes in place that require people to consider the ethical dimension of business decisions.

Use ethics officers.

Put strong corporate governance processes in place.

Act with moral courage and encourage others to do the same.-BP IN INDIA FOR

Behaving Ethically

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Strategic Management and the Role of Business in Society

The public stock company is the backbone of our economy.Four characteristics of public firms:Limited liability for investorsTransferability of investor interestLegal personalitySeparation of ownership and control

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Stakeholders Approach

Lessons Managerial actions affect economyEthical business produces wealth but unethical practices destroy itStakeholder management is needed

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EXHIBIT 12.2

Honesty and Ethics Ranking of Different Professions

How would you rate the honesty and ethical standards

of people in different fields?

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Only 15% of high executives

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STRAW MEN Aproaches

Straw men approaches to business ethics are raised by business ethics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical decision making

Ethical Universalism

Ethical UniversalismThe most important concepts of what is right and wrong are universal and transcend culture, society, and religionResults in a set of universal ethical standards that apply to members of all societies, all companies, and all businesspeopleSets limits and puts boundaries on ethical behavior

Ethical Relativism

Ethical RelativismDiffering religious beliefs, customs and behavioral norms across countries and cultures give rise to multiple sets of standards concerning what is ethically right or wrongWhat is ethical or unethical depends on the prevailing local ethical standards and can vary from one nation to another There can be multiple sets of ethical standardsThere is no one-size-fits-all set of ethical norms

Integrative Social Contracts Theory

Integrative Social Contracts TheoryProvides a middle positionThe ethical standards a company should try to uphold are governed by both:A common or universal set of ethical standards that apply everywhereEthical standards that vary according to local custom (i.e., cultures, traditions, and shared values)The more stringent standards should always take precedence

Three Categories of Management Morality

Moral Managers Are dedicated to high standards of ethical behavior both personally and on the part of their organizationsImmoral ManagersAre actively opposed to or have no regard for ethical standards in business behaviorAmoral ManagersDo not pay attention or are blind to business ethics or believe that business and ethics dont mix

Drivers of Unethical Strategies and Business Behavior

Apparent pervasiveness of immoral and amoral business peopleConfusion over conflicting ethical standardsFaulty oversight that allows for the overzealous pursuit of personal gain, wealth, and self interestHeavy pressures to beat earnings targetsUnethical company cultures

Approaches to Managing a Companys Ethical Conduct

Unconcerned or nonissue approachDo what is legal; do what we can get away withDamage control approachPrevent adverse publicity; use window dressingCompliance approachPut a compliance system in place to control ethical behaviorEthical culture approachUse culture and peer pressure to control ethical behavior

CASE STUDY: BP-gulf of Mexico oil leak.

Facts of the case:

BP-formely British Petroleum, leased/licensed the

DEEPWATER HORIZON, oil rig operated by Transocean and contracted by Haliburton.

2. This rig exploded in flames in Gulf of Mexico on the night of April 20,2010.

3.RESULT-11 deaths, 17 injured, and hundreds of miles of

Beaches soiled, polluted.

4.The specialized valve-blowout preventor designed to prevent crude oil releases failed to activate after the explosion.

CASE STUDY: BP-gulf of Mexico oil leak.

Prelude of the event:

OSHA had reported during March 2008, that BP had the worst environmental disaster recorded in US history PLACED IN PUBLIC RECORD.

Aftermath of the event:

For 87 days, crude oil gushed from the rig till it was capped on 15th July 2010.The total oil estimated to have gushed out was 210 million gallons(US).With efforts from BP, and host of other organizations it was sealed.Legal and ethical issue and stakeholders disputes STARTED.

CASE STUDY: BP-gulf of Mexico oil leak.

Aftermath of the event.contd.

2.7 million of oiled material and tar balls were removed from the Louisiana coast and the Alabama ,Florida beaches.BP ADMITED guilty to 14 criminal charges-including manslaughter and negligence They PAID 4.5 BILLION in FINES AND PENALITIES and spent 42 BILLION ON CLEANING the environment and paying victims.4 employees faced criminal charges.

Aftermath of the event.contd.

The case suites:The justice department is overseeing the trial betweenThe plaintiffs- TRANSOCEAN,HALLIBRUTON, STATES OF LOUISIANA AND ALABAMA AND PRIVATE PLAINTIFFS defendant- BP AND ITS PARTNER, ANADARKO PETROLEUM,.THE CASE- plaintiffs to prove that the total 210 million US gallons(4.2 million barrels) of oil was discharged as a RESULT OF THE OIL RIG EXPLOSION for 87 days.-allege that BP failure of preparation caused the crisis and aftermath of oil flow.Defendants-defending whether or not it was prepared for

the blowout and its response was adequately done.

CASE STUDY: BP-gulf of Mexico oil leak.

Who are the stakeholder in this case?

1.FED GOVT-dept of energy, interior, justice member

Of congress and President OBAMA.

2.OBAMA appointed Minerals Management Services

To oversee the offshore drilling.

3.other- BP employees & fly, BPs partners, and the

PLAINTIFFS.

4.STATE GOVT, AGENCIES affected by spill, lawyers(both sides) Insurance companies, auditors, competitors, all of

Whom are also stakeholders.

5.Thousand of boats, ten thousands of workers, and

Million of feet of containment boom.

THE EFFECT

BP as a SUPERMAJOR in its industry has

moved from the highest earnings per

barrel to the lowest falling

Behind Shell,exxon And Chevron Corp.

Stakeholder Impact Analysis

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Stakeholder theorylooks at the relationships between an organization and others in its internal and external environment. It also looks at how these connections influence how the business conducts its activities.One of the most important contributors to stakeholder theory isR. Edward Freemanand his bookStrategic Management: A Stakeholder Approach(1984).

Stakeholder Management Approach to Business ethics

Milton Friedman focus on the shareholders as they only stakeholders who matter. THEORY ONEThe business of business is making a profit and building shareholder value the prime purpose

* The quickest way to destroy shareholder value is to ignore stakeholders-THEORY TWO

Freemans Stakeholders theory

The core idea of stakeholder theory is that organizations that manage their stakeholder relationships effectively will survive longer and perform better than organizations that don't.Freeman suggests that organizations should develop certain stakeholder competencies. These include:Making commitment to manage stakeholders interestDeveloping strategies to effectively deal with stakeholders and their interest.Dividing and categorising interest into manageble segments.Ensuring that the organisations function address the needs of the stakeholders

Weiss-1994.Why pay attention to stakeholders?

Organisation has no conscience nor identity and so NO ETHICAL BUSINESS BUT ETHICAL INDIVIDUALS.SO MANAGERS TO LOOK AT STAKEHOLDERS.POWER,RELATIONSHIP OF INTEREST, THEN MORAL RESPONSIBLITY TO EACH FROM BUSINESS SIDE.Moral or philosophical reasons corporate social responsibility to each of the stakeholders are to be chalked outPractical reasons licence to operate is the power that is bestowed upon the managers from the stakeholders/shareholders and the relationship of interest.Strategic planning reasons identifying opportunities and threats

BLIND LOYALTY TO SHAREHOLDERS robs other's rights or kind of property claim inside the company.If we do so .unjustifiable harm is done to others.

Approaches to Stakeholders

Win-Win Approach- collaborative outcomes making moral decisions that benefit the common good of all constituencies with the constraints of justice, fairness and economic interest.Possible???Zero-Sum Approach: Winners and losers in complex situations where the perceived zero-sum game due to limited resources

Clutter buck's institutional and control oriented approach

Set a clear example Publish a code of ethics Use reward and punishment mechanism Include ethics in recruitment criteria Reinforce policies through training and development Provide mechanism for negotiating concerns Establish openness and transparency into decision making processes Provide feedbackClutterbuck and Snow -1990s says to motivate managers mutual benefit.

Drummond and Carmichaels personalized development approach

1989.

Good business pays and ethical failures cost

During skill shortage time

EMPLOYEESS WILL PREFER TO WORK FOR A COMPANY WITH A GOOD ETHICAL REPUTATION

WILL STAY LONGER

CUSTOMER WILL STAY LONGER

SUPPLIER WILL MEET HIGH STDS.-good business is good to do business with

GOVT INTERVETIONS LESS

BUSINESS ENVIRONMENT WILL BE IMPACTED STRONGLY

Carmichael and Drummonds approach

Acknowledge the personal dimension to ethical behavior Monitor symptoms of personal, ethic related stress Analyze feelings about venture and its activities link analysis to diagnosis of problems Draw up personal and corporate ethics checklist Explain your ground - rules to others Set up systems of justice and reinforce these through contract and ethics statements Communicate ethics position

Prudential case!!

High ethics /success /survival- no guaranteed.PROFIT STILL COME FIRSTsometimesdo well economically too with low ethics.Carmichael and Drummond says.

High-ethics, low-profit organization do no survie.High profit and low ethics organization should not survive

Who decides who the stakeholders are?

38% of firms gather external views on business ethics,29% have non-executive directors for this purpose25% employ consultants.To conclude- SH theory begins to study links between organization and society and find that The public demands is raising the ethical states.The public too highlights interesting issues about power, interest and rights.

Ethical issues in Marketing Management