Global business ethics 

Globalization

Main issues of globalization:

1. Imperfect global markets
2. People become mere objects of the global system
3. Environmental harm and injustice
4. unequal distribution of income and wealth
5. Unsustainable global economic system

Typical instruments for upholding human rights and environmental norms:

a. Setting requirements for social and environmental standards (e.g. code for suppliers)
b. Setting up audit mechanisms to check whether these standards are met
c. Setting up mechanisms to educate and help the supplier firms to meet the standards.

Economic players involved in this issue:

1. Respective governments
2. Government of the sourcing countries
3. Consumers

➔ Child labor, child slavery globally

- Fair trade*

*​Fair trade:
- aim at empowering people in their supply chain and care for economic, societal and
environmental conditions that allow workers and communities to flourish and develop
through their participation in the supply chain.
- Often strengthen local communities and local cultural identities around the world and
connect those communities with local markets in developed countries
➔ Globalization of Outsourcing
◆ Environmental harm
◆ Undermining ethical standards
- Serious violation of human rights, sweatshop conditions,exploitation, and
environmentally harmful production
- Improve globalization and come close to the ideal of a win-win situation
(requires shared responsibilities and concerted actions from the
businesses and the governments of developing countries)
➔ Globalization of E-waste
◆ Harm to people and the environment
● Workers - often exploited (child workers) are treated as mere objects and
their potential development is being undermined
● Toxic substances harm the local communities
 ◆ Environmental injustice
● Environmental harm that results from advanced electronics affect porter
regions and poorer people in the world
● Benefits go to the richer areas and well-off people

Environmental injustice ​results from environmental harm and burdens to poorer regions which
are disproportionately higher than the benefits that these regions gain from the global economy
Social injustice ​results from the persistence of global poverty, the lack of opportunities for
many regions in the world to gain from global economic development, and from unequal
distribution of income and wealth in the world

The issues are caused by 3 characteristics in the global context:

1. Large asymmetries in power, capabilities and wealth
- Significantly lack educational opportunities and competitive systems of
higher education
2. Lack of proper regulation around the world
- Grey areas and loopholes can be abused for unethical practices
- Severe human rights violation and environmental destruction often
happens in regions with limited or corrupt government
3. Complexity of the global economic system
- Results in lack of transparency, knowledge, and a responsibility with
regard to ethical issues in the system

Global business ethics: principles

Fundamental global norms and principles:

> The Universal Declaration of Human Rights (UDHR)
> Rio Declaration on Environment and Development
> United Nations Convention Against Corruption

More specific global rules and norms for business:

> ​rules established by the World Trade Organization
> International Labor Organization

Specific function for global business:

> United Nation Global Impact
- a recommended ethical framework for global business which companies
voluntarily can adopt
- formulated ​10 ethical principles for global business​ ​(based on the UDHR, the Rio
Declaration…, basic principles of ILO, and the UN Convention Against Corruption
Two levels of global business ethics:

1. Basic global business ethics

- Mainly grounded in the existing global normative framework and describes the
minimum of ethical norms we can expect any business to follow
- Reference points​ (basic ethical guideline for global business practice)
a. Business should respect fundamental rights and global norms
b. Respect other cultures and different cultural values
c. Ethical values and principles a business has established on its own -
express in its culture, core values, ethics and compliance program, and
corporate responsibility strategy

2. Advanced global business ethics:

- Grounded in ethical theory and aims to make business a positive force in the world.
a. Business could care about the people in the supply chain, and empower them by
meaningful and fair participation
b. Business could set up its operations in a way that allows global partners to
flourish
c. Business can train people in the supply chain, and provide opportunities for them
d. Business can also engage in underdeveloped markets, and provide products that
meet specific regional preferences and needs

- Based on ethics of care and virtue ethics, strive to empower global stakeholders through
business operations, and ensure that the relationship with the business enhances the
stakeholder's potential to flourish and develop.
- Just upholds the original ideal of a free-market economy in which everyone in the market
benefits and is better-off
- Recognized that there is no perfect, self-regulating global market, but instead large
external effects, power asymmetries, and ethical issues - ask companies to actively care
about establishing a win-win in their business operations.
Economic and ethical challenges of the 21st 
century  
Sustainability
- Means the ability to maintain something over time
- Continuance of certain processes, such as economic growth, evolutionary process, or
the continuance of life on earth
➔ Ability to maintain entities, systems, or processes that we consider as fundamental for
our own wellbeing and the wellbeing of people around the world, future generations, and
nature
➔ Emphasizes the fundamental dependence and interrelatedness of human beings
➔ Stresses the fact that there are systemic environmental limits to economic activities and,
that exceeding those limits will have serious negative impacts on our own future, people
around the world, future generations, and nature.
➔ The complexity of many sustainability issues is directly related to the complexity of global
economic system and economic activities.
➔ We can achieve a sustainable future only if we create a sustainable economy and
sustainable businesses.

Sustainable economy
→​an​​economy that serves the wellbeing of contemporaries, future generations, nature in a
systematic and well-defined way, and has theability to continue in the long run without larger
friction or crises.
→ taking care of the wellbeing of the natural environment is a necessary precondition
→ can only be developed by the various actors who together form the economic system:
● Consumers
● Businesses
● Employees
● Communities
● Non-governmental organizations
● Governments
● others

Sustainable business
→ ​a business that systematically considers all environmental, societal, global, and future
impacts of its business operations and products and improves its competitiveness and long-term
success

Reasons why businesses should care about sustainability:

*Ethical reasons:
 1. Business generally needs to consider societal and global norms and value
- Sustainability has become a societal and global norm today
- It would not be a good business strategy to ignore or counteract values and
norms that are broadly shared in society (it would shy away customers,
employees…)

2. Economic activities have been a major factor in causing sustainability issues

3. Economy and business should ideally be a positive force in the world
- Being a positive force in the world today requires that a business careful
considers its own environmental, global, and future impacts and aims to minimize
harm and maximize benefits in this broader sustainability context

*Economic reasons
1. Strategic management
- The sustainability perspective enables a business to develop a broad strategic
perspective on its own operations
- A business is in a better position to make long-term strategic decisions and
position itself for future challenges and markets
2. Business opportunities
a. Efficiency gains
- This inspires businesses to systematically analyze their resource
and energy use and enable them to identify efficiency potentials
- Can ultimately result in gains by various measures
b. Identification of new markets
- New preferences, needs, and wants emerge that provide
opportunities for businesses

3. Business capabilities and societal role

- Has the potential to help society become more sustainable
- By its economic function to provide goods and services, a business can
substantially contribute to sustainable development and be a positive force in the
society

Benefit corporations
- A new approach to adjust the legal framework and create a new legal form business that
fits to these new types of business and better protects them legally
- “A new type of legal entity” in the US
- To establish a legal type of business that allows social entrepreneurs and sustainable,
purpose-driven businesses to use the environmental purpose of their business
● Must have a corporate purpose of creating public benefit(social or environmental benefit)
● Directors of a benefit corporation have the duty to protect the interests of all core
stakeholders and to uphold the purpose of the benefit corporation
● It has an obligation to issue annual reports on their progress in achieving its purpose
 - Traditional corporation
> can have any purpose as long as it is a legal one
> directors have a sole legal obligation to serve the financial interests of the
stakeholders; no legal obligation and few possibilities to protect the purpose of the
business as a value in itself
- Benefit corporation
> required to formulate a more specific purpose of creating public benefit
> defines the legal obligation of the board of directors in a way that explicitly supports the
concept of purpose-driven businesses
> legally required to report on their progress in serving their purpose (results in more
transparency and credibility)
● Higher returns, lower risks due to higher transparency and competitiveness
● Better adaptations to sustainability challenges,
● higher efficiency,
● more robust customer base,
● better positioning in the new markets
● Better motivated and qualified employees

→ demonstrates that the changing norms and values in business require changes to the legal
framework for business.
→ social enterprises, sustainable, value-, and purpose-driven businesses, and benefit
corporations demonstrate the ​flexibility of capitalism.

Governance 
Key Elements of Governance Structure:
1. Governance
● 1st layer
● Surrounds ​all ​the activities in an organization
○ To comply with laws and regulations in the jurisdictions in which the
organization operates
○ To ensure the needs of the key stakeholders are met
○ To ensure that the organization operates within the boundaries and
values established by the board and senior management
2. Risk Management
● 2nd layer
○ To identify and manage the risks that may adversely affect the
organization’s success
○ Exploit the opportunities that enable the key risks
3. Internal Control
● 3rd layer
● Represent subset → but integral part of the broader risk management activities
 4. Three arrows
● Represent the flow of information throughout the governance structure
● Depict the flow of direction and accountability from one layer to the next

a. Arrows downward
1. Board → to senior management: to guide them to carrying out the
risk management activities
2. Senior management → to lower levels of management:
responsible for the specific controls

b. Arrows upward
1. Lower level managers: accountable to senior management for the
success of controls
2. Senior management: accountable to provide the board
assurances regarding the effectiveness of risk management
activities

CORPORATE GOVERNANCE:
❏ About seeing that the business is running properly
❏ All companies need managing and governing
→ involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders.
→ also provides the structure through which the
1. objectives of the company are set, and
2. the means of attaining those objectives and monitoring performance are
determined.
❏ Refers to the way a corporation is governed
❏ Technique by which companies are directed and managed
❏ Carrying the business as per the stakeholders’ desires
❏ Actually conducted by the BoDs and the concerned committees for the company’s
stakeholders’ benefit
❏ All about balancing individual and societal goals and economic and social goals

Pillars of Corporate Governance:

1. Fairness
● Protect shareholders’ rights
● Treat all shareholders including minorities, equitably
● Provide effective redress for violations

2. Accountability
● Ensure that management is accountable to the BOD (vv)
3. Transparency
 ● Ensure timely, accurate disclosure on all material matters (including the financial
situation, performance, ownership, and corporate governance)

4. Independence
● Procedures and structures are in place to ensure the minimization or avoid
completely conflicts of interest
● Independent Directors and Advisers → from the influence of others

Elements of Corporate Governance

1. Good Board Practices
● Roles and authorities are clearly defined
● Duties and responsibilities of Directors are understood
● Well structured Board
● Appropriate composition and mix of skills
● Appropriate Board procedures
● Director remuneration in line with best practice
● Board self-evaluation and training conducted

2. Transparent Disclosure
● Financial information disclosed
● Non-financial information disclosed
● Financials prepared according to IFRS
● Companies Registry fillings up to date
● High quality annual reports published
● Web-based disclosure

3. Control Environment
● Internal control procedures
● Independent audit committee established
● Risk management framework present
● Internal audit function
● Disaster recovery systems in place

4. Well defined shareholders rights

● Minority shareholder rights formalized
● Well-organized shareholder meetings conducted
● Policy on related party transactions
● Policy on extraordinary transactions
● Clearly defined and explicit dividend policy

5. Board Commitment
 ● Board discusses corporate governance issues and created a governance
committee
● Company has a corporate governance champion
● Corporate governance improvement plan has been created
● Appropriate resources are committed to corporate governance activities
● Policies and procedures have been formalized and distributed to relevant staff
● A corporate governance code has been developed
● A code of ethics has been developed
● The company is recognized as a corporate governance leader

Overview of governance:

Governance “ umbrella” BODs

1. Strategic decisions
→ responsibility of the BODs to provide strategic direction and guidance relative
to the establishment of key business objectives, consistent with the organization’s
business model and aligned with stakeholder priorities

Board: ​an organization’s governing body such as:

a. Board of directors
b. Supervisory board
c. Head of agency or legislative body
d. Board of governors or trustees of a NPO
e. Any designated body of the organization

Strategy: ​how management plans to achieve the organization objectives

2. G​overnance oversight
→ board’s role in managing and monitoring the organization’s operations

Key components of governance oversight

1. Risk management
a. Senior management
b. Risk owners
2. Assurance
a. Internal activities
b. External activities

● Board provides direction to management

● Empowers them with authority to take necessary actions to achieve the direction,
 ● Oversees the overall results of operations
● Understand and focus on the needs of key stakeholders
● Day to day governance is executed by the management of the organization
● Senior management and line managers have important, although somewhat different,
roles in governance
● Roles are carried out through risk management activities
● Internal and external assurance activities provide management and the board with
assurance regarding the effectiveness of governance activities
● Parties include (but not limited to):
○ Internal auditors
○ Independent outside auditors

Roles and responsibilities within governance:

The board and its committee

1. Identify the key stakeholders of an organisation
2. Understand the needs and expectations of the key stakeholders
3. Identify the potential outcomes that would be unacceptable to the key stakeholders

Stakeholders’ characteristics:
1. Some are directly involved in the operation of the organization’s business
2. Other stakeholders are not directly involved → but interested in the organization’s
business (they are affected by the success or other outcomes of the business)
3. Some are neither directly involved nor interested → but may nonetheless influence
aspects of the organization’s business, thus the organization’s success

https://youtu.be/c_EuVEXQMRk

What is Corporate Governance:

→ the process by which org are directed and controlled in terms of:
1. authority,
2. Accountability
3. stewardship,
4. Leadership
5. direction, and
6. Control
→ framework by which a company’s BODs and senior management established and persues
objectives while providing effective separation of ownership and control
1. Establishment and maintenance of independent validation mechanics within an org to
ensure the reliability of system of controls used by the BODs to monitor compliance with
strategies and risk tolerances
Why is C. G important:
→ implementation of these ensure that proper oversight is in place to hold the org accountable
to the standards, laws and regulations that it should be abiding by
→ helps achieve its objectives and desired outcomes and fulfil its obligation thr:
1. Sound strategic in business planning
2. Risk management
3. Finanicla management and reporting
4. Human resource planning and cintrol
5. Compliance and accountability systems

→ provides framework for responsibilities to all participants conncected to the organization,

clients, employees, providers of capital

How is it assessed?
1. Structure effectives
- Targets organzational structure thru review of:
1. Legal entities
2. Individuals
3. Policies
- Focuses on how roles and responsibilities and lines of authority, communication
channels are reflected in the legal channels of the institution
- Considers the quality of ethics policy and code of conduct established by the
board
-
2. Board supervision adequacy
- Focuses on elements of ability of BOD to understand and oversee the activities
of the organization
- Board charters are reviewed to understand the legal requirements established for
the board by the shareholders
- Focuses on how the committees are structured, quality of minutes
- Focuses on the quality, frequency and timeliness of information flow to the board
- Attention to audit activities and governance committee
- Considers boards members and their qualifications
- Reasonableness of compensation practices
- Quality and accuracy of board minutes
- Adequacy and frequency of training and self-assessments
- Board member attendance
3. Management effectiveness
- Management committee charters and activities in line business metrics
- Qualifications of committee members
Scope of committee activities
- Flow of information to the board
-
4. Adequacy of control functions
 - Effectiveness and relationship with the boards
- Focuses on efficacy of internal audit, external audit, credit review and compliance

Strong → all or significant majority of characteristics reviewed, highest standards possible

Adequate → meeting expectations for each element but one to few characteristics did not meet
expectations, shortfalls will be easily addressed in the normal course of business; not significant
enough to adversely affect supervisory ratings of the institution
Weak → one or more serious shortfalls in meeting minimum expectations; require significant
efforts to correct and could negatively affect the institution supervisory ratings

Corporate Governance 
5 Main principles of Corporate Governance ( UK code)
1. Leadership
→ T ​ ​he board should support the company's long-term sustainable growth and ensure
that the mission, principles and strategy of the company are consistent with the
corporate culture and the policies and practices of the workforce.
2. Effectiveness
→ The board and its advisory groups should have the required combination of the
organization's skills, expertise, independence and knowledge to enable them to
discharge their respective duties and responsibilities effectively.
3. Accountability
→ The Code assumes the responsibility of the Board of Directors of the Company to all
investors in accordance with relevant laws and sets the direction to the Board of
Directors to establish and monitor the exercises of the management authorities.
4. Remuneration
→ A systematic and clear process for the implementation of executive policies should be
in place hence, the remuneration and for fixing individual directors' remuneration
packages. In determining his or her own remuneration, no director should be involved.
5. Relations with shareholders
→ It is the responsibility of the board as a whole to ensure that a satisfactory discussion
with shareholders takes place. General meetings must be used by the board to connect
with investors and to facilitate their interest.

(from: ​https://www.youtube.com/watch?v=XJzV4wmmQM8​)

- System by which organizations are directed and controlled

Why is it required?
- Companies are owned by the shareholders, but run by the BODs.
 - Ensures the company is run in the interests of the shareholders

Principles of corporate governance (OECD)

1. Rights of shareholders
2. Equitable treatment of shareholders
3. Stakeholder relations
4. Disclosure and transparency
5. The responsibilities of the board

A key issue in corporate governance is that of balance:

1. The role of Non-executive directors (NEDs)
- Who do not actually work for the company
2. Chairman and chief executive should not be the same person
- The chairman of the BODs and the executive is the one who runs the company

→ ​Executive director ​works full time with the running of the organization.
→ ​Non-executive Directors​​should be independent of the organization ​and have an
important role to play:
● Industry expertise
● Corporate conscience
● Balance in decision making
● Insight on corporate governance
● Remuneration committee (at least 3 NEDs) → sets the pay of the executive directors
● Audit committee (at least 3 NEDs) → who appoints the external auditors.

*​At least half of the board​(excluding the chairman) should consist of NEDS (so they can
outvote the executive directors).

Social responsibility
- organization’s impact on society and its stakeholders
- Not just interested in profits (e.g do not damage the local community, do not pollute, etc.)
- Not necessarily a legal thing (a company chooses to do)
- Although behaving in a socially responsible way may have an adverse impact on short
term profits, it is generally considered to be the right decision for the longer growth and
success of the organisation.

https://www.youtube.com/watch?v=LpSQ8UNX5kk

Aim of corporate governance:

● Make the directors to work in the best interests of the company/shareholders

Theories that underpins the corporate governance:

1. Agency Theory
 - Separation of ownership and actual management of company \
- Agency problem: shareholders do not ​trust t​ he directors employed
- Pays agency costs
● for employment of directors (salaries, bonuses) and
● monitoring costs
○ (monitoring the directors’ performance of they are following
Corporate Governance)
○ disclosures
○ Audit fees

2. Transaction Cost Theory

- Incurring costs either at ​internal transaction ​or ​e​xternal transaction
- Internal (employee)
- External (outsourcing)
- Component of transaction costs:
1. Uncertainty costs → e.g looking for a good supplier (research) (spends
time)
2. Opportunity cost → benefit to another party (new web designer as
opposed to long-associated web designer)
3. Stakeholders Theory
-
4. Fundamental principles of the corporate governanc​e
Best practices adopted by organizations:
● Split the role of the CEO and the chairman

Corporate Governance
From: ​https://www.youtube.com/watch?v=LpSQ8UNX5kk

Board structure:
1. Multi tier
- Rare
- Practiced in Germany and France, etc.
- Consists of:
1. Supervisory Board
2. Management Board
- Advantage: supervisory board not encumbered or threatened by the
management board
- Disadvantage: lots of reparate meeting, more expensive
2. Unitary Board
- One board where there are: 1) NEDs and 2) EDs
- usual / most common

Approached
 a. Rules based
- (Sarbanes Oaxley Act for USA)
- Rare
- More strict
b. Principle based
- Usual
- Lay out best practice and principles flexibility in different circumstances
- OECD → high level of code that talks about the rights of shareholders and
responsibilities of directors
- Comply or explain basis
- Judgement are being made by the shareholders/investors
- ICGN → code for international practice of CG

→ At least half of the board should compose of Non-executive boards (> 50%)
Roles of NEds.
1. Strategies of the business
2. Scrutinize Exec Directors
3. Risks managements are operation g
4. People - right number, qualities of people

Board of Subcommittees:
1. Audit Committee → made up of independent NEDs and needs to have relevant and
recent financial experience, ensures that there is a risk management policies in placed
2. Nomination Committee → considers the structure of the board, bring people, make
recommendation for approval
3. Remuneration Committee → sets the pay for directors: fixed or proportional
4. Risk Committee → specific focus on risk management; makes sure that risk
management is given the profile that it needs and focus that it needs in risk management

Governance Codes: (L ​ EARR)

1. Leadership
2. Effectiveness
3. Accountability
4. Remuneration
5. Relationship with shareholders