Book Professional Ethics New

OUM Business School
OUMM3203
Professional Ethics
Copyright © Open University Malaysia (OUM)

OUMM3203
PROFESSIONAL
ETHICS
Dr Ho Jo Ann
Dr Tee Keng Kok

Project Directors: Prof Dato’ Dr Mansor Fadzi l
Prof Dr Wardah Mohamad
Open University Malaysia
Module Writers: Dr Ho Jo Ann

Universiti Putra Malaysia
Dr Tee Keng Kok

Moderator: Tuan Fatma Tuan Sulaiman

Developed by: Centre for Instructional Design and Technology

First Edition, August 2011

Second Edition, December 2011
Third Edition, December 2013 (rs)
Copyright © Open University Malaysia (OUM), December 2013, OUMM3203
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

Table of Contents
Course Guide ix xiv
Topic 1 Moral Reasoning and Ethical Theory 1

1.1 Moral Reasoning and Ethical Theory 2
1.1.1 Meaning of Ethics 2
1.1.2 Meaning of Business Ethics 3
1.1.3 Meaning of Professional Ethics 3
1.1.4 Why should Businesses be Ethical? 4
1.1.5 Formation of Individual Ethics 4
1.2 Normative Philosophy and Ethical Relativism 6
1.3 Ethical Principles 7
1.3.1 Eternal Law 8
1.3.2 Classical Teleological Ethical Theory: Utilitarianism 8
1.3.3 Classical Deontological Ethical Theory: 10
Universalism
1.3.4 Distributive Justice Theory 11
1.3.5 Personal Liberty Theory 12
1.4 Normative Philosophy as Basis for Moral Choice 14
1.4.1 Golden Rule 14
1.4.2 Kantian Rights 15
Summary 17
Key Terms 18
Topic 2 Stakeholder Relationships 19

2.1 The Stakeholder Concept 19
2.1.1 Classification of Stakeholders 20
2.1.2 Support for the Stakeholder Concept 21
2.2 Stakeholder Management 23
2.2.1 Identifying the FirmÊs Relevant Stakeholders 24
2.2.2 Stakeholder Power 24
2.2.3 Stakeholder Legitimacy 26
2.2.4 Stakeholder Urgency 26
2.3 Responsibilities of the Firm towards its Stakeholders 27
2.4 Managing Stakeholder Relationships 28
Summary 29
Key Terms 30

iv TABLE OF CONTENTS
Topic 3 Nature of Ethics in Modern Business 31

3.1 Ethical Problems as Managerial Problems 31
3.2 Characteristics of Ethical Problems in Management 32
3.2.1 Most Ethical Decisions Have Extended 33
Consequences
3.2.2 Most Ethical Decisions Have Multiple Alternatives 33
3.2.3 Most Ethical Decisions Have Mixed Outcomes 34
3.2.4 Most Ethical Decisions Have Uncertain 34
Consequences
3.2.5 Most Ethical Decisions Have Personal Implications 35
3.3 Examples of Ethical Problems in Management 36
3.4 Analysis of Ethical Problems in Management 38
3.5 Ethics in Islam 40
3.5.1 A Universal Message 41
3.5.2 Syariah 41
3.5.3 Commerce and Business 42
3.5.4 Teachings about Economic Practices 43
3.5.5 Obligations of Piety 44
3.5.6 Conclusion 45
Summary 45
Key Terms 46
Topic 4 Managerial Ethics and Rule of Law 47

4.1 Rule of Law 48
4.2 Law as a Guide to Moral Choice 48
4.3 An Example of Moral Choice 50
4.4 Law as Combined Moral Judgement 51
4.5 Characteristics of Law 52
4.6 Relationship between the Law and Moral Standards 54
4.7 Formation of the Law 56
4.7.1 Individual Processes 56
4.7.2 Group Processes 59
4.7.3 Social Processes 60
4.7.4 Political Processes 61
4.8 Conclusion on Rule of Law as Basis for Moral Choices 61
Summary 63
Key Terms 64
Topic 5 Organisational Approaches in Improving Ethical Behaviour 65

5.1 Improving Ethical Climate in Organisations 66
5.1.1 Ethical Codes 67
5.1.2 Ombudsman Position 69
5.1.3 Ethics Hotlines 69

TABLE OF CONTENTS v
5.1.4 Ethics Training 70

5.2 Structural causes of Unethical Behaviour 71
5.3 Solutions to the Structural Causes of Unethical Behaviour 72
5.4 Ethical Responsibilities of Management 73
Summary 75
Key Terms 75
Topic 6 Social Responsibility and Organisations 76

6.1 Historical Views of Social Responsibility 77
6.1.1 Entrepreneurial Era 78
6.1.2 Depression Era 79
6.1.3 Social Era 80
6.2 Areas of Social Responsibility 81
6.3 Arguments on Social Responsibility 84
6.4 Organisational Approaches to Social Responsibility 85
6.5 Social Responsibility of Government 86
6.6 How Government Influences Organisations 87
6.7 How Organisations Influence Government 87
6.8 Managing Social Responsibility 88
6.9 Evaluating Social Responsibility 90
6.9.1 Social Audit 90
Summary 93
Key Terms 94
Topic 7 Corporate Governance 95

7.1 What is Corporate Governance? 96
7.1.1 Components of Corporate Governance 96
7.2 Perspective of Corporate Governance 97
7.3 Corporate Governance Dealing with Top 99
Management
7.4 Why Study Corporate Governance? 99
7.5 Code of Corporate Governance 100
7.6 Future of Corporate Governance 103
Summary 105
Key Terms 105
Topic 8 Moral Dimensions of Economic System 106

8.1 Economic System 107
8.2 Employment and Wages 108
8.2.1 Moral Right to Employment 109
8.2.2 Fair Hiring Practices 111
8.2.3 Affirmative Action and Preferential Treatment 113
8.2.4 Wages 114

vi TABLE OF CONTENTS
8.2.5 Equal Pay for Equal Work 115

8.2.6 Equal Pay for Comparable Work 115
8.2.7 Share of Returns on Resources 116
8.3 Ranking and Rating 117
8.4 Ethical Implications for Performance Appraisal 118
Summary 119
Key Terms 120
Topic 9 Employees and the Workplace 121

9.1 Respecting EmployeesÊ Right to Privacy 122
9.2 Substance Abuse 124
9.3 Abusing Employees 126
Summary 128
Key Terms 128
Topic 10 Loyalty to a Company 129

10.1 What Loyalty Means 131
10.2 Whistle-blowing 133
10.2.1 Internal Whistle-blowing 134
10.2.2 External Whistle-blowing 136
10.3 Morality of Terminating Whistle-blowers 137
10.4 Improper Loyalty 138
Summary 138
Key Terms 139
References 140
Answers 142

COURSE GUIDE

COURSE GUIDE ix
COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.
INTRODUCTION
OUMM3203 Professional Ethics is one of the courses offered by the Faculty of
Business and Management at Open University Malaysia (OUM). This course is
worth 3 credit hours and should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This is a compulsory OUM course for all students of OUM.
As an open and distance learner, you should be acquainted with learning

independently and be able to optimise the learning modes and environment
available to you. Before you begin this course, please confirm the course material,
the course requirements and how the course is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

x COURSE GUIDE
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussion 3
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS 120
COURSE OUTCOMES
By the end of this course, you should be able to:
1. Discuss a variety of ethical issues related to business and professional
practices;
2. Explain different ethical and theoretical perspectives and apply the
theories;
3. Elaborate the concept and perspectives of stakeholders;
4. Describe the future of corporate governance;
5. Explain law as a combined moral judgment;
6. Discuss several causes of unethical behaviour in organisations and
approaches to overcome them; and
7. Discuss good management, employment rights and how the economic
system deals with opportunities related to employment.
COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic is presented
below:
Topic 1 aims to introduce the learner to fundamental concepts and theories of

morals, the history and development of ethical theories, and a systematic study
of right and wrong with a critical application of ethical theories to current social
problems.

COURSE GUIDE xi
Topic 2 focuses on stakeholder relationships. Stakeholders are individuals or

groups who can be affected by the actions, decisions, policies or goals of an
organisation. Stakeholders can be categorised into market and non-market
stakeholders.
Topic 3 deals with the question of finding a balance between economic performance
and the social performance of an organisation when faced with an ethical dilemma.
This topic also discusses about ethics in Islam.
Topic 4 examines issues related to the law as a guide to managerial decisions and
actions, and the processes involved in formation of the law.
Topic 5 focuses on unethical behaviour in an organisation and the causes of

occurrence in the organisation. The responsibilities of the senior management are
also discussed.
Topic 6 exposes the learner to the concept and effects of corporate social
responsibility and managing it effectively.
Topic 7 discusses corporate governance, its definition, reasons for studying it and
the future of corporate governance.
Topic 8 outlines the general economic systems in dealing with the issues related
to employment.
Topic 9 details the employeeÊs right to privacy and instances leading to violations
of privacy.
Topic 10 discusses the meaning of loyalty to a company or an organisation.
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one sub-section or a few sub-
xii COURSE GUIDE
sections. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the sub-section(s). Most of the time, the answers to the questions can
be found directly from the module itself.
Activity: Like Self-Check, the Activity component is also placed at various

locations or junctures throughout the module. This component may require you
to solve questions, explore short case studies, or conduct an observation or
research. It may even require you to evaluate a given scenario. When you come
across an Activity, you should try to reflect on what you have gathered from the
module and apply it to real situations. You should, at the same time, engage
yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of only having to recall and define.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful

textbooks, journals, articles, electronic contents or sources can be found. The list
can appear in a few locations such as in the Course Guide (at the References
section), at the end of every topic or at the back of the module. You are
encouraged to read or refer to the suggested sources to obtain the additional
information needed and to enhance your overall understanding of the course.
PRIOR KNOWLEDGE
None.
ASSESSMENT METHOD
Please refer to myINSPIRE.

COURSE GUIDE xiii
REFERENCES
Carroll, A. B., & Buchholtz, A. K. (2006). Business and Society: Ethics and
Stakeholder Management. (6th ed.). Ohio: South-Western.
Donaldson, T., & Preston, L. (1995). The Stakeholder Theory of the Corporation:
Concepts, Evidence, Implications. Academy of Management Review 20(1),
65-91.
Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston:

Pitman Publishing.
Hosmer, L. 1991. The ethics of management. (2nd ed.). Boston: Irwin.
Institute for Global Ethics. (2006). Cooked Books, Fried Reputation: Study, Ethics
Newsline (Vol. 2006): Ethics Newsline.
Lawrence, A. T., & Weber, J. (2011). Business and Society: Stakeholders, Ethics
and Public Policy (13th ed.). Singapore: McGraw-Hill.
Lawrence, A. T., & Weber, J. (2011). Business and Society: Stakeholders, Ethics
and Public Policy. (13th ed.). Singapore: McGraw-Hill.
Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a Theory of Stakeholder
Identification and Salience: Defining the Principle of Who and What Really
Counts. The Academy of Management Review, 22(4), 853-886.
Thorne, D. M., Ferrell, O. C., & Ferrell, L. (2008). Business and Society. (3rd ed.).
Boston: Houghton Mifflin.
Wheeler, D., & Sillanpaa, M., The Stakeholder Corporation: A Blueprint for
Maximising Stakeholder Value, London: Pitman Publishing. (1997). The
Stakeholder Corporation: A Blueprint for Maximising Stakeholder Value.
London: Pitman Publishing.

xiv COURSE GUIDE
TAN SRI DR ABDULLAH SANUSI (TSDAS)

DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books24x7, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner,
you are encouraged to make full use of the resources available through this
library.

Topic Moral
1 Reasoning and
Ethical Theory
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define ethics from business and professional point of view;
2. Explain the five factors involved in the formation of individual
ethics;
3. Explain normative philosophy and ethical relativism;
4. Compare all major ethical systems; and
5. Apply the relevant ethical theories to ethical issues raised in business
and professional practice.
INTRODUCTION
What comes to your mind when someone mentions the word „ethics‰? Perhaps
your answer is correct. Let us see what we are going to learn in this topic.
In this topic, you will be exposed to the fundamental concepts and theories of
morals; the history and development of ethical theories; and also the systematic
study of right and wrong, good and evil. These concepts and theories will then
be applied to contemporary managerial dilemmas.

2 TOPIC 1 MORAL REASONING AND ETHICAL THEORY
1.1 MORAL REASONING AND ETHICAL

THEORY
Do you know that ethical problems are truly complex when it comes to the
management of an organisation? These problems are complex because of the
following attributing characteristics (which will be elaborated further in Topic 3):
Extended consequences;
Multiple alternatives;
Mixed outcomes;
Uncertain consequences; and
Personal implications.
Ethical problems are also pervasive because managers make decisions and take
actions that affect other people. Managerial decisions and actions need to be
addressed and require some degree of moral analysis when these:
Affect other people negatively; or
Harms or hurt other people in ways beyond their individual control.
In the following sections, you will be given the definition of ethics, business
ethics and professional ethics. You will also find out why a business should be
ethical as well as about the formation of individual ethics.
1.1.1 Meaning of Ethics

What is ethics?
Ethics can generally be defined as the principles of morally acceptable

conduct of individuals. Ethics also means an individualÊs personal beliefs
about right and wrong behaviours.
Although this simple definition communicates the essence of ethics, three

implications warrant additional consideration:
(a) Ethics is individually defined. People have ethics whereas organisations do

not;
(b) What constitutes ethical behaviour can vary from one person to another;
and

TOPIC 1 MORAL REASONING AND ETHICAL THEORY 3
(c) Ethics is relative; it is not absolute. This means ethical behaviour usually
conforms to generally accepted social norms.
1.1.2 Meaning of Business Ethics

While ethics generally refers to the conception of right and wrong (Lawrence &
Weber, 2011), business ethics refers to the application of ethical values and ideas
on issues that arise in the business context. It is not different from ethics in
general. For example, if we consider lying to be unethical, then anyone in
business who lies about his products or the financial performance of his company
to his stakeholders is acting unethically as well.
1.1.3 Meaning of Professional Ethics

Do you know what professional ethics is? Let us refer below to know its
meaning.
Professional ethics indicates the moral values that a group of similarly

trained people develop to control their task performance or use of resources.
People internalise the rules and values of their professional culture just as they
do those of their society. They reflexively adhere to professional rules and values
when deciding how to behave.
Some organisations have many groups of professional employees such as nurses,

lawyers, researchers, doctors and accountants, whose behaviour is governed by
professional ethics. Professional ethics help to shape an organisationÊs culture
and determine the values of its members in their dealings with other
stakeholders. Most professional groups are allowed to enforce the ethical
standards of their profession. Professional groups, such as doctors and lawyers,
can be banned from practising if they violate their professional rules.
ACTIVITY 1.1
Answer the following questions on ethics.

(a) How do you define the term „ethics‰?
(b) How does ethics affect your life? Give several examples.

1.1.4 Why should Businesses be Ethical?

Ethics plays a prominent role in business as it is required in any kind of business
conduct. Businesses should be ethical for two main reasons:
(a) Significant Influence on Environment and Stakeholders

Business actions can affect the natural environment and the organisationÊs
various stakeholders such as its customers, employees and the community.
Since businesses can have an enormous influence on its stakeholders, an
organisation has to be responsible and ethical in its actions.
(b) Enhance the Business Performance

Business ethics enhances the organisationÊs business performance.
Businesses recognise that ethical actions can directly affect their
organisationÊs bottom line (Lawrence & Weber, 2011). On the other hand,
being unethical can have detrimental effects on an organisation as shown
below.
A study conducted by the University of Washington found that companies

which had misstated their accounting information lost 41 percent of their
market value after their misdeed was discovered. This is because
dishonest firms tend to lose their customers and face higher financing
costs.
Source: Institute for Global Ethics (2006)
1.1.5 Formation of Individual Ethics

What makes some individuals ethical and others unethical? Why are some
people honest while others are dishonest? Various factors are instrumental in the
formation of individual ethics, as shown in Figure 1.1.
Figure 1.1: Factors that form individual ethics

(a) Family Influences

Individuals start to form their ethical standards from childhood in response
to their perception of their parentsÊ behaviours. Children are more likely to
adopt high ethical standards if they see that their family members adhere to
high standards (such as being truthful) and if they receive rewards for
conforming, and punishment for not conforming, to these standards.
However, if family members engage in unethical behaviours (such as being

untruthful) and allow their children to do the same, then the latter is likely
to develop lower ethical standards.
(b) Peer Influences

When children enter school, they are influenced by peers with whom they
interact every day. For example, if a childÊs friends engage in shoplifting,
vandalism or drug abuse, the child too might decide to do the same.
Conversely, if the childÊs peers have higher ethical standards and reject the
said behaviours, he is likely to adopt these standards.
(c) Life Experiences

Dozens of important events, both positive and negative, shape peopleÊs
lives and influence their ethical beliefs and behaviour. These events are a
part of growing up and maturing.
For example, a person who steals something and does not get caught might
feel no remorse and continue to steal. However, a person who is caught
stealing might feel guilty enough to change his ethical standards and make
it a point not to steal in the future.
(d) Personal Values and Morals

Values and morals also influence a personÊs ethical standards. For instance,
a person who places financial gain and personal advancement as a top
priority will adopt a personal code of ethics that promotes the pursuit of
wealth.
Thus, he may be ruthless in attempting to gain these rewards regardless of

the cost to others. A person who gives priority to his family will adopt a
different ethical standard.
(e) Situational Factors

The final determinant of an individualÊs ethics is situational factors.
Sometimes, people unexpectedly find themselves in situations that cause
them to act against their better judgement.

For example, some people who cheat on their expense accounts do so

because of personal financial difficulties. Although this does not justify
their dishonesty, it does provide some context for understanding why
people might sometimes behave unethically if they have no other choice.
ACTIVITY 1.2
Which of the above-mentioned factors have been most influential

in the formation of your ethics? Give some examples.
1.2 NORMATIVE PHILOSOPHY AND ETHICAL

RELATIVISM
Moral reasoning requires understanding of normative philosophy. Philosophy
is the study of thought and conduct. Therefore, normative philosophy is the
study of proper thought and conduct; that is, how we should behave.
Normative philosophers have been looking at the issue of normative philosophy

for more than 2,400 years ago, since the time of Plato. They have attempted to
establish a logical thought process based upon an indisputable principle that
would determine whether an act is labelled as the following:
(a) Right or wrong; or
(b) Good or evil; or
(c) Fair or unfair.
The next issue to be addressed in this description of the techniques of moral

reasoning concerns ethical relativism. Ethical relativism stated that ethical
principles should be defined according to historical period, societyÊs cultures,
special situational behaviour or personal view. The question here is very basic.
Are there objective universal principles upon which one can construct an ethical
system of belief that is applicable to all groups, in all cultures and at all times?
Moral standards of behaviour differ between groups within a single culture,
between cultures and between times. For example, in contemporary Malaysia,
moral standards for decisions on product safety differ between leaders of
consumer interest groups and executives of major industrial corporations. It is
also probable that these standards of product safety would differ even more

greatly between Malaysia and the United States, or between the contemporary
period and the late 19th century.
SELF-CHECK 1.1
Explain briefly the following terms:
(a) Normative philosophy; and
(b) Ethical relativism.
1.3 ETHICAL PRINCIPLES

The universal recognition that we owe something to other people within our
society, and that we are bound by a concept of right and wrong in our behaviour
to those people, has to be made operational. We have to establish some consistent
analytical methods of classifying our action as right or wrong.
If we cannot, it is not due to lack of trying. As indicated earlier, intellectual

history over the past 2,400 years is filled with attempts to justify moral standards
and establish ethical systems. None of it is perfect but there are at least five major
theories that do have a direct relevance to managerial decisions. Figure 1.2 shows
the five major theories.
Figure 1.2: Five major theories with direct relevance to managerial decisions

Let us look at the explanations provided for these theories in the following
sections.
1.3.1 Eternal Law

Many religious leaders and some philosophers such as Thomas Aquinas and
Thomas Jefferson believed there is an eternal law (also known as natural law)
incorporated in the mind of God. The law is apparent in the state of nature and
revealed in the Holy Scripture. It would be immediately obvious to any man or
woman who will take time to study nature or the scripture. Thomas Jefferson, the
first of the secular humanists, believed that the truths of this law were self-
evident. As quoted below, he said that the rights were inalienable and that duties
could easily be derived from these rights.
If people have the right to „life, liberty and the pursuit of happiness,‰ then
they also have the obligation to ensure the same right to others. Religious
leaders tend to emphasise the revealed source of the truth more than
the reasoned nature. However, they also believe that the state of the Law is
unchanging, and that the rights and duties are obvious: if we are loved,
then we must love others. This reciprocal exchange is summarised in
Christian theology by the Golden Rule: Do unto others as you would
have others do unto you.
What is wrong with eternal law or natural law (interpreted by religious leaders
or normative philosophers) being the basis for an ethical system in management?
Nothing, except for the number of interpretations. No two natural law theorists
and very few religious writers have been able to agree on the exact provisions of
the revealed or reasoned truth. Each religion provides moral standards for their
members and many of the members observe those standards in daily life.
However, the standards differ between groups, and there is no infallible way to
determine which one is right or best or proper for society. Even the Golden Rule,
that simple, elegant, sensible guide to life, cannot be applied universally at all
times.
1.3.2 Classical Teleological Ethical Theory:

Utilitarianism
Did you realise that the teleological approach to managerial ethics places
complete emphasis on the outcome and not on the intent of individual actions?
„Teleology‰ is derived from the Greek term which means outcome or result.

Some of the most influential philosophers in the Western tradition such as

Jeremy Bentham and J. S. Mill hold that the moral worth of personal conduct can
be determined solely by the consequences of that behaviour. That is, an act or
decision is right if it benefits people. Conversely, it is wrong if it leads to damage
or harm. The objective, obviously, is to create the greatest degree of benefits for
the largest number of people while incurring the least amount of damage or
harm.
There is more to life than the acquisition of material benefits alone. Friendships,
knowledge, health and other satisfactions we find in life should be taken into
account as well. The aggregate satisfactions or benefits for everyone within
society have to be considered. However, there are negative costs and adverse
outcomes associated with each action, and these have to be considered to
establish a balance. The negative costs and adverse outcomes (refer to Figure 1.3)
include pain, sickness, death, ignorance, isolation and unhappiness. The
aggregate harm or costs have to be considered, and then a balance of the net
consequences can be computed.
(a) Isolation (b) Unhappiness

Source: http://www.pharmacyescrow.com Source: http://ilovemyself.net
Figure 1.3: Adverse outcomes of negative costs
This teleological ethical system which focuses on net consequences rather than
individual intentions is termed utilitarianism. It is commonly associated with
Jeremy Bentham (1748 1832), a British thinker. The name of the philosophy is
derived from the word utility which, in the 18th century, referred to the degree of
usefulness of a household object or domestic animal. In microeconomic theory, it
measures our degree of preference for a given good or service relative to price. In
utilitarian theory, the term refers to our perception of the net benefits and costs
associated with a given act.
Utilitarianism differs from the economic concept of cost/benefit analysis in that

the distribution of the costs and benefits has to be included as well. That is, these

are net benefits to society, and each individual within the society has to be
considered and treated equally in the distribution as shown below.
„The greatest good for the greatest number‰ takes precedence in Utilitarian
theory over „The greatest good for a smaller, more elite number.‰
What is wrong with utilitarianism? Not much, except for the possibility of
exploitation. In the vast majority of cases, where no one is going to be hurt badly,
and particularly where it is possible to use financial equivalents for both the costs
and the benefits, it is a familiar and useful form of analysis. However, there is
always the possibility of justifying benefits for the great majority of the
population by imposing sacrifices or penalties on a small minority.
Utilitarianism fails because of these factors:

(a) In reality, it is about these two principles: the greatest good and the greatest
number. At some point in our decision-making on important matters, these
two principles come into conflict. Then, we have no single means of
determining what is the right or proper act.
(b) We can probably agree that there are some actions that are simply wrong,
despite great apparent net benefits for a huge majority. For example, killing
an innocent child to bring happiness to the whole human race. No one
should ever have to accept that kind of cruel act.
(c) It is impossible to balance the benefits of the majority against the sacrifices
of a minority.
1.3.3 Classical Deontological Ethical Theory:

Universalism
Do you know that the word „deontology‰ is a Greek term referring to the duties
or obligations of an individual? The deontological approach (as shown below) to
managerial ethics is, in essence, the opposite of teleological theory.
The deontological theory states that the moral worth of an action cannot be
dependent upon the outcome because these outcomes are so indefinite
and uncertain at the time of the decision to act is made. The moral worth of
an action has to instead depend upon the intentions of the person
making the decision or performing the act.

If you wish the best for others, then your moral actions are praiseworthy, even if
you happen to be an unimpressive and clumsy individual who often seems to be
doing the wrong thing. Therefore, these good intentions will usually result in
beneficial outcomes.
Personal intentions can be translated into personal duties or obligations because

if we truly wish the best for others, then we will always act in certain ways to
ensure beneficial results. Those ways become duties that are compulsory upon us
rather than choices that are open to us. Our personal duties are universal,
applicable to everyone and consequently much of deontological theory is also
termed as universalism. The first duty of universalism is to treat others as ends
and not as means. Other people should be seen as valuable ends in themselves,
worthy of dignity and respect, and not as impersonal means to achieve our own
means. No action can be considered right in accordance with personal duty if it
disregards the ultimate moral worth of any other human being.
What is wrong with universalism?

(a) It is a useful method of moral reasoning but there are no priorities and no
degrees.
(b) It is difficult to treat others as ends and not as means all the time,
particularly when many serve as means to our personal ends. For example,
storekeepers are means of procuring our groceries, customers are our
means of earning our livelihood and employees are the means of staffing
our factories.
1.3.4 Distributive Justice Theory

Neither of the two classical theories mentioned above, utilitarianism or
universalism, can be used to judge all moral actions under all circumstances.
Consequently, two modern ethical systems have been developed that are based
upon values rather than principles.
The first of these, the theory of distributive justice, was proposed by John
Rawls and is explicitly based upon the primacy of a single value:
justice.
Justice is felt to be the first virtue of social institutions, just as truth is the first
virtue of systems of thought.

John Rawls proposes (1971) that society and the institutions within it are marked
by these two elements:
(a) Collaboration
Collaboration comes about since individuals recognise that joint actions
generate much greater benefits than solitary efforts.
(b) Conflict
Conflict is inevitable because people are concerned with the just
distribution of gained benefits. Each person prefers a greater to a lesser
share, as well as a system of distribution that ensures the greater share to
himself. These distributive systems can have very different bases to each
person equally, or to each according to his need, effort, contribution or
competence.
Most modern economic systems make use of all five principles: equal, need,
effort, contribution and competence. For instance, public education is,
theoretically speaking, distributed equally, welfare payments on the basis of
need, sales commissions on effort, public honours on contribution, and
managerial salaries on competence.
People would not normally select absolute equality in the distribution of benefits.
This is because they recognise that some of them would put forth greater effort,
have higher skills and so on. They would also not agree to absolute inequality
based upon effort, skill or competence because they would not know who among
them have those qualities and consequently who among them should receive
more or less benefits. Instead, they would develop a concept of conditional
inequality, where differences in benefits have to be justified. They would propose
a rule to ensure that these differences in benefits be justified only if they are
shown to result in compensating benefits for everyone, particularly the most
disadvantaged members of their society.
What are the problems with distributive justice? It is entirely dependent upon the
acceptance of the proposition that social cooperation provides the basis for all
economic and social benefits. Individual effort is downplayed, if not ignored.
1.3.5 Personal Liberty Theory

The theory of personal liberty is an ethical system proposed by Robert Nozick
(1974). This system is based upon the primacy of a single value rather than a
single principle: liberty. Liberty is thought to be the first requirement of society.
An institution or law that violates individual liberty has to be rejected even if it
may result in greater happiness and increased benefits for others.

Nozick agrees that society is an association of individuals, and that cooperation

between these individuals is necessary for economic gains. The holdings of each
individual (in income, wealth and the other bases of self-respect) are derived
from other people in exchange for goods or services, or received as gifts. An
existing pattern of holdings may have come about through application of any of
the principles of distribution (to each equally, or to each according to need, effort,
contribution or competence). However, these patterns will be changed by
transfers. These transfers, by exchange or gift, can be considered just as long as
they are voluntary.
Personal liberty can be expanded from a market system for the exchange of
holdings to an ethical system for the evaluation of behaviour. Individuals must
be allowed to make informed choices among alternative courses of action leading
towards their own welfare. These choices would be considered just, right or
proper as long as the same opportunities for informed choices are extended to
others. Justice depends upon equal opportunities for choice and exchange, not
upon equal allocations of wealth and income.
What is lacking in this concept of liberty? It is based on a very narrow definition

of liberty which is limited to the negative right not to suffer from the intrusion of
others. The right to life, for instance, is the right not to be killed by others.
However, it may also include the right to continue living through access to some
minimal level of food, shelter, clothing and medical assistance, which come from
personal initiative, rather than social cooperation.
SELF-CHECK 1.2
Using a mind map, summarise these five ethical theories:
(a) Eternal law t h e o r y (Natural law);
(b) Classical teleological ethical theory: Utilitarianism;
(c) Classical deontological ethical theory: Universalism;
(d) Distributive justice theory; and
(e) Personal liberty theory.

Complete the following exercises to check your understanding.

SELF-CHECK 1.2
EXERCISE 1.1
1. Compare and contrast some of the features of utilitarianism and
universalism with respect to ethical theory.
2. Discuss some of the weaknesses of each ethical theory that you
have studied.
1.4 NORMATIVE PHILOSOPHY AS BASIS FOR

MORAL CHOICE
As elaborated earlier, there are five major ethical theories. Although they do not
outwardly conflict with each other, they cannot be reconciled into a logically
consistent whole. Each system expresses only a portion of the truth and each is
incomplete or inadequate as a means of judging the moral content of individual
actions or decisions.
What does this mean to managers?

The major implication for managers is that there is no single system of belief,
with rationally derived standards of moral behaviour or methods of moral
reasoning, that can fully guide them in reaching difficult ethical decisions.
What should we do?

Instead of using just one ethical system, we should incorporate all five systems
and think through the consequences of our actions. Moral reasoning, which
utilises all five ethical systems, is not simple or easy, but it does work, especially
when combined with economic and legal analysis.
We have looked at all the major systems, now, let us shift our attention to the
following two significant ethical perspectives:
Golden rule; and
Kantian rights.
1.4.1 Golden Rule

The Golden Rule is a Christian principle based on a verse in the Bible which says,
„Do unto others as you would have them do unto you‰. This principle can also
be found in most, if not all, world religions. It requires identifying various

courses of action and choosing the one that treats others the way you would
want to be treated. In terms of business organisation, „others‰ refers to the
organisationÊs stakeholders. Stakeholders include the organisationÊs investors,
partners, employees, unions, customers, suppliers and governments.
1.4.2 Kantian Rights

Derived from the view of philosopher, Immanuel Kant (1785), this perspective
assumes that in a moral universe, every person has certain basic rights, as shown
in Table 1.2:
Table 1.2: Kantian Rights
Rights Explanation
Free consent People have the right to be treated only as they knowingly and
willingly want to be treated.
Privacy People have the right to do what they want in their private lives, and
they have the right to reveal the extent of their private activities.
Freedom of People have the right to refuse to do what violates their moral beliefs
conscience as these beliefs reflect commonly accepted norms.
Freedom of People have the right to conscientiously criticise an organisationÊs
criticising ethics, as long as their criticisms do not violate the rights of
individuals in the organisation.
Fairness If people believe their rights are being violated, they have the right to
a fair and impartial hearing.
Under this view of ethics, the morally correct action is the one that minimises
violations of these rights. To resolve an ethical dilemma from this viewpoint, one
would have to consider which stakeholders are affected by the action and to
what extent their rights may be violated.
ACTIVITY 1.3
In your view, are the personal rights expounded by Kant upheld in

your organisation? Discuss with your coursemates.

EXERCISE 1.2
1. What are ethics? How are individual ethics formed?
2. Elaborate on some of the personal rights as indicated by
Immanuel Kant.
3. Do you agree with the Golden Rule? How does it contrast
with Islamic teachings?
4. In your opinion, what is the most important factor that
influences the formation of individual ethics?
ACTIVITY 1.4
Read this case study:
You are a senior analyst in a corporation that evaluates companies for

possible mergers and acquisitions. If you juggled the figures on a certain
companyÊs financial statement, it would look like the company has the
potential for a takeover. Your firm would receive a hefty fee from the acquiring
company and your own outlook for increased salary and advancement would
improve significantly.
Here are some key points of the good and bad consequences to be weighed:
Your companyÊs profits will be enhanced, allowing it to pay higher salaries
to employees and higher dividends to shareholders.
Your own financial and career interests will be enhanced.
The acquiring company may find itself with a company that is not
financially viable and may incur severe losses as a result.
Your companyÊs reputation and long-term prospects would be affected
if your deception became known.
Your own personal reputation and future would be jeopardised as well.
By applying any relevant ethical theories that you have studied in

this topic, how would you go about evaluating and deciding on this
case? Discuss with your coursemates.

Ethics refers to an individualÊs personal beliefs about right and wrong

behaviour.
An individualÊs ethics is shaped by a combination of factors such as

influences of family and peers, life experiences, personal values and morals
and situational factors.
Moral reasoning provides reasons and grounds for determining whether an

action is morally right or wrong. Some theorists argue that there is one
universal moral standard for everyone (moral absolutism), while others argue
that no such standard exists (moral relativism).
Some moralists hold that certain actions are wrong in themselves. Others
believe that no action can be judged immoral in itself since circumstances and
social conditions play the decisive role in determining whether or not a given
action is right or wrong.
Utilitarianism states that the outcome of a decision or action is of prime

importance and that it is the results that truly matter in our treatment of other
people. The principle to be followed is that of beneficiency: a decision or act is
right, proper and good only if it generates the greatest amount of benefit for
the largest number of people at the lowest cost or harm to others.
Meanwhile, universalism states that it is the intent behind a decision or action

that is important, for we can never accurately foresee and evaluate all
possible results. The principle to be followed is that of consistency: a decision
or act is right, proper and good only if we can convince everyone facing the
same set of circumstances to make the same decision or perform the same act.
Distributive justice is based upon the primacy of a single value (justice) rather
than a single principle. Belief in the primacy of justice will lead us to make
decisions and take actions that are expected to result in compensating
benefits for all, especially the least advantaged members of our society.
Personal liberty is also based upon the primacy of a single value (liberty)
rather than a single principle. Belief in the primacy of liberty will lead us to
make decisions and take actions that will result in greater happiness and
increased benefits for all.

Eternal law refers to moral standards that are revealed in scripture or nature
to religious leaders or human philosophers. The belief is that law is
unchanging and valid for all times.
Business ethics Kantian rights

Distributive justice Moral reasoning
Eternal law Normative philosophy
Ethical relativism Personal liberty
Ethics Professional ethics
Golden rule Universalism
Individuals ethics Utilitarianism

Topic Stakeholder
2 Relationships
LEARNING OUTCOMES
1. Identify stakeholders, primary stakeholders and secondary
stakeholders;
2. Discuss why organisations should subscribe to stakeholdersÊ view
based on normative, instrumental and descriptive arguments;
3. Discuss the concept of stakeholder management;
4. Identify a firmÊs relevant stakeholders based on three elements; and
5. Explain an organisationÊs responsibilities towards its stakeholders.
INTRODUCTION
In this topic, we will discuss the concept of stakeholders. We will also touch on
the concept of stakeholder management and the management of stakeholder
relationships.
2.1 THE CONCEPT OF STAKEHOLDER

Before we delve into the definition and concept of stakeholders, let us first
understand the definition of stake. A stake is an interest, claim or share in an
undertaking or enterprise. A large organisation has many stakeholders. In
business terms, the definition of stakeholders is as shown below:
„Individuals or groups who can affect or is affected by the actions, decisions,

policies, practices or goals of an organisation‰.
(Freeman, 1984)

20 TOPIC 2 STAKEHOLDER RELATIONSHIPS
2.1.1 Classification of Stakeholders

Generally, there are two categories of stakeholders based on the nature of their
relationship with an organisation. Wheeler and Sillanpaa (1997) categorised
stakeholders into:
Market stakeholders; and
Non-market stakeholders.
Let us now look into each category in more detail.
(a) Market stakeholders/Primary stakeholders
„Market stakeholders are individuals or groups which have a direct

interest in the organisation as well as engaged in economic transactions
with the organisation as it produces its goods and services‰.
(Lawrence & Weber, 2011)
Primary stakeholders include customers, shareholders, suppliers, creditors

and employers. For example, a shareholder as a primary stakeholder
contributes capital to an organisation in the form of investment in exchange
for dividends. The shareholder can also influence the organisationÊs policies
as the shareholder can elect members of a firmÊs board of directors. They
also have the right to vote on a firmÊs decisions such as mergers and
acquisitions.
(b) Non-market stakeholders/ Secondary stakeholders
„Non-market stakeholders include individuals and groups who are not

engaged in a direct economic transaction with the organisation but are
affected by or can affect its actions‰.
Secondary stakeholders include communities, the media, business support

groups, the government and the general public. The media can affect the
organisation through news that a newspaper or magazine publishes. While
for the community, it can also be affected by the organisationÊs policies and
decisions.
For example, the health of a community can be at stake if a firm decides to

dump its toxic waste into the rivers and streams that the community uses.

TOPIC 2 STAKEHOLDER RELATIONSHIPS 21
On the other hand, the community can also affect the organisationÊs
operations when the community does not welcome an organisation and
objects to its plans to set up operations in the communityÊs neighbourhood.
Let us now look at Table 2.1 which shows examples of an organisationÊs market
and non-market stakeholders.
Table 2.1: OrganisationÊs Market and Non-Market Stakeholders
Market stakeholders Non-Market stakeholders

Employees Local communities
Owners/Stockholders/Shareholder Social activists
Customers Media
Suppliers Business support groups (e.g. trade associations)
Competitors Government
Retailers/Wholesalers Federal, state and local governments
Creditors General public
SELF-CHECK 2.1
Answer the following questions.

(a) What is the definition of stakeholder?
(b) Identify two types of stakeholders.
2.1.2 Support for the Concept of Stakeholder

Donaldson and Preston (1995) identified three arguments for the concept of
stakeholder. Organisations should follow the concept based on three stakeholder
theory arguments:
(a) Descriptive Argument
„The descriptive argument describes how organisations manage and

interact with its stakeholders‰.
(Donaldson & Preston, 1995)

Although an organisationÊs financial performance is important, the

organisation still needs to be concerned about these aspects:
(i) Producing safe and innovative products for its customers;
(ii) Providing a safe and healthy work environment for its employees; and
(iii) Complying with government regulations.
(b) Normative Argument
„The normative argument says that taking care of its stakeholders is simply
the right thing for organisations to do. As organisations have vast power
and resources, they have a duty towards all those affected by the
organisationÊs actions‰.
(c) Instrumental Argument
„The instrumental argument says that stakeholder theory is an effective

corporate strategy. Companies that take into consideration the rights and
concerns of their stakeholders tend to perform better in the long run over
those who do not‰.
ACTIVITY 2.1
Discuss why organisations should subscribe to the stakeholder

view based on these arguments:
(a) Descriptive;
(b) Normative; and
(c) Instrumental.

EXERCISE 2.1
1. What is the difference between a market stakeholder and a non-
market stakeholder?
2. Read the following situation.
You are a fruit juice manufacturer. You just learned that a few
customers have become sick from drinking your product. You
suspect that the juice was not properly pasteurised. You need to
ensure this incident causes minimal damage to your reputation.
Identify the stakeholders affected by this incident.
2.2 STAKEHOLDER MANAGEMENT

Do you know that an organisation has many stakeholders to whom it is
accountable? Managers must manage their relationships well with their
organisationÊs stakeholders. Failing to address the concerns of their stakeholders
can damage a firmÊs reputation and ultimately affect its bottom line. Stakeholder
management has become increasingly important as managers discover that their
organisationÊs stakeholder groups have to be relatively satisfied for the firm to
meet its objectives (Carroll & Buchholtz, 2006).
Do you know the meaning of stakeholder management? Let us look below to

know its meaning.
Stakeholder management refers to the process of managing the expectations

of the individuals and groups who have an interest in your organisation or
will be affected by the organisationÊs activities.
Organisations that want to implement stakeholder management must first

identify their relevant stakeholders. We will discuss this matter in the next
section.

EXERCISE 2.2
Do you think it is important for an organisation to engage in
stakeholder management? Provide reasons for your answer.
2.2.1 Identifying a Firm’s Relevant Stakeholders

An organisation must identify its relevant stakeholders. We have discussed earlier
two main types of stakeholders. However, not all stakeholders are relevant to an
organisation.
For example, a company like Amazon or Dell which sells its products directly to
its customers would not have retailers or distributors. However, distributors
would be an important stakeholder for a company like Nestle which sells its
products mainly through supermarkets and sundry shops.
In order to identify stakeholders who are relevant to an organisation, managers

must understand the characteristics of their stakeholders. A manager may identify
a firmÊs relevant stakeholder based on these elements:
Stakeholder power;
Stakeholder legitimacy; and
Stakeholder urgency.
2.2.2 Stakeholder Power

What is the meaning of stakeholder power?
„Stakeholder power refers to the ability to use resources to make an event

happen or to secure a desired outcome‰.
Stakeholders may have coercive, utilitarian or symbolic power over the

organisation.
(a) Coercive power
„Coercive power involves the use of physical force or violence‰.

(Thorne, Ferrell & Ferrell, 2008)

Stakeholder groups such as environmental activists can have coercive power

when they protest against an organisationÊs policy or action and destroy the
organisationÊs facilities during their protest. Figure 2.1 shows some
environmentalists gathering support for the cause of the planet.
Figure 2.1: Environmentalists gathering support for a cause

Source: http://static.guim.co.uk
(b) Utilitarian power
„Stakeholders can have utilitarian power when they have the power to
control the organisation resources such as financial or material resources‰.
(Thorne et al., 2008)
(c) Symbolic power
„Stakeholders can possess symbolic power when they have access to or are
able to use symbols or prestige‰.
For example, a letter written by a minister on a ministry letter head would

have symbolic power compared to a plain letter. The Internet can also be a
form of symbolic power when it is able to command the attention of the
media or government.

ACTIVITY 2.2
Identify at least five stakeholders in your organisation. Explain the

types of power these stakeholders have over your organisation.
2.2.3 Stakeholder Legitimacy

Do you know the meaning of stakeholder legitimacy? Let us refer below to know
its meaning.
„Stakeholder legitimacy refers to whether the stakeholderÊs claims are justified

or proper within a given context. A stakeholderÊs claim can be considered
legitimate when their claims are judged to be reasonable by other stakeholders
and society.‰
For example, it would be legitimate for consumers to expect an organisation to

produce safe products for their consumption. Therefore, an organisation would
want to address the consumersÊ concerns if they are faced with criticism of
unhealthy food. Shareholders, institutional investors and board of director
members who own shares all have legitimate claims of ownership because they
are all owners of the organisation.
2.2.4 Stakeholder Urgency

Urgency refers to how fast an organisation responds to its stakeholdersÊ needs.
The more powerful the stakeholder and the higher the legitimacy of the
stakeholder issue, the faster the organisation needs to respond to the particular
issue at hand. According to Mitchell, Agle and Wood (1997), the urgency of an
issue will depend on these factors:
(a) Time sensitivity

This refers to the degree to which there is managerial delay in attending to a
claim or relationship of a stakeholder.
(b) Criticality
This refers to the importance of a claim or relationship to a stakeholder.

SELF-CHECK 2.2
Briefly explain the following elements:

(a) Stakeholder power;
(b) Stakeholder legitimacy; and
(c) Stakeholder urgency.
2.3 RESPONSIBILITIES OF A FIRM TOWARDS

ITS STAKEHOLDERS
When a manager has identified an organisationÊs relevant stakeholders, the next
logical question asked would be this:
What are my firmÊs responsibilities to these stakeholders?
The organisationÊs responsibilities towards its stakeholders can be thought of as

the companyÊs corporate social responsibility (CSR) which will be discussed in
Topic 6. An organisationÊs social responsibility includes its economic, legal, ethical
and philanthropic responsibilities as shown in Table 2.2 below.
Table 2.2: OrganisationÊs Responsibilities towards its Stakeholders
Responsibilities Explanation
Economic Be profitable; maximise sales and minimise costs. Provide investors
with adequate and attractive returns for their investments.
Legal Obey all laws and regulations such as environmental, employment and
consumer laws.
Ethical Do what is right, fair and just. Assert ethical leadership in the
organisation. Operate the minimum legal requirement.
Philanthropic Be a good corporate citizen; engage in volunteerism. Give support to the
community by providing education programmes, healthcare services,
cultural and arts programmes.
Source: Carroll & Buchholtz (2006)

ACTIVITY 2.3
Imagine that you have your own firm. Explain your organisationÊs
responsibilities towards its stakeholders. Provide some examples to
support your explanation.
2.4 MANAGING STAKEHOLDER

RELATIONSHIPS
Carroll and Buchholtz (2006) identified three strategic steps that can lead
organisations to manage their stakeholder relationships successfully and these
are:
(a) Integrate stakeholder management into the firmÊs philosophy, values and
vision
Identify your organisationÊs missions, values and norms. Then, specify
which stakeholder groups and issues are relevant to your organisation.
(b) Create vision statements or value statements that include stakeholders

Reinforce your organisationÊs commitment to its stakeholders in a public
statement.
(c) Implement a stakeholder performance measurement system

Such a system should be auditable, integrated and monitored as stakeholder
relations are improved. Measurement indicates that there is serious intent to
achieve results and the presence of such a system will ensure the
stakeholderÊs sustainable commitment to the organisation.
EXERCISE 2.3
State whether the following statements are True or False:
1. Stakeholders are divided into two categories; primary stakeholders
and secondary stakeholders. (____)
2. An organisation only has the following responsibilities towards its
stakeholders:
(a) Economic responsibility
(b) Legal responsibility
(c) Ethical responsibility (____)

Stakeholders are individuals or groups who can affect or be affected by the

actions, decisions, policies, practices or goals of an organisation.
Stakeholders can be categorised into market and non-market stakeholders.
Organisations should follow the stakeholder concept based on three

stakeholder theory arguments: descriptive, normative and instrumental.
Managers have to be on good terms with their organisationÊs stakeholders.

Failure in meeting the needs of stakeholders can damage a firmÊs reputation
and ultimately affect its bottom line.
An organisation must clearly identify its relevant stakeholders in order to

ensure the continuity of the organisation.
A manager may identify a firmÊs relevant stakeholders based on stakeholder

power, legitimacy and urgency.
An organisation has economic, legal, ethical and philanthropy responsibilities

towards its stakeholders.
The strategic steps that can lead organisations to manage their stakeholder
relationships successfully are:
Integrate stakeholder management into their firmÊs philosophy, values

and vision;
Create vision statements or value statements that include stakeholders;
and
Implement a stakeholder performance measurement system.

Descriptive argument Stakeholder

Instrumental argument Stakeholder legitimacy
Market stakeholder Stakeholder management
Non-market stakeholder Stakeholder power
Normative argument Stakeholder urgency

Topic Nature of
3 Ethics in
Modern
Business
LEARNING OUTCOMES
1. Explain some ethical problems in management;
2. Elaborate on the five characteristics of ethical problems in
management;
3. Explain three methods for analysing ethical problems in
management; and
4. Discuss ethics from the Islamic perspective.
INTRODUCTION
In this topic, we shall examine various ways through which organisations
attempt to strike a balance between economic and social performance when faced
with an ethical dilemma.
3.1 ETHICAL PROBLEMS AS MANAGERIAL

PROBLEMS
Ethical problems are managerial problems because they represent a conflict
between an organisationÊs economic performance and social performance. There
should be a right or proper balance between economic performance and social
performance. Thus, the managementÊs dilemma is to strike a balance between
economic and social performances. Let us examine the factors that enter into that
32 TOPIC 3 NATURE OF ETHICS IN MODERN BUSINESS
balance and consider various theoretical structures that may assist management
in finding solutions.
3.2 CHARACTERISTICS OF ETHICAL PROBLEMS

IN MANAGEMENT
According to Hosmer (1991), there are five characteristics of ethical problems in
management as presented in Figure 3.1.
Figure 3.1: Five characteristics of ethical problems in management
Sections 3.2.1 - 3.2.5 are taken from the book, The Ethics of Management, by
LaRue Tone Hosmer (1991).
Let us look at each characteristic in the following sections.

TOPIC 3 NATURE OF ETHICS IN MODERN BUSINESS 33
3.2.1 Most Ethical Decisions Have Extended

Consequences
Do you realise that the results of managerial decisions and actions do not stop
with first-level consequences? Rather, they extend throughout the society, and
that extension constitutes the essence of the ethical argument. The argument
states that the decisions of managers have an impact on those within the
organisation and outside the organisation: the society. Since the impact is beyond
their control, managers need to seriously consider their decisions.
For example:
(a) Bribes change governmental processes.
(b) Pollution affects environmental health.
(c) Unsafe products destroy lives.
There is little disagreement here, as most people recognise the extended

consequences of managerial actions. Disagreements, if any, usually arise from the
existence of multiple alternatives, mixed outcomes, uncertain consequences and
personal implications that complicate the decision-making process leading to
those actions.
So, let us look at the remaining four characteristics of ethical problems which
play a significant role in the management of an organisation.
3.2.2 Most Ethical Decisions Have Multiple

Alternatives
It is commonly thought that ethical issues in management are primarily
dichotomous, a yes or a no choice, with no other alternatives.
For example, some would assume that these would be the questions dealt in an
organisation:
(a) Should a manager pay bribes or not?
(b) Should a factory pollute the air or not?
(c) Should a company manufacture unsafe products or not?
However, the above questions do not reveal the real situation faced in a business
organisation. Although a dichotomous framework presents the ethical issues in
sharp contrast, it does not accurately reflect the managerial dilemma. Therefore,
multiple alternatives have to be considered in making ethical choices.
3.2.3 Most Ethical Decisions Have Mixed Outcomes

It is commonly thought that ethical issues in management are largely antithetical,
with directly opposed financial returns and social costs. For example:
(a) Pay an indirect bribe but maintain the sales volume of imported goods
through prompt delivery.
(b) Cause air or water pollution but avoid the costs of installing and operating
pollution-control equipment.
(c) Design a slightly unsafe product but reduce the material and labour costs of
manufacture.
Like the dichotomous framework, the antithetical model for outcome evaluation
presents ethical issues in sharp focus but it does not accurately portray the
managerial dilemma. Social benefits and costs as well as financial revenues and
expenses are associated with almost all the alternatives in ethical choices.
ACTIVITY 3.1
You are the owner of an organisation. You intend to develop a

sophisticated product to cater to the societyÊs needs. In order to be able
to produce the product, your organisation needs to conduct several
experiments which will pollute the air quality.
How do you deal with this situation using the ethical choice of
multiple alternatives?
3.2.4 Most Ethical Decisions Have Uncertain

Consequences
It is commonly thought that ethical issues in management are free of risk and
doubt, with a known outcome for each alternative. For example:
(a) Pay the bribe, and receive the imported goods promptly.
(b) Invest in pollution-control equipment, and emissions will be reduced.
(c) Produce an absolutely safe product at an additional cost of Z dollars per
unit.

A deterministic model, that is, one without probabilities, simplifies the process of
analysis but it does not accurately describe the managerial dilemma. It is not
clear what consequences would follow from the alternatives considered to avoid
paying indirect bribes to customs officials. Neither is it clear what consequences
will follow from most ethical choices.
3.2.5 Most Ethical Decisions Have Personal

Implications
Most ethical decisions have personal implications. It is commonly thought that
ethical issues in management are largely impersonal, divorced from the lives and
careers of managers. Many people believe that prima facie ethical decisions in a
given operation may reduce the profits of the company but not the executivesÊ
salaries or their opportunities for promotion.
Managerial controls, however, are designed to record financial results of the

operations, not the ethical quality of the decisions that led to those results. Most
incentive systems are based upon these controls. For example:
(a) Maintain the dollar sales of imported goods at expected levels, and despite
slightly increased expenses for indirect bribes, the quarterly review will be
pleasant and remunerative.
(b) Delay the installation of pollution-control equipment, and the return on
invested capital will be close to the planned percentage.
An impersonal model simplifies the process of decision making on ethical issues

but it does not accurately describe the managerial dilemma. Individual benefits
and costs, as well as financial and social benefits and costs, are associated with
most of the alternatives in ethical decisions.
You have just read the characteristics of ethical problems in management. Before
we proceed to the next section, attempt the exercises below to enhance your
understanding.
EXERCISE 3.1
1. How do ethical problems arise in management? Using your own

example, how would you overcome an ethical problem?
2. List some features or characteristics of ethical problems in
management.

3.3 EXAMPLES OF ETHICAL PROBLEMS IN

MANAGEMENT
What are some examples of ethical problems? Let us look at a few. Bear in mind
that the moral content of each problem differs, and that each of us will differ in
our view of the moral severity of that content.
Moral standards differ between individuals because the ethical systems of belief,
the values or priorities, the convictions that people believe are truly important,
and upon which their moral standards are based also differ. These beliefs depend
upon each personÊs family background, cultural heritage, educational experience
and other factors.
Difference in ethical beliefs are not important at this stage of discussion. What is
more important at this stage is to recognise that they can affect people adversely.
They may even hurt or harm others in ways beyond the control of those holding
the ethical beliefs. The condition of hurt or harm to others in ways beyond their
control is the essential element in the ethical dilemma of management. That
condition is present in all the examples outlined below.
(a) Pricing Level

Price, it would seem, should be a purely economic decision based upon cost
and demand. Yet the pricing level selected can have harmful effects on
some customers. In banking, for example, under the combined impact of
deregulation by the government and competition from other financial-
service firms, it has become common to pay fairly high rates of interest on
customer deposits. However, the benefits of those rates go primarily to the
customers with large bank balances. To offset the increased interest that
must be paid to attract larger deposits and to reflect the actual costs of
service, most banks have raised the fees they charge to smaller customers.
(b) Advertising Messages

Truth in advertising is a complex issue. There are two situations which
minimise the effectiveness of advertising:
(i) A rigidly truthful television or magazine advertisement, every
statement of which is supported by a reference to a scientific study,
would be incredibly dull and probably ineffective.
(ii) A totally untruthful television or magazine advertisement, with
wildly exaggerated claims, would be illegal and probably equally
ineffective.
Varying degrees of truthfulness and deception lie between these two
extremes. The problem is drawing a line along that spectrum.

(c) Product Promotions

Promotion is one form of advertising; another is the use of gifts and price
rebates to attract customers. For example, under the impact of deregulation,
airlines have developed product promotion in the form of additional flights
and vacation lodgings for frequent flyer passengers who exceed a given
mileage on a particular airline each year.
Most frequent flyers travel on business, yet the benefits are given to the
traveller who decides which airline to use, not to the company that
generates the volume of traffic and pays for the tickets. The cost of these
benefits is borne by the non-business traveller, who generally flies much
less often.
(d) Working Conditions

The working conditions for many manual and clerical employees are less
than ideal. Temperature, humidity or noise levels may be too high;
ventilation and lighting may be inadequate, and fumes and dust are still
found in some workplaces. The most harmful of these conditions along
with the obvious safety hazards, have been outlawed by state and federal
laws, but there are still many opportunities to improve working conditions
for hourly employees.
(e) Customer Service

Declining product quality has been a problem in many industries for a
number of years. Declining product quality in the automobile industry
results in „lemons‰. It means new cars with major defects that can create
substantial hardships for buyers who cannot depend upon these cars for
transportation to and from work or medical appointments, shopping trips,
family gatherings, and so on.
(f) Workforce Reductions

It has become common for many large companies to reduce their size and
overhead costs to create a lean and mean management. These downsizing
operations are generally a response to an increase in competitive pressures,
but there is an obvious human cost to the people forced to leave.
(g) Environmental Pollution

Improper disposal of toxic wastes is clearly illegal, yet some companies
continue to dump chemicals. This, despite possible harm to the
environment and probable conflict with the law, still widely occurs.

(h) Community Relations

The major employer within a local community has substantial economic
power, particularly if the employer has plants in other locations and can
move work and employment between them. This economic power is often
used in pressing for tax reductions, which can have an obvious impact on
residents of the community by increasing their taxes or decreasing their
services.
(i) Supplier Relations

Larger manufacturing firms have economic power within the communities
in which they operate, and against small suppliers from which they
purchase materials, parts and supplies. Economic power is a difficult
concept to define but easy to recognise.
3.4 ANALYSIS OF ETHICAL PROBLEMS IN

MANAGEMENT
How do we decide on these and other ethical problems?
You may regard some of the examples cited in the previous section as simple
instances of practical management. Meanwhile, you may regard some other
examples as outrageous abuse of power and position. Ethical decisions are much
more difficult to make when a person is directly involved in the situation.
Ethical decisions are not simple choices between right and wrong. They are
complex judgements on the balance between the economic and social
performances of an organisation. There has to be a balance between economic
and social performances. How do we reach this balance? We can create the
balance through these three relevant methods of analysis which resolve ethical
dilemmas in management (Figure 3.2).
Figure 3.2: Methods to analyse ethical problems in management

By using the example of work force reductions and plant closures, let us see how
the three methods are applied to create a balance between economic and social
performances as shown in Table 3.1.
Table 3.1: Analytical Methods of Reasoning on Ethical Problems
Methods Explanation
Economic We can look at many ethical problems from the viewpoint of the
Analysis microeconomic approach; relying on impersonal market forces to make
the decision between economic and social performances. It is utterly
unpleasant for workers to lose their jobs when work force reductions and
plant closures happen. Yet, there is a labour market, and these workers
will be employed again, provided they are willing to adjust their wage
demands to market conditions.
The underlying belief is that a market economy has a limited number of

resources. When consumers are supplied with highest quality goods at
lowest possible costs, these resources are being used as efficiently and
effectively as possible.
Legal We can also look at the ethical problems through the framework of legal
Analysis approach; relying on impersonal social forces to decide between right
and wrong. Workforce reductions and plant closures are unpleasant but
society has never felt they are so harmful to the people involved that a
law prohibiting them is necessary. Should they become a major problem,
a law can be passed to deal with the situation.
The underlying belief is that a democratic society can establish its own
rules. If people and organisations follow these rules, members of that
society will be treated as justly as possible.
Ethical Lastly, it is possible for us to look at ethical problems using the structure
Analysis of normative philosophy; relying on basic principles to decide between
right and wrong. We can compute the greatest good for the greatest
number and decide on that basis when workforce reductions and plant
closures happen.
The underlying belief is that if all the rational men and women in a
society acted on the same principles of beneficiency or consistency,
members of that society would be treated as fairly as possible.
The above three methods of analysis have been proposed to resolve ethical
dilemmas in management. Now, try applying what you have learnt in this
section by answering the following questions.

EXERCISE 3.2
1. What are the available mechanisms for analysing ethical
problems in management? Briefly explain each of method of
analysing.
2. List some ethical problems in management.
3.5 ETHICS IN ISLAM

It is essential to not look at ethics from a single perspective but also view it from
different perspectives. So, let us look at what Islam has to say about ethics.
In attempting to expound the major aspects of ethical thought in Islam, two

possible methods are used:
A historical or horizontal method which simply follows the chronological line
of development, or
An analytical or schematic method which deals with major ethical themes
vertically.
People sometimes question whether there is such a thing as Islamic ethics. They
are obviously puzzled by the legalism and ritualism of the religious and
institutional life of Muslims. They also wonder why the contribution of the
Muslim authors to the issue is insufficient compared to their contributions in
literary, linguistic, philosophical, historical, theological and scientific subjects.
Actually, there is a modest attempt to exhibit the ethical material in Islamic
thought as objectively as possible.

3.5.1 Universal Message

The holistic approach of Islam is evident in its three core tenets as illustrated in
Figure 3.3 below.
Figure 3.3: Holistic approach of Islam
Due to these tenets, Islam is deemed as universal and timeless. As such, it applies
to all people in all places. Islam is not a new religion but the continuation of
divine revelations from Prophet Abraham to Prophet Muhammad s.a.w, who
was the last prophet assigned to the human being. The QurÊan explicitly states
that Islam is the continuation and conclusion of the CreatorÊs religion given to
mankind.
3.5.2 Syariah
Before we move on to discuss the ethical aspects of Islam, let us look at what
syariah means.
Syariah is the law of Islam based on the QurÊan. Probably the most encompassing
and most universal ethical prescription of the syariah is contained in one of the
verses of the QurÊan which requires a Muslim, at all times and in all
circumstances, to act in what can be translated from Arabic as a decent and
benevolent way, and to refrain from wrongdoing.
This overall guiding conception is similar to AristotleÊs admonishment as shown

below.
„Do not harm others and deal with others as one would wish to have others
deal with oneself‰.

The basic message of the Creator is found in all His religious revelations to
humankind as shown below:
(a) Christian rule Golden Rule of the New Testament:
„Do unto others as you would have them do unto you.‰
(b) Islamic rule:
„None of you is a believer until he desires for his brother that which he
desires for himself.‰
(c) Buddhism rule:
„Hurt not others in ways that you yourself would find hurtful.‰
(d) Judaic rule:
„What is hateful to you, do not do to your fellow man. That is the entire
law; all the rest is commentary.‰
Beyond this fundamental teaching which is shared with other great ethical
traditions, the Syariah regulates almost every aspect of relationships, ranging
from that which is between the Creator and humankind, to intimate matters of
interpersonal relations. As the Syariah is a comprehensive legal system, rules of
interpretation achieve a prominent position, and techniques of legal
interpretation based on the different schools of jurisprudence are outstanding. A
variety of contrasting positions and schools of thought has developed among
Muslims over the centuries.
3.5.3 Commerce and Business

Commerce and business have remained central subjects in Islamic ethical
tradition. Islamic teachings has essentially been through individual
proselytisation, more particularly as a result of trade and commerce.
Renowned for their tradition of trade and commerce, Arabs who became
Muslims continued that tradition. It was due to their superiority in navigation,
shipbuilding, astronomy and scientific measuring devices that Arab and Muslim
trade and commerce developed and spread across the world.
Furthermore, the Muslim world, during its first few centuries, was at the
crossroads of ancient trade routes from the Mediterranean, the Arabian Gulf, East
Africa, the Indian subcontinent and all the way to China. Due to this trading link,
a significant number of Arab words relating to trade and commerce have found
their way into Western languages. However, Muslim traders could not have
grown their faith and trade if it were not for their strong attachment to what we
now know as business ethics .
3.5.4 Teachings about Economic Practices

In the absence of unified legislative and judicial authorities among Muslims,
practices differ and enforcement is practically non-existent. This diversity among
Muslims has generated different customs, behaviours and expectations in
business relations. Generally, however, Islamic economic and business
conceptions are very much the equivalent of a free enterprise, private sector
market economy approach, though they do not exclude the right of society to
impose limitations for the greater benefit of the community.
The syariah recognises the right to private property but retains the communityÊs
right to what may be termed as eminent domain or collective interests. In fact,
one of the important ethical considerations in property is that its use is
permissible but abuse and waste are forbidden.
In a hadith, the prophet said that nine-tenths of all GodÊs bounty, which includes
income, is derived from commerce. To a large extent, this explains the drive of
Muslims over the centuries to meet their economic needs through commerce and
to consider profits as not only legitimate but a desirable way of engaging in any
kind of industry. Making profits is very much a part of the activities of Muslims,
provided the profits are obtained in a permissible way. However, profits cannot
overshadow the duties of brotherhood, solidarity and charity. They are, of
course, subject to zakat, which is a tax imposed upon Muslims.
The syariah divides rules of conduct between halal and haram, meaning
essentially that which is permissible and that which is not. The distinction
between halal and haram applies to legitimate and illegitimate. Illegitimate
profits are exemplified by riba, which is to a large extent the equivalent of usury.
However, it also has come to mean the collection of a predetermined fixed
amount of interest.
A Muslim is allowed to earn profit only from his work or, if his capital is
involved, whenever he shares the risk of loss. Consequently, gambling is
prohibited, as it is a sin to profit from the need or misery of others.

3.5.5 Obligations of Piety

The fulfilment of obligations in good faith and in accordance with the principles
of business ethics is not only required but inseparable from the general obligation
of piety as can be seen in the following verse.
In the QurÊan, Chapter 2 Verse 177 says that:
„It is not righteousness that you turn your faces towards East or West; but it is
righteousness to believe in God and the last day, and the angels and the Book,
and the messengers; to spend of your substance, out of love for Him, for your
kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the
ransom of slaves; to be steadfast in prayer, and practise regular charity; to
fulfil the contracts which you have made.‰
A contract is the most important bond that exists between Muslims, as well as
between Muslims and non-Muslims as shown in the following hadith:
„The buyer and the seller have the option (of cancelling the contract), as long
as they have not separated; then, if they both speak the truth and make it
manifest, their transaction shall be blessed, but if they conceal and tell lies, the
blessing of their transaction shall be obliterated.‰
Translation: Any defect in the thing sold must be made obvious. In the case of
defects being hidden, the contract or agreement made will be void.
Source: http://aaiil.org/text/had/manhad/ch22had.shtml
The prophet went on to say the following:

„The truthfullest, honest merchant is with the prophet and the
truthful ones and the martyrs.‰
Thus, the fulfilment of obligations in good faith and in accordance with

principles of business ethics is not only required but inseparable from the
general obligation of piety. Fulfilment of obligations also includes the notion of
rectitude, which includes not taking undue advantage of other people. Fairness is
deemed both a means and an end, irrespective of practical realities. Honesty is
not only a virtue but an expected trait for every Muslim.

3.5.6 Conclusion
Those qualities and characteristics mentioned above are particularly significant
because Prophet Muhammad was a merchant whose life is an example to follow.
Fifteen centuries ago, Islam brought about a spiritual, social and legal revolution. Its
potential for effecting progress in a positive way remains unchanged. This is
essentially the belief of enlightened liberal Muslims who do not have a regressive
view of religion and history. Indeed, at the height of its civilisation, between the
seventh and twelfth centuries, Islam was neither repressive nor regressive. On the
contrary, it was a progressive, humanistic and legalistic force for reform and justice.
Muslim scholars of all backgrounds do not consider Islam to be an evolving

religion, but rather a religion and legal system which requires evolution in its
application. Indeed, the provisions of the QuÊran are such that, by their
disciplined interpretation, Islam can provide solutions to contemporary
economic, ethical and social problems in Muslim societies.
EXERCISE 3.3
1. How would you find a balance between economic and social

performance when faced with an ethical dilemma. Cite your
own example and apply the analytical tools for analysis from
the literature that you have studied.
2. „Ethical problems in management are complex because of the
extended consequences, multiple alternatives, mixed outcomes,
uncertain consequences and personal implications.‰ Discuss.
Most ethical decisions have extended consequences, multiple alternatives,

mixed outcomes, uncertain consequences and personal implications.
Moral standards differ between individuals because the ethical systems of

belief, the values or priorities, the convictions that people believe are truly
important, and upon which their moral standards are based also differ.
There are three forms of analysis that can assist us in reaching the proper
balance between economic and social performances. They are:
Economic (based upon impersonal market forces);

Legal (based upon impersonal social forces); and

Ethical (based upon personal principles and values).
The main guiding principles in Islamic ethical issues are found in the syariah.
Syariah regulates almost every aspect of relationships, ranging from that

which is between the Creator and humankind, to intimate matters of
interpersonal relations.
Economic analysis Mixed outcomes

Ethical analysis Multiple alternatives
Ethical problems Personal implications
Extended consequences Syariah
Legal analysis Uncertain consequences

Topic X Managerial
4 Ethics and
Rule of Law
LEARNING OUTCOMES
1. Define ÂlawÊ and its importance;
2. Discuss how law can be used as a guide for managerial decisions
and actions when faced with an ethical dilemma;
3. Describe five characteristics of law;
4. Explain the relationship between law and moral standards; and
5. Describe the four processes involved in forming law.
X INTRODUCTION
What is an ethical dilemma? Have you ever encountered a situation where you
need to make a choice between two very difficult options? Figure 4.1 shows an
example of a moral dilemma or an ethical dilemma. A psychiatrist recognises
that his patient needs rest. However, he is concerned that the longer his patient
sleeps, the more the patient will need to pay for his counselling session.
Figure 4.1: Moral dilemma

Source: http://www.cartoonstock.com

48 X TOPIC 4 MANAGERIAL ETHICS AND RULE OF LAW
This topic focuses on issues related to the law as a guide to managerial decisions
and actions when one is confronted with an ethical dilemma.
Let us examine the following in this topic:

(a) Rule of law;
(b) Law as a guide to moral choices;
(c) Characteristics of law;
(d) Legal requirements and moral standards;
(e) Formation of the law; and
(f) Rule of law for moral choices.
4.1 RULE OF LAW

We will look at the law as a possible basis for making managerial decisions when
one is confronted with an ethical dilemma.
„The law is a set of rules established by a society to govern behaviour

within that society‰.
We would fall back on these rules (law) when faced with a conflict between an
organisationÊs economic performance and social performance. We should let the
law decide, particularly in a democratic society, where the argument can easily
be made that the rules within the law represent the collective judgments made by
members of the society. We should follow these collective judgments, instead of
trying to establish our own moral opinions. There are numerous examples of
laws that reflect collective moral judgments.
4.2 LAW AS A GUIDE TO MORAL CHOICE

We cannot rely upon the market as a guide for managerial decisions and actions
when faced with an ethical dilemma, but what about the law? The legal
argument is very different. Now, let us look at the meaning of legal argument.
What is meant by this term?

TOPIC 4 MANAGERIAL ETHICS AND RULE OF LAW W 49
Legal argument refers to an established set of rules in a society. These rules

reflect the collective choices of members of the society regarding any
decisions and actions that affect its welfare.
Example:
Halim, a bank officer who has to decide whether to:
(a) Make a high-risk loan to a small, local company with the return interest rate
limited by law; or
(b) Provide an equivalent loan to a larger, distant corporation at much lower
risk but equal return, doubtless a higher return, if the lower administrative
costs of loaning to large, well-financed corporations are included in the
calculation.
ACTIVITY 4.1
If you were the bank officer mentioned in the above example, how
would you decide which way to proceed if you really want to adopt
the legal argument?
Let us say that, in this case, society has determined that excessive interest charges
are more harmful than limited local support and that consequently the loan
should be given to the larger, distant firm. Should we object to this? Suppose we
believe it is necessary, for the good of our society, that the formation of small,
entrepreneurial companies be encouraged. It is often said that:
(a) If we do not like an action by a corporation, we should attempt to pass a
law which prohibits that action or encourages an alternative action; and
(b) If we cannot get the law approved through democratic processes, then we
should accept the situation as it is.
The assumption here is that we should rely on the law in making decisions and
agree that a given act is right if legal and wrong if illegal, with the understanding
that this determination of right and wrong can be changed to reflect the view of
the majority.
In the example given above (of the bank which refuses to advance funds to a
high-risk company in the local community), it would be fairly easy to design
corrective legislation. Each bank within the state, or within the nation, may be
forced by law to invest a certain percentage of its funds within the communities
from which it draws those funds from depositors.

4.3 AN EXAMPLE OF MORAL CHOICE

Now, let us return to the banker in the previous example. The bank officer has to
decide whether he should invest in a high-risk local company that will provide
employment opportunities and other benefits to the community. Let us agree
that:
(a) The local community is in an area of high unemployment where new jobs
are badly needed, and the proposed company is in a labour-intensive, high-
growth industry which requires a large workforce;
(b) The alternative investment, the large corporation is in a distant city, capital-
intensive and capable of creating few jobs;
(c) The product of the proposed local company is a much needed health-care
item which would reduce the pain and suffering of elderly patients
throughout the country while the product of the alternative investment is a
line of high-calorie packaged foods with low nutritional value.
(d) The usual funds available through the small business administration for
small companies have been sharply reduced in recent years. In addition, no
governmental guarantee or interest subsidy is available to the smaller
company.
Now, we have a classic ethical dilemma: the choice between economic

performance and social obligation, complicated by extended consequences,
uncertain outcomes and career implications.
How would the banker decide when faced with this kind of dilemma? If he
replies to the owners of the small company that he would very much like to help,
he will face the following:
• The law prevents an adequate return to compensate for the risk;
• No government guarantees or interest subsidies are presently available; and
• Bank officers are required by the legal system to minimise risks for their
depositors.
Of course, the usual response of most bankers to socially desirable but financially
risky loans is to reject them without giving any explanation. They would usually
suggest to potential borrowers that they seek funds elsewhere. The question in
this case, however, is not whether banks should make socially desirable but
economically unfeasible loans. No bank can give out loans to everybody and
remain in business. By the same token, a bank cannot be too rigid in giving loans
at the expense of the society in which it operates. There has to be a limit on both
sides and a balance. The question is: How does one achieve this balance?

Enhance your understanding by attempting the activity below.
ACTIVITY 4.2
1. „The law can be used as a guide for managerial decisions and

actions when faced with an ethical dilemma.‰ Discuss this
statement with your coursemates.
2. Using your own example, how would you attempt to strike a
balance between the economic and social performances of an
organisation?
4.4 LAW AS COMBINED MORAL JUDGMENT

Before we move further, let us read the statement below.
„If we want to go beyond the basic rules of law in our own decisions and
actions, we can do so. However, we cannot go beyond the law, for then we are
adhering to moral standards which are not complying with the majority of the
population. We live in a democratic society. Hence, if we do not like something
that we are doing, we need to get the majority of voters to pass a law
restricting these actions. However, until then we have to comply with majority
of the population.‰
How do we respond to the above statement? If it is not possible to respond

logically and convincingly, are we then forced to accept the rule of law as the
final determinant in most moral dilemmas?
To answer these questions, it is necessary to:

(a) First, define the law to ensure that we are discussing the same set of
concepts; and
(b) Second, examine the processes involved in the formulation of the law.

4.5 CHARACTERISTICS OF LAW
Before we move on, let us look at the definition of law.
The law can be defined as a consistent set of universal rules that are widely
published, generally accepted and usually enforced.
There are certain ways in which people are required to act in their relationships
with others within a society. They are required to act in a certain way, not just
expected, suggested or petitioned to act in that way. There is an element of
persistence about the law, which defines what we must do. Figure 4.2 shows five
characteristics of law.
Figure 4.2: Characteristics of law
Let us look at the characteristics in greater detail as shown in Table 4.1.

Table 4.1: Characteristics of Law
Characteristics Explanation
Consistent The requirements to act or not to act have to be consistent to be
considered as part of the law. For example, if two requirements
contradict each other, both cannot be termed as law because
obviously people cannot obey both.
Universal The requirements to act or not act must be universal or applicable to
everyone with similar characteristics and facing the same set of
circumstances.
Published The requirements to act or not act must be published and put in
print so that they are accessible to everyone within the society. No
doubt that not everyone has the time to read up or understand
everything that is published. However, trained professionals such
as attorneys are available to interpret and explain the law. Hence,
ignorance of the law is not a valid excuse.

Accepted The requirements to act or not act in a given way must be obeyed. If
most members of the society do not voluntarily follow the law, they
would have to be compelled to do so.
Enforced The requirements to act or not act in a given way must be enforced.
Members of society have to understand that they will be compelled
to obey the law if they do not do so voluntarily. People have to
recognise that if they disobey the law, and if it is noted and can be
proven, they will suffer loss of convenience, time, money, freedom
or life. There is an element of persistence about the law. There is
also or should be an element of certainty as it defines what will
happen if we do not follow rules.
This set of rules that are consistent, universal, published, accepted and enforced
is supported by a framework of highly specialised social institutions, as shown in
Table 4.2 below.
Table 4.2: Social Institutions and Their Responsibilities
Social Institutions Responsibilities

Legislatures and councils Law formation
Attorneys and paralegal personnel Law explanation
Courts and agencies Law interpretation
Police Law enforcement
The adversary relationships of the trial court often seem to ignore the provisions of
consistency and universality, and focus instead on winning rather than justice. The
enforcement actions of the police also often seem arbitrary and to concentrate on
keeping the peace rather than maintaining equity. Let us admit that:
(a) Enforcing the law is a difficult and occasionally dangerous task.
(b) Interpreting the law, as in court cases, often involves the award of large
amounts of money. The potential gain or loss of these funds has distorted
the concept of the law as a set of published and accepted regulations.
However, we are looking at the law as an ideal concept of consistent and

universal rules to guide managerial decisions, not as a flawed reality.
SELF-CHECK 4.1
List and briefly describe the five characteristics of law.

4.6 RELATIONSHIP BETWEEN LAW AND

MORAL STANDARDS
The law, as we mentioned earlier, may be viewed in ideal terms as a set of
universal and consistent rules that govern human conduct within a society. The
question is whether we can accept these rules as representing the collective moral
judgment of members of our society.
• If we can, then we have the standards to guide managerial decisions and
actions, even if these standards may be at a minimal level.
• If we cannot, then we will have to look elsewhere for our standards.
In considering the possible relationship between moral judgments and legal

requirements, three conclusions can be reached fairly quickly as shown below:
Conclusion 1
The requirements of the law overlap to a considerable extent. However, they

do not duplicate the probable moral standards of a society. Clearly, a person
who violates the federal law against bank robbery also violates the moral
standard against theft. It is easy to show that laws governing sexual conduct,
narcotics usage, product liability and contract adherence are similar to the
moral beliefs that are probably held by the majority of people in our society.
We can agree that in a democratic society, legal requirements reflect many of
the basic values of the citizens. Thus, we can say that legal requirements
overlap with moral standards. There is also an area of overlapping between
the law and morality as shown in Figure 4.3.
Figure 4.3: Overlapping between moral standards and legal requirements
However, the area of overlapping is not complete. There are some laws that
are morally unresponsive, with no ethical content whatsoever. For example,
the requirement that we drive on the left-hand side of the road is neither right
nor wrong; it is just important that we all agree on which side to drive.

Finally, there are some moral standards that have no legal standing at all. We
all object to lying as it goes against our moral standards. However,
truthfulness is not required by law except in court and under oath, and in a
few other specific instances, such as employment contracts and property sales.
Conclusion 2
The requirements of the law tend to be negative, while the standards of

morality are more often positive. According to the law, we are forbidden to
assault, rob or defame each other. However, we are not required to help
people, even in extreme situations.
For example, there is no law insisting that we must aid a drowning child. Here,
we do have a situation where the moral standards of the majority can be
inferred as most of the adult population in any country would go to the aid of
a drowning child, to the limit of their ability.
Conclusion 3
The requirements of the law tend to lag behind the apparent moral standards of
society. Slavery, of course, is the most unpleasant example. However, sexual
and racial discrimination, environmental pollution and bribery in foreign
countries can all be cited as moral problems that were slowly remedied by
legislation.
Advocates of the rule of law would say, however, that the evidence of a delay
between apparent moral consensus and enacted legal sanctions does not
necessarily indicate a lack of relationship between legal requirements and
moral standards. It only serves to confirm that relationship, they would claim,
for laws controlling discrimination, pollution and bribery were eventually
passed.
SELF-CHECK 4.2
Based on your understanding of the relationship between law and moral
standards, provide examples of:
(a) Legally and morally accepted behaviour; and
(b) Legally and morally unaccepted behaviour.

To test your understanding, try the following exercise.
EXERCISE 4.1
1. Define law.
2. Discuss the basic characteristics of law.
4.7 FORMATION OF LAW

The law is formed through several processes as outlined in Figure 4.4.
Figure 4.4: Formation of law
We will look into each process in the following sections.
4.7.1 Individual Processes

Do you know that the law is a dynamic entity, as the rules change over time?
Think of the changes that have occurred in the laws governing employment. This
is essentially the same point made previously, that there seems to be a time lag
between changes in moral standards and changes in legal requirements.
Nevertheless, actions that were considered legal 20 years ago (such as racial and
sexual discrimination in hiring employees, or the discharge of chemical wastes
into lakes and streams) have now become illegal.
The question is whether these changes in law can be attributed to changes in the
moral standards of the majority of our population through social and political
processes, and consequently, whether the law represents the collective moral
standards of our society. The social and political processes by which the
changing moral standards of individual human beings are alleged to become
institutionalised into the formal legal framework of society is lengthy and
complex, but a simplified version is shown in Figure 4.5.

Figure 4.5: Processes by which individual

norms, beliefs and values are institutionalised into law
Each individual has a set of norms, beliefs and values which collectively forms
his or her moral standards as shown in Table 4.4.

Table 4.4: Individual Moral Standards
Moral
Explanation
Standards
Norms Norms are criteria of behaviour. They are the ways in which an
individual expects everyone to act when faced with a given situation.
Beliefs Beliefs are criteria of thought. Beliefs are different from norms in that
they involve no action (no apparent behaviour towards others), but an
abstract way of thinking that tends to support an individualÊs norms.
They are the ways an individual expects people to think about given
concepts.
For example, if you believe in participatory democracy, then you expect
others to recognise the worth of that concept and accept it as a form of
government.
Values Values are the rankings or priorities that a person gives to his or her
norms and beliefs. Most people do not consider all their norms and
beliefs are of equal importance. Generally, some are more important
than the others. The important norms and beliefs are the ones that a
person „values‰ or holds in high esteem.
Do you know that values are often controversial? Do you know why? It is
because a norm or belief that one person holds in high esteem can conflict with a
different norm or belief that another person holds in equally high esteem.
Generally, there will be little tolerance or compromise, as each person attaches
great importance to his criteria of:
• Behaviour (ways in which people ought to act); and
• Beliefs (ways in which people ought to think).
We live in a pluralistic society with numerous cultural traditions and in a secular

nation, with no accepted or endorsed religious heritage. Consequently, we have
to live with the fact that norms, beliefs and values will differ among individuals.
These differences can eventually lead to conflicts.
SELF-CHECK 4.3
Explain the following terms briefly:
(a) Norms;
(b) Beliefs; and
(c) Values.

4.7.2 Group Processes

Context, which means the general background or surrounding environment of a
situation, plays a significant role in the norm, beliefs and values of an individual.
Each individual develops a set of norms, beliefs and values through exposure to:
• Cultural or religious context;

• Social or political context; and
• Economic or technological context.
Each society has a context that consists of inter-related factors as shown in

Figure 4.6.
Figure 4.6: Six inter-related factors of context
The interwoven nature of the context, within which individual choices of norms,
beliefs and values are made, ensures that all the mentioned factors interact with
one another. As can be seen in Figure 4.7, technological changes in
communication bring political changes in governance. The political changes
cause economic changes in spending and taxation patterns, which eventually
result in cultural changes in personal lifestyle.

Figure 4.7: Interaction of inter-related factors of the context

The exact relationships among economic, technological, social, political, cultural
and religious factors are not known, nor can their combined influences upon an
individualÊs norms, beliefs and values be predicted with accuracy. However, the
relationships and influences can easily be observed as shown in the example:
The changing status of women resulted from:

(a) The economic shift from heavy manufacturing and mining to
knowledge-based and service industries;
(b) The technological development of better birth-control methods; and
(c) The social expansion of educational opportunities.
4.7.3 Social Processes

All individuals within a society do not have the same exposure to economic,
technological, social, political, cultural and religious factors. Such exposure
comes from:
• Individual positions;
• Family units;
• Peer groups; and
• Formal organisations.
In a democratic society, the changing norms, beliefs and values of individuals

within society do have an apparent, although delayed, impact upon the law. This
impact would appear to be the result of both social and political processes.
Basically, the social process involves accumulation of power.
People with similar norms, beliefs and values tend to become associated in small
groups. It is just natural to join others who have parallel views. These small
groups generally are part of much larger organisations such as:
• Business firms;
• Labour unions;
• Political parties;
• Charitable agencies;

• Religious institutions; and

• VeteranÊs associations.
These larger organisations over time either achieve an acceptable compromise on

norms, beliefs and values or split into smaller organisations that can achieve such
a compromise. There are alternative theories on the means by which this
compromise is formed such as:
• Autocratic decision;
• Bureaucratic adjustment; and
• Coalition bargaining or collective choice.
4.7.4 Political Processes

The political processes by which the norms, beliefs and values held by
organisations, groups and individuals are institutionalised into law can be seen
as a means of resolving conflict. Organisations, groups and individuals have
different opinions on norms (what should be done now) and beliefs (what should
be accomplished in the future).
These different views have to be accustomed to consistent and universal rules to

be effective. The following are alternative theories on the ways this is done:
• Presidential leadership;
• Institutional compromise;
• Congressional bargaining; and
• Constituent pressure.
Elected representatives are formally assigned the responsibility of formulating

laws in a representative system. However, issues differ by sections of the
country, segments of the population and sectors of the economy. Consequently,
coalitions have to be formed to pass most legislation. The public can express
opinions on potential laws by voting for some administrators and all legislators,
and indirectly through public surveys, letters and the media.
4.8 CONCLUSION ON RULE OF LAW AS BASIS

FOR MORAL CHOICES
The question now is whether these social and political processes, lengthy and
complex though they may be, truly combine the personal moral standards of the
majority of the population into universal legal requirements. The view that the law
represents collective moral judgment is appealing. However, there are problems in
the transfer from individual moral standards to universal legal requirements at

each stage of social and political processes. Let us look in detail at problems of
moral standards as shown in Table 4.5 to better understand this situation.
Table 4.5: Moral Standards and Their Explanations
Problems of Moral Explanation

Standards
The moral standards of • Most people might be unaware of payments of
members of a society may large bribes by certain organisations until
be based upon a lack of Lockheed case.
information relative to • Many people might be unaware of the magnitude
issues of corporate of a toxic waste disposal problem, even if millions
conduct. of metric tonnes of such waste are being produced
annually.
• It is difficult for personal moral standards to
influence the law if relevant information is
missing.
The moral standards of • People with similar norms, beliefs and values
an individual may be tend to become associated in small groups.
diluted in small groups. However, their standards are not always precisely
similar; compromises have to be made.
• Furthermore, many small groups act from
motives other than morality. Economic benefits
and professional prestige often play a big role.
• It is difficult for personal moral standards to
influence the law if they are not conveyed
accurately.
The moral standards of • Many organisations share norms, beliefs and
members of society may values. However, there is no evidence that each
be misrepresented in the individual and each group within the
consensus of large organisation has equal influence in determining
organisations. that consensus.
• This can be seen in the norms, beliefs and values
of many non-profit organisations such as
hospitals and universities, where the standards of
the professional personnel (the physicians and the
faculty) often prevail.
The moral standards of • This is the same point that was made above in
members of a society may shaping the consensus of an organisation, though
be misrepresented in the on a larger scale.

formulation of laws. • There is no guarantee that all organisations have

equal influence, or even equal influence weighted
by size, in determining the law.
• This can be seen in the provisions of tax
legislation, in which certain organisations always
seem to be favoured.
Legal requirements • This can be seen in both product liability cases
formed through the and equal employment review. The meaning and
political process are often application of the law have to be clarified outside
incomplete or imprecise of the legislative process.
and have to be • It is difficult for personal moral standards to
supplemented by judicial influence the law, if they are considered only
court decisions or indirectly, if at all, in two of the means of
administrative agencies formulating that law.
actions.
Now, let us try the exercise below.
EXERCISE 4.2
1. The formulation of law involves very complex and inconvenient

processes. What are these processes?
2. Match the social institutions to their responsibilities.

Legislatures and councils Law interpretation
Attorneys Law explanation
Courts Law formation
• The law is a consistent set of universal rules established to govern societal

behaviour. These rules are widely published, generally accepted and usually
enforced.

• There are five characteristics of the law that is consistent, universal,

published, accepted and enforced.
• Society-established rules reflect the collective choices of members of that

society regarding any decisions and actions that affect its welfare.
• There is an overlap between moral standards and legal requirements of

society, such as the federal law against bank robbery and the moral standards
against stealing.
• There are four chain processes of formation of the law ă individual process,
group process, social process and political process.
• Some changes in the norms, beliefs and values of individual members of

society are eventually reflected by changes in the law.
Beliefs Moral choice

Context Moral standards
Law Norms
Legal argument Values
Legal requirements

Topic Organisational
5 Approaches in
Improving
Ethical Behaviour
LEARNING OUTCOMES
1. Explain four main ethical safeguards;
2. Explain some structural causes of unethical conduct in organisations;
3. Identify various means of resolving unethical behaviour in
organisations; and
4. Discuss the responsibilities of management in addressing ethical
problems.
INTRODUCTION
Figure 5.1: Unethical behaviour

66 TOPIC 5 ORGANISATIONAL APPROACHES IN IMPROVING ETHICAL BEHAVIOUR
What do you think after reading the comic strip in Figure 5.1? Do you feel the act
of asking money or bribes is equivalent to breaching the ethical codes laid out in
an organisation?
We can assume that the senior executives of most business firms want their staff
members to act in ways that they would consider right, proper and just. We can
also be reasonably certain that they want them to act in ways that will not offend
the majority of the population, and not attract adverse publicity from the nationÊs
media.
Yet, this unethical behaviour happens ever so often. Why do they occur and what
can be done to prevent them? In this topic, we will examine several ways of
preventing unethical behaviour and discuss the causes and solutions of unethical
behaviour.
5.1 IMPROVING ETHICAL CLIMATE IN

ORGANISATIONS
In order to improve an organisationÊs ethical climate, top management can use a
variety of ethical safeguards as shown in Figure 5.2.
Figure 5.2: Ethical approaches to improve ethical climate in organisations
In the following sections, we will look at each approach and see how it improves
an organisationÊs ethical environment.

TOPIC 5 ORGANISATIONAL APPROACHES IN IMPROVING ETHICAL BEHAVIOUR 67
5.1.1 Ethical Codes

What is the definition of ethical codes? Let us look at the definition below.
Ethical codes are statements about the norms and beliefs of an organisation.
These norms and beliefs are generally proposed, discussed and defined by the
senior executives in the firm before being published and distributed to all its
members. Now, let us look at Table 5.1 for an explanation of norms and beliefs in
relation to ethical codes of an organisation.
Table 5.1: Ethical Codes on Norms and Beliefs
Aspects Norms Beliefs

Definition Norms are standards of Beliefs are standards of thought.
behaviour. They are the ways of thinking in
They are the ways in which the which the senior management
senior management of an of an organisation want
organisation want staff to act employees to adopt. However,
when facing a certain situation. this is not censorship. The intent
is to encourage ways of thinking
and patterns of attitudes that
will lead to the desired
behaviour.
Expressed Norms in an ethical code are Beliefs in an ethical code are
form generally expressed as a series of generally expressed in a positive
negative statements, for it is easier form.
to list the things a person should
not do than to be precise about the
things a person should do.
Example Employees of a company are Our first responsibility is to our
expected not to accept customers.
personal gifts which cost We wish to provide good
more than RM25 from any services for the community in
business friend or associate. which we operate.
Employees are expected to
pay their full share of the cost
of meals or other
entertainment which is more
than RM25.

Do you think ethical codes work? Are they helpful in conveying to all employees
the moral standards selected by the board of directors and president? The answer
is, not really.
The problem is that it is not possible to state clearly and explicitly the norms and
beliefs of an organisation relative to the various constituent groups (employees,
customers, suppliers, distributors, stockholders and the general public) without
offending at least one of these groups. For example, it is not possible for a
company to say that it considers its employees are more important to the success
of the firm than its stockholders. By saying that, the company sends the message
that profits and dividends come second, which goes against the goal of many
business organisations.
Consequently, codes of ethics are usually written in general terms, noting

obligations to each group without stating which of them takes precedence in any
given situation.
The basic difficulty with codes of ethics is that they do not establish priorities
between norms and beliefs. Priorities are the true values of a firm. For example,
let us say that one division in a firm is faced with declining sales and profits.
Thus, the firm would be faced with the question of whether it should reduce its
middle management employment and cut its overhead costs (the classic
downsizing decision). The code of ethics says, in one section, that we respect our
employees; while in another section, that we expect fair profits. How then do we
decide on the best course of action? What is fair in this instance? The code of
ethics does not provide us the answer.
Ethical dilemmas are conflicts between economic and social performances. The
latter is expressed as obligations to employees, customers, suppliers, distributors
and the general public. Ethical codes can express a general sense of obligations
which members of senior management feel towards those groups. However, they
cannot help the middle management or lower-level management to choose
between groups, or between economic and social performances.
ACTIVITY 5.1
Give two examples of positive beliefs that an organisation should

have. Discuss with your coursemates.

5.1.2 Ombudsman Position
An ombudsman is a person within an organisation who is often an older and

respected manager who is close to retirement. He has been relieved of
operating responsibilities and assigned the task of counselling younger
employees on career problems, organisational difficulties and ethical issues.
The term „ombudsman‰ originated from the Swedish language and it means:
A government agent in a country who has been specially appointed to

investigate complaints made by individual citizens against public officials for
abuses of power or uncaring acts. Often, the ombudsman can go considerably
beyond counselling and investigation and is able to act informally to resolve
problems.
Does the position of ombudsman work? Actually, it does not. The problem is that
the person reporting the incident is not truly „not implicated in any way.‰ We
can assume that ombudsmen are generally discreet in talking to an offender.
However, the source of information for the ombudsman (the originator of the
complaint) is usually clear. It has to be a person within the organisation who has
information about the practice and the moral scruples to report it. He is generally
someone who has spoken to the offender about the practice within the past 30
days. The ombudsman does not have to be concerned about retribution but his
informer generally does.
ACTIVITY 5.2
In your opinion, do you think an ombudsman can effectively play his
role in solving cases involving ethical issues? Explain your reasons.
5.1.3 Ethics Hotlines

Sometimes, employees may face an ethical issue but are reluctant to raise it with
their manager or colleagues. Ethics hotlines may provide an avenue for
employees, who do not want to be seen with an ethics officer, to report or
enquire about ethical matters anonymously. For example, Telekom Malaysia
(TM) has set up an Ethics Hotline, which operates 24 hours every day, for staff to
turn to for advice on ethical issues and concerns. Ethics hotlines can be an

effective approach to protect the confidentiality of the callers, while gathering

important information that is needed to resolve complaints or allegations related
to ethics.
In Figure 5.3, we can see an example of a corporate company which provides a

web-based report and ethics hotline number for their staff if they want to report
conduct that may be unethical, illegal, in violation of professional standards, or
otherwise inconsistent with the company code of conduct.
Figure 5.3: Ethics hotline

Source: https://secure.ethicspoint.com
5.1.4 Ethics Training

An organisational compliance programme requires instituting an ethics training
programme and communication system to educate employees about the firmÊs
ethical standards. Ethics training usually involves lectures offered by a company
trainer and is usually given to managers. To be effective, ethics training should
be related to actual situations that employees may experience in their job and
possible ethical solutions to those problems.
Generally, an ethics training programme should educate an organisationÊs

employees about the firmÊs policies, expectations, relevant laws and regulations,
and general social standards. An effective ethics training would make employees
aware of the available resources, support systems and personnel who can assist
with ethics and legal advice.

According to Thorne, Ferrell & Ferrell (2008), an organisationÊs ethics training

can have three goals. The goals of ethics training are to ensure that an employee:
(a) Recognises when a situation requires ethical decision making;
(b) Understands the values and culture of the organisation; and
(c) Evaluates the impact of ethical decisions on the company.
SELF-CHECK 5.1
What are the four ethical approaches used in addressing an

organisationÊs ethical enviroment? Discuss each approach briefly.
5.2 STRUCTURAL CAUSES OF UNETHICAL

BEHAVIOUR
We have seen that neither codes of conduct nor an ombudsman can ensure that
the moral standards selected by the president and board of directors of a firm
will be adhered by all members of the firm. Consequently, we have to look at the
causes of unethical behaviour and see if we can eliminate those causes.
For example, let us look at established organisations such as General Electric,

General Dynamics, E. F. Hutton and the Thorp Division of ITT. We will be
looking at the reason product managers at General Electric defrauded the
government, and regional managers at E. F. Hutton defrauded banks.
The individual managers of these large organisations cheated the government,

banks and customers. However, they did not directly benefit from their
unethical act. These were not instances of managerial dishonesty as there were
no payments, vacations and gifts. However, the individuals did benefit
indirectly. Thus, it is necessary to understand this indirect benefit for this is the
structural cause of unethical behaviour within organisations.
Most large companies today are diversified, with numerous divisions. Each
division normally consists of a given product line, market segment and
production process. Divisionalised structures of this type are generally
decentralised authority for product, market and process changes are allocated
to divisional managers, who are then held responsible for economic performance.

There are two major problems with the divisionalised and decentralised type of
organisational structure:
(a) Interrelationships between divisions (in products, markets, processes or
technologies) cannot be used as the basis for economies of scale or
economies of scope due to the separate nature of the divisions.
(b) Corporate management in a decentralised structure has little control over
the strategies of the divisions until after an outstanding success or an
absolute failure has occurred. They are reduced to an ineffective review
function. These problems brought changes in the management of
diversification, starting around 1975.
Before moving to the next section, attempt the exercise shown below.
EXERCISE 5.1
1. What are ethical codes?

2. Do ethical codes work? State your reason.
3. Do you think ethics training is effective in improving an
employeeÊs ethical behaviour? State your reason.
4. What are the structural causes of unethical behaviour?
5.3 SOLUTIONS TO STRUCTURAL CAUSES OF

UNETHICAL BEHAVIOUR
What can you do to remove the structural causes of unethical behaviour in
organisations? Unfortunately, not much can be done. In the previous topic, we learnt
on individual choice that there are no completely satisfactory means of reaching a
decision when confronted by an ethical dilemma. Multiple analysis (using economic,
legal and moral forms of reasoning) appears to make the issues clearer and the
proper, right or just decision more apparent. However, the process does not
guarantee unanimity as the values and priorities arising from economic, legal and
moral outcomes differ among members of every organisation. Thus, there are no
complete satisfactory means of changing the planning, control and motivational
systems to ensure that the moral standards of senior executives will be followed.
We can put less emphasis on the financial measures of performance (sales revenues,
variable costs, fixed expenses and quarterly profits) and more on the numerical

measures (customer complaints, quality rejections, workforce absenteeism,

community attitudes and delay in responding to dividend inquiries). However,
these alone are not going to solve the problem in management and represent a
conflict between the economic and social performances of an organisation.
What do you think will happen if the conflict is not specifically addressed and
resolved by senior executives within the firm? If it is not resolved properly by the
senior executives within the firm, the natural tendency of middle-level and
operating-level managers will tend to favour the economic performance of the
organisation. This is so as under the current managerial systems, their performance
is measured by economic criteria and their future is dependent upon economic
results.
ACTIVITY 5.3
If you were a manager who has to solve the problem of unethical
conduct in your organisation, how would you go about it? Discuss
with your coursemates.
5.4 ETHICAL RESPONSIBILITIES OF

MANAGEMENT
Let us say that you are a senior executive in a firm. How do you address and resolve
the conflict between economic and social performances? The resolution of the
conflict has to be done as part of the strategic planning process. Ethical issues have to
be made a part of that process, and no longer ignored or pushed down to the
operating levels. Hard ethical questions have to be asked by the managers in the
business units, and specific ethical answers have to be supplied by the corporate
executives.
If you are a corporate executive, how would you answer these difficult ethical
questions?
(a) „One of our major clients insists upon putting inaccurate statements in
their advertisements. Should we maintain that client?‰
(b) „We can reduce our costs by replacing the wholesale distributors who
helped us in building the market. Should we start direct factory-to-store
shipments?‰

Basically, your response should have the following components:

(a) Character
The character to face issues which have adverse social impacts associated with
each of the alternatives.
(b) Courage
The courage to thoughtfully evaluate each of these alternatives following
economic, legal and moral forms of reasoning.
It also entails having the character to recognise that personal costs may be associated
with the choice and courage to bear those costs. However, others may disagree with
this decision because of the following differences:
Differences in perspectives within the firm; or
Differences in beliefs in the importance of economic outcomes, legal
requirements, moral principles of benevolence and consistency, and moral
values of justice and liberty.
We have numerous economic, legal and ethical outcomes, requirements, principles

and values, but no clear ordering among them. However, this is not an excuse to
avoid making ethical decisions in management. We have to make those decisions
based on our sense of responsibility to others as it is a test of our character and a
measure of our courage.
SELF-CHECK 5.2
How does the management respond in addressing ethical problems

in an organisation?
Test your understanding by doing the exercise shown below.
EXERCISE 5.2
What can be done to solve the structural causes of unethical behaviour

problem existing in organisations?

There are mainly four approaches in addressing the ethical climate in an

organisation ethical codes, ombudsman position, ethics hotlines and ethics
training.
Ethical codes are lists of statements containing the norms and beliefs of an
organisation published and distributed to all members of the firm.
An ombudsman is usually an elderly and respected person within an

organisation who has been relieved of operating responsibilities and given the
task of counselling younger employees on various ethical issues.
Divisionalisation and decentralisation are believed to be the prime structural

causes of unethical behaviours.
The solution for unethical behaviour is placing less emphasis on the financial
measures of performance and more on numerical measures.
The management has to make decisions related to unethical conduct based upon
their sense of responsibility to others as it is a test of their character and a
measure of their courage.
Beliefs Ethics hotlines

Decentralisation Ethics training
Divisionalisation Norms
Ethical codes Ombudsman

Topic Social
6 Responsibility
and
Organisations
LEARNING OUTCOMES
1. Describe the three eras involved in the evolution of thought about
social responsibility;
2. Explain the three areas of social responsibility;
3. Discuss the arguments for and against social responsibility; and
4. Explain how the government and organisations influence each other.
INTRODUCTION
After comprehending the principles of ethics on an individual level, let us now
focus on organisational best practices from the stakeholder perspective. One of
the most talked about corporate best practices is corporate social responsibility
(CSR). Do you know what CSR stands for? Take a look at Figure 6.1 to get
clearer understanding of the term.

TOPIC 6 SOCIAL RESPONSIBILITY AND ORGANISATIONS 77
Figure 6.1: Pyramid of social responsibility

Source: http://bclc.chamberpost.com
As can be seen in Figure 6.1, CSR revolves around four main areas of
responsibility economic, legal, ethical and philanthropy.
Corporate social responsibility is the adoption of an organisation regardless of

private or public, large or small, at a strategic level of its economic, legal, ethical,
and community responsibilities to meet the stakeholder expectations. It is a set
of obligations that an organisation has to protect and extend to the society in
which it functions.
(Ferrell, Thorne, & Ferrell, 2011)
In this topic, we will look into the following aspects related to social
responsibility historical views, organisational approaches, influences of
government and organisations to each other, management and social audit.
6.1 HISTORICAL VIEWS OF SOCIAL

RESPONSIBILITY
Views of social responsibility held by organisations, the government and the
public at large have changed dramatically over the last hundred years. In
particular, there have been three critical turning points in the evolution of
thinking about social responsibility, as outlined in Figure 6.2.

78 TOPIC 6 SOCIAL RESPONSIBILITY AND ORGANISATIONS
Figure 6.2: Evolution of thought about social responsibility
Let us look in detail at each era of social responsibility in the following sections.
6.1.1 Entrepreneurial Era

The entrepreneurial era started in the United States during the late 1800s. At that
time, the so-called captains of industry, such as John D. Rockefeller, Cornelius
Vanderbilt, J. P. Morgan and Andrew Carnegie, were amassing fortunes and
building empires in industries ranging from oil to railroads and from banking to
steel. Prior to their day and age, virtually all businesses were small, so these men
were truly the first executives to control power and wield influence at the
national level.
Unfortunately, in many instances, early entrepreneurs abused their power

through ruthless practices as shown in Table 6.1.
Table 6.1: Practices of Early Entrepreneurs
Practices of Early
Explanation
Entrepreneurs
Labour lockouts Some employers use this tactic of withholding employment to
hinder union organisations or to gain leverage in labour disputes.
It is often accomplished by literally locking employees out of the
workplace but it is also possible through work stoppage, layoffs
or the hiring of non-union replacement workers.
(Source: http://www.britannica.com)
Discriminatory Some providers of products and services charge unreasonable
pricing policies prices for them. Certain groups of consumers are made to pay
different prices for the same products and services. The providers
introduced the discriminatory pricing policies to take into
account the economic status of individuals, that is, their ability
and willingness to pay.
(Source: http://www.globecon.org)

Kickbacks Payments or services are offered with the intent to influence or

gain something from an organisation or a person. Kickbacks are
closely associated with bribes.
(Source: http://www.wisegeek.com)
Blackmail Money or a valuable item is extorted from a person by
threatening to expose an act or discreditable information.
(Source: http:// www.answers.com)
Tax evasion This is an illegal act whereby a person, organisation or
corporation intentionally avoids paying their true tax liability.
Criminal charges and substantial penalties are imposed upon
those caught evading taxes.
(Source: http://www.Investopedia.com)
Eventually, outcries from public officials and other leaders forced the federal
government to step in and pass laws that outlawed some undesirable business
practices and restricted others. These laws were significant in that they
acknowledged the relationship among business, government and society. This
also indicated for the first time that business had a role to play in society beyond
the pure maximisation of profit.
6.1.2 Depression Era

Subtle changes in views towards social responsibility continued throughout the
early part of the 20th century. However, the views changed drastically during the
Depression Era of the 1930s. By this time, large organisations had come to
dominate the American economic scene, and many people criticised them for
irresponsible financial practices that led to the stock market crash of 1929. As part
of Franklin RooseveltÊs New Deal programme, the government passed several
laws to protect investors and smaller businesses.
Let us look below to learn more about the New Deal Programme brought
forward by the 32nd President of United States of America, Franklin D.
Roosevelt.
In 1929, the American stock market crashed catastrophically, setting off a

domino affect throughout the American economy. In addition to its economic
struggles, the country was also facing major issues in the farming sector. Many
Americans found themselves extremely poor almost overnight, which triggered
social unrest in the already troubled nation. Roosevelt felt that the country
needed these three essential things: relief, recovery and reform. Thus, the New
Deal Programme was introduced in 1930s.

The New Deal was a series of social, economic and governmental reforms
initiated by Franklin. It focused on providing relief to unemployed Americans
and the troubled manufacturing sector while promoting economic recovery and
reforming the American finance system to prevent the recurrence of the
Depression Era. At that time, the New Deal was met with huge amounts of
criticism from some quarters and massive praise from others. In retrospect, the
New Deal was a major event in American history as it shaped the landscape and
attitudes of Americans.
(Source: http://www.wisegeek.com)
The Securities and Exchange Commission (SEC) was established in 1934 to

regulate the sales of securities and curb unfair stock market practices. As an
outgrowth of these and other actions, the social responsibility of organisations
was clearly described. In particular, the new government actions insisted that
organisations take an active role in promoting the general welfare of the
American public.
6.1.3 Social Era

The era where American history was characterised by social responsibility was
known as the social era of the 1960s. The civil rights movement and widespread
opposition to the war in Vietnam energised the American public to examine the
nationÊs values, priorities and goals. Students and activists accused big
businesses, such as McDonnell Douglas and Du Pont, of trying to promote and
extend the Vietnam War in order to increase their profits.
The growing trend towards social responsibility raised two important questions:
(a) To whom should a business organisation be responsible?
(b) Who is ultimately accountable for an organisationÊs practices?
We will address these questions in the following sections.
ACTIVITY 6.1
Draw a mind map showing the evolution of thinking about social

responsibility. Elaborate on the map in detail.

6.2 AREAS OF SOCIAL RESPONSIBILITY

Do you know that there are a few key areas of social responsibility? In general,
organisations may exercise their social responsibility in three areas, as shown in
Figure 6.3.
Figure 6.3: Three areas of an organisationÊs social responsibility
(a) Organisational Constituents

Organisational constituents are people and organisations directly affected
by the practices of a specific organisation and have a stake in its
performance. The major types of constituents are state and federal
governments, creditors, customers, suppliers, employees, interest groups,
courts and investors.
The interests of people who own and invest in an organisation are affected
by virtually anything the firm does. If the firmÊs manager is caught
committing criminal acts or violating acceptable ethical standards, the
resulting bad press and public outcry are likely to hurt the organisationÊs
profits, stock prices and so forth. Organisations that are socially responsible
in their dealings with employees treat workers fairly, make them a part of
the team, and respect their dignity and basic human needs.
To maintain a socially responsible stance towards investors, managers

should do the following:
Maintain proper accounting procedures;
Provide appropriate information to shareholders about the current and
projected financial performance of the firm; and
Manage the organisation in such a way as to protect shareholdersÊ
rights and investments.
(b) Organisational Natural Environment

A second critical area of social responsibility is the natural environment.
Not long ago, many organisations regularly and indiscriminately dumped
sewage, waste products from production and trash into streams, rivers, the

air and on vacant land. Now, however, many laws have been put in place
to regulate the disposal of waste materials. In many instances, companies
have seen the consequence of their actions and have become more socially
responsible in their handling of pollutants.
Figure 6.4 shows the raw sewage overflow which can contaminate the river
and endanger the livelihood of the organisms living there. This act of
disposing waste material is strictly prohibited by the law.
Figure 6.4: Raw sewage overflow

Source: http://www.i8not.net
Companies also need to develop economically feasible ways to avoid

contributing to acid rain, depletion of the ozone layer and global warming.
They need to find alternative methods of handling sewage, hazardous
wastes and ordinary trash. Companies also need to develop safety policies
that reduce accidents with potentially disastrous environmental results.
Figure 6.5 shows the cause and effect of global warming which is
threatening the livelihood of organisms living on Earth. Global warming is
mainly caused by the emission of factory fumes which contain a high
percentage of carbon dioxide. The heat released into the atmosphere makes
the ice cap thin and easy to melt. This makes the Earth prone to danger if
left unresolved.

Figure 6.5: Cause and effect of global warming
For example, companies may follow these practices to comply with their
responsibility towards the natural environment:
Contributions to charities, philanthropic organisations, non-profit
foundations and associations;
Support for museums, symphonies, public radio and television; and
Taking a role in improving public health and education.
(c) Organisational General Social Welfare

Some people feel that in addition to treating constituents and the natural
environment responsibly, business organisations should promote the
general welfare of society. Some people also believe that organisations
should act to correct or at least not contribute to political inequalities.
SELF-CHECK 6.1
1. Describe the three eras of social responsibility briefly.
2. Explain the three areas of social responsibility in detail.

6.3 ARGUMENTS ON SOCIAL RESPONSIBILITY

On the surface, there would seem to be little disagreement over the need for
organisations to act responsibly; not only towards their constituents but also the
natural environment and the wider society in which they operate. Nonetheless,
several convincing arguments have been put forth by those who oppose these
wider interpretations of social responsibility. Some of the most prominent
arguments on both sides of this contemporary debate are summarised in
Table 6.2.
Table 6.2: Arguments Supporting and Opposing Social Responsibility
Supporting Social Responsibility Opposing Social Responsibility
1. Businesses create problems and 1. The purpose of business is to

should therefore help to solve generate profit for owners.
them.
2. Corporations are citizens in our 2. Involvement in social programmes

society. gives businesses too much power.
3. Businesses often have the 3. There is a potential for conflict of

resources necessary to solve interest.
problems.
4. Social responsibility can enhance 4. Businesses lack the expertise to
profits. manage social programmes.
Although each of the arguments summarised above is a distinct justification for

socially responsible behaviour on the part of organisations, another basic reason
for social responsibility is profit itself. Organisations that make clear and visible
contributions to society can achieve enhanced reputation and garner a greater
market share for their products.
ACTIVITY 6.2
List the arguments supporting and opposing social responsibility.

Provide some examples for each argument.

6.4 ORGANISATIONAL APPROACHES TO

SOCIAL RESPONSIBILITY
Some people advocate an expanded social role for organisations, while others
argue that their social role is already too large. Not surprisingly, organisations
have a wide range of approaches on social responsibility. As shown in Figure 6.6,
the four approaches that an organisation can take in relation to social
responsibility fall along a continuum, ranging from low to high degrees of
socially responsible practices.
Figure 6.6: Organisational approaches to social responsibility
Let us look at the elaboration of each social responsibility in Table 6.3.
Table 6.3: Organisational Approaches to Social Responsibility
Organisational
Explanation
Approaches
Social This approach has the lowest degree of social responsibility. The few
Obstruction organisations that take this approach usually do as little as possible
to solve social or environmental problems. When they cross the
ethical or legal line that separates acceptable from unacceptable
practices, their typical response is to deny or cover up their actions.
Social This approach involves doing everything that is legally required to
Obligation solve social or environmental problems but nothing more. This
approach is most consistent with the arguments against social
responsibility which were described earlier. Managers in
organisations that take this approach usually insist that their job is to
generate profits.

Social Response This approach involves meeting legal and ethical requirements and
going beyond those requirements in certain cases. Such firms
voluntarily agree to participate in certain limited social programmes,
but solicitors must convince the organisations that they are worthy
of support.
Social This approach has the highest degree of social responsibility. This
Contribution approach goes far beyond minimal requirements and involves
proactively seeking opportunities to contribute to society. Firms that
adopt this approach take to heart the arguments in favour of social
responsibility. They view themselves as citizens in a society.
6.5 SOCIAL RESPONSIBILITY OF

GOVERNMENT
There is a two-way relationship between organisations and government. As
shown in Figure 6.7, organisations and government use several methods in their
attempt to influence each other.
Figure 6.7: How organisations and government influence each other

6.6 HOW GOVERNMENT INFLUENCES

ORGANISATIONS
The government influences organisations through direct and indirect regulations.
Before we elaborate further on how the government influences organisations
(refer to Figure 6.8), let us look at the definition of regulation.
Regulation is the establishment of laws and rules that dictate what organisations
can and cannot do under certain circumstances.
Figure 6.8: GovernmentÊs regulations in influencing organisations
6.7 HOW ORGANISATIONS INFLUENCE

GOVERNMENT
Do you know how organisations influence the government? Mainly, there are
four main methods employed by organisations in addressing government
pressure for more social responsibility as shown in Table 6.4.

Table 6.4: OrganisationsÊ Methods in Influencing the Government
OrganisationsÊ
Explanation
Methods
Personal Many corporate executives and political leaders are in the same
Contacts social circles. Thus, personal contacts and networks offer one
method of influence. A business executive may be able to contact a
politician directly and present his case regarding a piece of
legislation being considered.
Lobbying Lobbying is an attempt by individuals or groups to influence
legislation. A lobbyist formally represents an organisation before a
law-making body.
Political Action PACs are special organisations created to solicit and then distribute
Committees money to political candidates, because companies cannot legally
make direct donations to political campaigns. Employees of a firm
(PACs)
may be encouraged to make donations to a particular PAC as
managers know that the PAC supports candidates with political
views similar to their own. The PAC, in turn, makes the
contribution itself, usually across the board to state and national
candidates.
Favours Organisations sometimes rely on favours and other influence tactics
to gain support.
6.8 MANAGING SOCIAL RESPONSIBILITY

As we have seen, there are pitfalls for managers who fail to follow high ethical
standards and for companies that try to circumvent their legal obligations.
Organisations, therefore, need to come up with an approach to social

responsibility similar to the way they would develop other business strategies.
They should view social responsibility as a major challenge that requires careful
planning, decision making, consideration and evaluation. They may accomplish
this through both formal and informal approaches as outlined in Figure 6.9.

Figure 6.9: Formal and informal organisational approaches
The formal approaches that organisations can use to manage social responsibility
are as shown in Table 6.5 below.
Table 6.5: Formal Organisational Approaches
Formal
Explanantion
Approaches
Legal Legal compliance is the extent to which an organisation complies with
Compliance local, state, federal and international laws. The task of managing legal
compliance is generally assigned to the appropriate functional
managers.
Ethical Ethical compliance is the extent to which members of an organisation
Compliance follow basic ethical (and legal) standards of behaviour. Many
organisations also establish formal ethics committees, which may be
asked to review proposals for new projects, help evaluate new hiring
strategies or assess a new environmental plan.
Philanthropic Philanthropic giving is the awarding of funds or other gifts to
Giving charities or other programmes. In this age of cutbacks, many
corporations have limited their charitable gifts over the past several
years as they trim their budget.

The informal approaches used by organisations to manage social responsibility

are as shown in Table 6.6.
Table 6.6: Informal Organisational Approach
Informal
Explanation
Approaches
Organisation Leadership practices and organisation culture can go a long way
Leadership and towards defining the social responsibility stance that an organisation
Culture and its members will adopt. Thus, providing appropriate leadership
and culture is vital in managing an organisation informally.
Whistle- Whistle-blowing is the disclosure by an employee of illegal or
Blowing unethical conducts by others within their organisation. Whistle-
blowers may have to proceed through a number of channels to be
heard and may even be fired for their effort of disclosing the conduct.
However, many organisations welcome their contributions.
6.9 EVALUATING SOCIAL RESPONSIBILITY

An organisation that is serious about social responsibility must ensure that its
efforts are producing the desired benefits. Essentially, this requires applying the
concept of control to social responsibility. Many organisations require current
and new employees to read their guidelines or code of ethics and to sign a
statement agreeing to abide by them. An organisation should also evaluate how
it responds to instances of questionable legal or ethical conduct.
6.9.1 Social Audit

Some organisations occasionally conduct corporate social audits. Do you know
what is meant by social audits? Read the explanation below to get a clearer
picture about this term.
A corporate social audit is a formal and thorough analysis of the effectiveness

of a firmÊs social performance.
It is a tool to evaluate social responsibility. It requires the organisation to define

all its social goals clearly. It also analyses the resources devoted to each goal,
determine how well the various goals are being achieved and make
recommendations about which areas need additional attention.

In short, social audit is a process of assessing and reporting business performance

of economic, legal, ethical and philanthropic social responsibilities expected by
stakeholders as mentioned earlier in the topic. Social auditing provides tools that
companies can use to identify and measure their impact on stakeholders,
communicate this information internally and externally, apply this information
to make continual improvements in areas that stakeholders see as important. One
of the most recent guidelines for social responsibility is ISO 26000 Guidance for
Social Responsibility. However, ISO 26000 is a guideline not for certification
purpose as can be seen below.
ISO 26000:2010 provides guidance to all types of organisations, regardless of

their size or location, on:
Concepts, terms and definitions related to social responsibility
The backgrounds, trends and characteristics of social responsibility
Principles and practices relating to social responsibility
The core subjects and issues of social responsibility
Integrating, implementing and promoting socially responsible behaviour
throughout the organisation and, through its policies and practices,
within its sphere of influence
Identifying and engaging with stakeholders
Communicating commitments, performance and other information
related to social responsibility
ISO 26000:2010 is intended to assist organisations in contributing to

sustainable development. This guideline is intended to encourage them to go
beyond their legal compliance, recognising that compliance with law is a
fundamental duty of any organisation and an essential part of their social
responsibility. It is intended to promote common understanding in the field of
social responsibility, and to complement other instruments and initiatives for
social responsibility but not to replace them. In applying ISO 26000:2010, it is
advisable that an organisation take into consideration of societal,
environmental, legal, cultural, political and organisational diversity, as well as
differences in economic conditions, while being consistent with international
norms of behaviour.
For further information on ISO 26000, visit this website:

http://www.iso.org/iso/catalogue_ detail

Social audit is a step away from evaluating a corporationÊs performance solely

based on financial achievements. In addition, social audit encourages
corporations to look into social, environmental and economic bottom lines,
namely, the Triple Bottom Line (Elkington, 1997, 1999). Other examples of non-
financial measurements are Six-Sigma and Balanced Scorecard.
Some of the benefits of social auditing to corporations are as follows:

Achieve the best social performance possible;
Facilitate organisational improvement and learning;
Improve relationships with stakeholders through dialogues;
Assist the organisation in identifying potential risks and liabilities;
Assist in coordinating programmes throughout the firm; and
Allow the company to assess its impact on the environment, community and
society.
Ideally, the outcome of social audit is a social report. Corporate social reporting is
the reporting of corporationsÊ social performance; it is the reporting of what a
corporation has or has not achieved at the end of a financial year. At the moment,
there are no one formalised reporting standard available. However, the Global
Reporting Initiatives (GRI) introduced one of the most comprehensive social
reporting guidelines. You can refer to www.globalreporting.org to get more
information on GRI.
Social reports can be part of an annual report or a stand-alone report. In 2007,

Bursa Malaysia made corporate social reporting mandatory for all public-listed
companies in Malaysia. Some of the benefits of social reporting to corporations
are as follows:
Facilitate reputation management;
Promote accountability; and
Increase transparency.
Stockholders and investors are able to make informed decisions as they judge
whether a corporation is achieving the goals it has established and abiding by the
values it has specified as important.

SELF-CHECK 6.2
1. How do governments and organisations influence each other?

2. Briefly explain direct and indirect regulations.
3. Briefly explain formal and informal organisational approaches.
4. What is social audit?
Complete the following exercise to check your understanding on the content of

Topic 6.
EXERCISE 6.1
1. Summarise the basic historical views of social responsibility.

2. What are the arguments for and against social responsibility?
3. What are the ways through which governments usually
influence organisations? How do organisations, in turn,
influence governments?
4. What formal organisational approaches can be used to manage
social responsibility?
There are three different eras of social responsibility: social era, depression
era and entrepreneurial era.
Organisations exercise their social responsibility in three areas: constituents,

natural environment and general social welfare.
Arguments which support social responsibility say that social responsibility

can enhance profits, corporations are citizens in our society and businesses
often have the resources necessary to solve problems.
Arguments which oppose social responsibility say that businesses lack the
expertise to manage social programmes, there is a potential for conflict of
interest and the purpose of business is to generate profit for owners.

There are four organisational approaches: social contribution, social response,

social obligation and social obstruction.
The government influences the organisations through direct and indirect

regulations.
There are four main methods employed by the organisations in addressing
government pressures for more social responsibility: favours, political action
committees, lobbying and personal contacts.
Corporate social responsibility Social contribution

Government Social obligation
Organisations Social obstruction
Regulation Social response
Social audit

Topic Corporate
7 Governance
LEARNING OUTCOMES
1. Explain corporate governance;
2. Identify three components in the definition of corporate governance;
3. Explain the two perspectives of corporate governance; and
4. Interpret good corporate practices based on the Code of Corporate
Governance.
INTRODUCTION
Have you heard of corporate governance? What does it mean? Occasionally,
business organisations would use this term due to the importance placed on it.
In the following sections, we will look into these aspects to learn more about
corporate governance:
Definition of corporate governance;
Components of corporate governance;
Perspective of corporate governance;
Corporate governance dealing with top management;
Reasons for studying corporate governance;
Code of corporate governance; and
Future of corporate governance.

96 TOPIC 7 CORPORATE GOVERNANCE
7.1 WHAT IS CORPORATE GOVERNANCE?

In responding to the dynamic world of business, corporations need to constantly
be alert of their corporate practices. This is especially crucial in light of many
instances where corporations ended up in controversial practices such as Enron,
American International Group (AIG), Transmile and Sime Darby. As public-
listed companies need to be accountable to their stakeholders and shareholders
in particular, top managements have to gear up to their best practices to uphold
their social contract, which is to meet social expectations.
Before we explore corporate governance further, let us look at the definition of

corporate governance.
Corporate governance is a formal system of oversight, accountability and

control of corporate decisions, operations, and actions has to be in place to earn
the corporation's much-needed commodity: stakeholders' continuous trust.
(Ferrell, 2011; Thorne, 2010)
This phenomenon of greater governance is a direct consequence of social

progression, availability of information and shareholder activism.
7.1.1 Components of Corporate Governance

From the definition of corporate governance, we can identify three components
as shown in Figure 7.1.
Figure 7.1: Three components of corporate governance
Let us look in detail at the components of corporate governance:
(a) Oversight
Oversight simply means check and balance. Hence, oversight allows
management decisions to be questioned and challenged, thereby reducing

TOPIC 7 CORPORATE GOVERNANCE 97
the risk of mismanagement. For example, the practicality to invest in a new

project abroad can be questioned and top management has to answer any
issues raised related to the project. The main objective of oversight is to
minimise top managementÊs abuse of power.
(b) Accountability
Accountability means how the decisions taken by the management align
with the firmÊs stated strategic direction. In simple words, did the
management act based on their stated mission or vision? As promises are
made to the public, management has to be accountable to them or else they
will lose the publicÊs trust. For example, a corporation promises to reduce
its carbon emissions. The question raised will be: Did the corporation
commit or take any effort to fulfil its promises? If it did not, then the
accountability of the corporation is at stake due to its undelivered promises.
(c) Control
Control is a process of auditing and improving organisational decisions and
actions. Actual performance is compared with budget, standard and goal.
Ultimately, corporate governance aims to balance power, address mistakes,
reduce risks and avoid misconduct in order to achieve integrity.
SELF-CHECK 7.1
1. In your own words, define corporate governance.
2. Explain briefly the components of corporate governance.
7.2 THE PERSPECTIVE OF CORPORATE

GOVERNANCE
Do you know that corporate governance can be observed from two different
perspectives? These perspectives are shown in Figure 7.2.
Figure 7.2: Corporate governance perspectives

All discussions, decisions and actions are made based on these perspectives.
Therefore, the top management needs to be clear about the perspective of
corporate governance that they hold. From the shareholder perspective, the spirit
of practising good corporate governance is in the interest of shareholders. Being
the owners of companies, the purpose of corporate governance is in the interest
of shareholders. The rationale according to Friedman (1962, 1970) is that
shareholders are owners of the corporation. Therefore, the corporation should be
responsible and accountable to its shareholders.
For example, if shareholders are pleased with the top managementÊs decision and
action to clear a piece of land for development, the top management will proceed
with the process. All other stakeholdersÊ interests are of secondary importance.
However, from the stakeholder perspective, the spirit of corporate governance is

in the interest of stakeholders. This is because other stakeholders also invest in
the success of the firm. Another argument is that all corporate decisions and
actions can affect its stakeholders and the stakeholders, in turn, can affect the
corporationÊs decisions and actions (Freeman, 1984).
For example, if a corporation is involved in insider trading, the following

situations might happen:
(a) Shareholders might suffer losses;
(b) Employees might lose their jobs; and
(c) Customers might decline the customer service they deserve.
Consequently, loyal employees will leave the corporation and loyal customers
might discontinue purchasing and using the corporationÊs products or services.
This signifies the reflexive relationship between businesses and their
stakeholders.
ACTIVITY 7.1
From the stakeholder perspective, if an organisation decided to limit
its budget, what would happen to its stakeholders? Discuss with
your coursemates.

7.3 CORPORATE GOVERNANCE DEALING

WITH TOP MANAGEMENT
In an organisation, corporate decisions, actions and operations are mainly the
responsibility of top management. Corporate governance deals mostly with top
management, specifically board of directors (refer below).
Board of directors and top management are fiduciaries to shareholders. They

are the persons placed in a position of trust who use due care and loyalty in
acting on behalf of the organisationÊs best interest.
When top management practises due care, it makes informed and prudent
decisions. These decisions range from merger, acquisition, investment to
divesting. Top management and board of directors are expected to be loyal. It is
only when they are loyal that all decisions are made in the interests of the
corporation and its stakeholders.
For example, when executive (the top management) compensation is decided, is

that decision beneficial only to a group of people or will it benefit the
corporation? A corporation with good corporate governance practice will make
decisions based on the best outcome for the corporation.
7.4 WHY STUDY CORPORATE GOVERNANCE?

After knowing what corporate governance is and what it is made of, the question
lies in why it is important to study it. It is part of a corporationÊs corporate
responsibility to observe some practices that are regarded as appropriate. As
owners of corporations, top managements are responsible and accountable to
their stockholders.
In addition, incidents of malpractices place companies under greater scrutiny by

all parties which include not only stockholders but also future investors, the
government, the media and the industry. Corporations cannot afford to
jeopardise their much needed reputation for support when facing stiff
competition.
SELF-CHECK 7.2
1. Elaborate on the two perspectives of corporate governance briefly.
2. Explain why one needs to learn about corporate governance.

7.5 CODE OF CORPORATE GOVERNANCE

The Malaysian Code of Corporate Governance (also known as the Code) is
formulated and governed by the Securities Commission (Securities Commission,
2010). The Securities Commission, established on 1 March 1993 under the
Securities Commission Act 1993, is a self-funding statutory body with
investigative and enforcement powers. It reports to the Minister of Finance and
its accounts are tabled in Parliament annually.
The Securities Commission, which is a government agency, protects the

stockholdersÊ rights by making sure that stock markets are conducted fairly and
that investment information is fully disclosed. The objective is to give
stockholders more and better company information as disclosure is one of the
best ways to safeguard investorsÊ interests. Figure 7.3 shows us the regulatory
fuction of the Securities Commission.
Figure 7.3: Regulatory functions of the Securities Commission

Now, let us move on to the Code. First issued in 2000, it covers the following
three main areas:
(a) Directors
The Code covers director appointments, formality and transparency.
(b) Shareholders
The Code emphasises information for investment decisions and annual
general meetings.
(c) Accountability and Audit
Accountability and audit refer to internal control and auditor relations.
The Code, which aims to achieve optimum governance framework, is divided

into two parts:
Principles of corporate governance; and
Best practices of corporate governance.
The revised 2007 version of the Code mainly concentrates on strengthening the
Board of Directors and the audit committee. It focuses on the eligibility criteria of
board members on ensuring the effectiveness of the boards in carrying out its
responsibility. For further information on the revised 2007 version of the Code,
you may refer to this website: http://www.sc.com.my/eng/html/cg/cg2007.pdf
However, it is worth noting that compliance with the Code is not mandatory.
Compliance is not regulated so as to reduce the ticking-the-box exercise. The
flexibility is to promote self-regulation in responding to the marketÊs best
practices. Under the Listing Requirements of Bursa Malaysia, companies have to
include a narrative account of how they have applied the principles and best
practices set out in the Code. In other words, a corporation has to disclose how it
has complied with the Code. Failure to do so will result in the corporation having
to provide a narrative explanation of the reasons. The goal is to give investors
information of the corporationsÊ performance, both financially and its
governance, in which they can make informed and sound decisions.
Two other organisations supporting the best practices of corporate governance in

Malaysia are:
(a) Malaysian Institute of Corporate Governance

The Malaysian Institute of Corporate Governance (MICG), which was
established in 1998, is a non-profit public company. One of its objectives is
to be a leading establishment for the promotion of best practices and
corporate governance development through continuous education
programmes for major corporate figures such as company directors, chief
executive officers (CEOs), company secretaries, company advisers,

company auditors, accountants, lawyers, members of audit committees and

investors (Malaysian Institute of Corporate Governance, 2007-2008). The
mission of MICG is stated in Figure 7.4.
Figure 7.4: Mission of the Malaysian Institute of Corporate Governance
(b) Malaysian Institute of Chartered Secretaries and Administrators

Established in 1958, the Malaysian Institute of Chartered Secretaries and
Administrators (MAICSA) sets out to produce qualified company
secretaries and ensure the professionalism of its members (Malaysian
Institute of Chartered Secretaries and Administrators, 2010). MAICSA seeks
to maintain the highest standard of integrity and ethics among its members
within the profession. It also aims to act as a change catalyst by involving
actively in enhancing corporate governance in the corporate field. In
addition, it sets out to champion the best practices in corporate governance
and its importance by educating the Malaysian corporate sectors. Figure 7.5
shows the mission of MAICSA.
Figure 7.5: Mission of MAICSA

EXERCISE 7.1
Discuss how MICG and MAICSA help to instill good corporate

governance practices in Malaysia.
ACTIVITY 7.2
Visit the Securities Commission website at www.sc.com.my and the
Malaysian Institute of Corporate Governance (MICG) at
http://www.micg.net/history.htm.
Find out how they encourage good corporate governance practices.
7.6 FUTURE OF CORPORATE GOVERNANCE

Do you know that corporate governance will be a significant part of corporate
management in time to come? To manage a corporation effectively and
efficiently, management must take corporate governance seriously. In order to
have good corporate governance, the management should look into the following
aspects:
(a) Involvement of Board of Directors

Board of directors will be held responsible for developing the corporationÊs
mission and vision, which take stakeholdersÊ interest into careful
consideration. In the business arena, the board of directors need to be alert
that corporations do not operate in isolation.
(b) Perform Self-Assessments

Apart from that, board members are required to perform self-assessments.
This is set out to reflect on how effective the boards are in governing the
corporation. By conducting self-assessments, they are also able to realise
how relevant they are in the corporate decision-making process.
Increasingly, board member selection will be more formalised.
(c) Enhanced Role of Nomination Committee

As spelled out in the 2007 revision of the Code, the role of the nomination
committee is enhanced. The committee is expected to play a more active
role in nominating qualified board members. Based on the fact that board
members operate in committees, they tend to work independently which

affects the corporate governanceÊs function of oversight. Consequently,

boards are expected to perform more effectively as a team.
(d) Well-elaborated Explanation

It is expected that more narrative information will appear in the annual
report. Corporations are expected to explain more of their decisions and
justify their actions and to report not only their accomplishments but also
their weaknesses and failures.
(e) Shift of Model

A shift to the stakeholder model as opposed to the shareholder model will
be more apparent.
(f) Conduct Training and Seminar

A series of training and seminars are organised for corporations to realise
the importance of having a broader view of those to whom they should be
accountable.
(g) Greater Management Support

There will be greater management support for corporate governance as
they begin to realise the importance of good corporate governance
practices.
(h) Well-informed Shareholders and Stakeholders

Shareholders and other stakeholders are now more well-informed and
educated. They are more sensitive towards current happenings in the
business world.
(i) Greater Government Involvement

Besides corporations, there will also be greater government involvement
and presence in promoting good corporate governance practice in light of
economic reform efforts. Good corporate governance practice will ensure
continuous support for businesses, which in turn will strengthen the
nationÊs economy.
ACTIVITY 7.3
Visit Bursa MalaysiaÊs website at www.klse.com.my to find out its role

in promoting good corporate governance practices in Malaysia.

EXERCISE 7.2
Discuss the aspects that the management should look into in order to
have good corporate governance.
Corporate governance is a formal system of oversight, accountability and

control of corporate decisions, operations and actions.
There are three components in the definition of corporate governance:

oversight, control and accountability.
There are two perspectives of corporate governance and they are:

Shareholder perspective; and
Stakeholder perspective.
Board of directors and top management are fiduciaries to shareholders. They

are persons placed in positions of trust who use due care and loyalty in acting
on behalf of the organisationÊs best interest.
In Malaysia, besides the Securities Commission, there are other organisations

which support the best practices of corporate governance such as the
Malaysian Institute of Corporate Governance (MICG) and the Malaysian
Institute of Chartered Secretaries and Administrators (MAICSA).
Accountability Institute of Secretaries and

Administrators
Board of directors
Securities commission
Code of Corporate Governance
Shareholder
Corporate governance
Stakeholder
Directors
Top management
Institute of Corporate Governance

Topic Moral
8 Dimensions of
Economic
System
LEARNING OUTCOMES
1. Define economic system;
2. Explain the effects of performance appraisal on the ethical
dimension;
3. Explain five ethical guidelines for performance appraisal; and
4. Compare affirmative action and preferential treatment.
INTRODUCTION
Have you ever heard the term „economic system‰? An economic system is an
ongoing process where people exchange material goods and personal services in
support of a wide range of human interests.
The moral dimensions of an economic system, in which resources are accessed

and manipulated while goods and services are exchanged and distributed, are
specified by what it does for people.
In this topic, we will look into these components: economic system, employment
and wages, ranking and rating, and ethical implications for performance
appraisal.

TOPIC 8 MORAL DIMENSIONS OF ECONOMIC SYSTEM 107
8.1 ECONOMIC SYSTEM

Everyone has to access physical resources to satisfy their physiological,
psychological, technological, aesthetic, intellectual and spiritual needs to develop
as human beings. Here, the economic system provides the much needed access.
Resources are given generously in nature; no one has a sole title to any of them.
The needs, ability and willingness of individuals to expend their efforts dictate
how the products of resources are generated and distributed. Thus, it is not
morally required that everyone has the same or equal share of resources. What is
required is that all human beings have equal opportunity to access and use the
available resources and that each person has the right to a minimum share of the
resources.
A morally sound economic system will ensure the following:

Fairness in the access to resources and the exchange and distribution of goods
and services;
Prohibit any man-made obstacles like discrimination on irrelevant grounds
that interfere with anyoneÊs access to resources; and
No single group of people in the system has a disproportionate share of
resources; everyone has a right to a fair share.
The society, in which the economic system operates, has an obligation to use its
government and social agencies to reallocate resources whenever they are
unjustly distributed among its members.
Did you know that how well employees are paid usually depends on how well
they are rated by their employers? All employees are subject to a formal or
informal appraisal process. Large companies customarily establish ranking and
rating systems that compare employees in a business unit and award merit pay
treatment to those judged to be doing better jobs and contributing more for the
organisation.
SELF-CHECK 8.1
In your words, define economic system.

108 TOPIC 8 MORAL DIMENSIONS OF ECONOMIC SYSTEM
8.2 EMPLOYMENT AND WAGES

Are you aware of the importance of having a good manager? Figure 8.1 shows
the criteria of a good manager although it is portrayed in a sarcastic manner.
Why do you think it is essential for an organisation to have a good manager?
Figure 8.1: How to be a good manager

Source: http://geekandpoke. typepad.com
Good managers will attract capable people into the business, keep their turnover
low, secure their loyalty to the company and its objectives, and maintain and
increase their productivity level wherever possible.
A business that wants to keep good employees will have to offer competitive
salaries along with health insurance coverage, savings and pension plans as part
of its basic wage package. To motivate and satisfy employees, managers also
need to do the following:
(a) Provide them with on- and off-the-job training;
(b) Give them effective job performance feedback;

(c) Allow them to participate in decision-making affecting the structure and

objectives of their jobs and how their performance on those jobs will be
measured;
(d) Provide opportunities for them to move to higher paying positions with
more responsibilities; and
(e) Provide them with safe working conditions.
Although the mentioned practices constitute good management, they have a

moral dimension as well. A companyÊs managers may ignore or abuse them in
the interest of the companyÊs bottom line. These actions are morally wrong
because they involve some form of injury or injustice to individuals, or failure to
give them due respect.
In the following subsections, we will look into these aspects:

(a) Moral right to employment;
(b) Fair hiring practices;
(c) Affirmative action and preferential treatment;
(d) Wages;
(e) Equal pay for equal work;
(f) Equal pay for comparable work; and
(g) Share of the return on resources.
SELF-CHECK 8.2
List the factors that indicate good management. Discuss each factor
briefly.
8.2.1 Moral Right to Employment

What moral claims and rights do employees have against their employers as far
as employment is concerned? Are you aware of what has been happening in
America for the past 10 years in terms of employment? Many American plants
and industries decided to shut down or relocate their operations or downsize
their workforce. Apart from putting thousands of people out of work, many of
the affected employees had to start over with new employers, perhaps in totally
different careers. Aside from economic loss, some of them also suffered a severe
psychological blow to their self-esteem.

Figure 8.2 clearly illustrates the effects of the shutting down, relocating and
downsizing of American plants and industries.
Figure 8.2: Effects of shutting down, relocating and downsizing American plants and
industries
Some might argue that the people involved in the shutdowns, relocations and
force reductions also suffered a violation of their legal right to employment.
However, the question is whether such a moral right can be shown to exist and
exactly against whom it may be asserted.
All of us are born into some kind of economic system which may range from the
relatively simple practices of primitive tribes to complex transactions in highly
industrialised, technology-oriented societies. Most of us, who are in highly
industrialised countries, get our access to material resources by way of a job or by
work, instead of farming or hunting.
As argued earlier, every human being has a moral right to acquire and use some
share of material resources to ensure they live at a decent level of physical and
psychological well-being. It seems to follow that if most people are subject to an
economic system in which a job is the means to obtain resources, then they have
a moral right to the job; the economic system „owes‰ them employment.
In a capitalistic economic system, like in the United States, the private sector
provides most of the job opportunities. Hence, the responsibility of actualising
the moral right to employment falls on the private employers.

In relation to the above sentence, how will you answer the following question?
Are all businesses morally obligated to employ some minimum number of

people to achieve a satisfactory level of employment in the society in which
they operate?
The answer is „No‰. The society highlighted in the question has adopted an
economic system whose very nature requires extensive freedom in its
commercial enterprises in order to generate a maximum level of material
prosperity for its members.
In a capitalistic system, this freedom includes the right:

(a) To hire and keep on the payroll those employees who are needed in order
to meet the demands of a particular business; and
(b) To operate efficiently at a satisfactory level of profit.
It also seems to include taking on only those people whose education, skills and
personality traits are judged as best-suited to the operations the business engages
in. One of the assumptions being made here is that the option to live under the
capitalistic system can be shown to be freely chosen by the members of a society,
either through some direct democratic process or indirect social contract.
In other words, by continuing to live under the system without political protest,
they indirectly indicate their preference for it. Given this assumption, the
freedom of employers to hire and retain employees as they see fit means that no
member of the society in which they operate has a moral claim to any specific job
offered in the private sector.
8.2.2 Fair Hiring Practices

In relation to fair hiring practises, these would be the viewpoints given by ethical
theorists:
(a) Natural Law Moralist

The natural law moralist (or anyone committed to a rights-based moral
theory) would point out that screening practices based on race, gender,
age or religious preference are immoral and violate the right of anyone to
be treated with dignity. Consequently, employers would ensure not to
discriminate on characteristics that have nothing to do with an
individualÊs job performance.

(b) Utilitarian
The utilitarian would come to the same conclusion adopted by the natural
law moralist, although his judgement would be dependent upon the
overall consequences of these practices.
(c) Cultural Relativist

The cultural relativist would argue that if there are no laws against
discrimination, then hiring and promotion policies would have to follow
whatever customs acceptable to a particular society.
We have looked at the viewpoints adopted by ethical theorists in relation to fair

hiring practices. Now, let us move on to another related aspect anti-
discriminatory practices. Read the following question carefully:
Are employment agencies morally wrong if they comply with anti-

discriminatory practices but refuse to send minorities or other applicants on
interviews for positions they are qualified to fill? would their cooperation be
formal or material in this instance?
Let us look at the viewpoints presented by the ethical theorists in relation to the
above question:
(i) Natural Law Moralist

The natural law moralist would consider it immoral since the agencies have
agreed to become an extension of the clientÊs employment office and are
performing a direct act of discrimination that is morally wrong in itself.
(ii) Utilitarian
The utilitarian, on the other hand, would likely weigh the consequences for
the agencies concerned such as the possibility of losing clients by refusing
to cooperate in anti-discriminatory practices. He would also attempt to
determine if a better state of affairs would result from compliance.
(iii) Cultural Relativist

The cultural relativist would approve compliance with an employerÊs
wishes if discrimination is an accepted social practice and not against the
law.

8.2.3 Affirmative Action and Preferential Treatment

There are many interpretations of the term „affirmative action‰. One of them is as
follows:
Affirmative action may range all the way from setting specific numbers of
minorities to be moved into positions over a given period. The proportion of
the positions they hold begins to approach their numerical distribution in
the general population, to establishing the overall principle that
employment and promotion opportunities are open to all, regardless of
gender, race, religion, age or disability.
It is very likely that both natural law and utilitarian moralists would agree that
everyone should have equal opportunity to compete for any job he or she is
qualified to do and would endorse this sense of affirmative action. Meanwhile,
cultural relativists would fall back on societyÊs customary practices and would
agree with the idea of equal opportunity.
Now, let us move on to explore another important term which is in contrast to

affirmative action. Have you ever heard the term „preferential treatment‰ or
popularly known as „setting quotas‰?
Preferential treatment is the practice of hiring or promoting members of

minority groups in preference to those from non-minority groups.
Preferential treatment commits the very offence it is supposed to remedy,

namely, selection of a person purely on the basis of characteristics which have
nothing to do with performance in a function or job. Setting specific quotas for
minorities can be regarded as an immoral act.
Below are steps that need to be implemented to curb preferential treatment:

(a) Adopt a going-forward policy of equal opportunity;
(b) Select people solely on the basis of qualifications for a position unless a
persuasive case can be made for instituting otherwise; and
(c) Practise preferential treatment only for a definite period.

Figure 8.3 shows clearly the distinction between affirmative action and
preferential treatment.
Figure 8.3: Comparison between affirmative action and preferential treatment
8.2.4 Wages
When it comes to wages, employees usually ask the following questions:
(a) What wages are employees morally entitled to?

(b) Are they entitled to a certain level of benefits in addition to basic wages?
EmployeesÊ wages are generally determined by the job market whatever it

takes to attract and keep productive people. Let us look at how wages differ
between large and small businesses:
(a) In larger industries, competitive salaries usually include basic wages and
bonuses plus assorted benefits like paid holidays, vacations, sick days,
medical and dental insurance, savings and pension plans.
(b) In smaller businesses, wages are very often simply what an enterprise can
afford to give; bonuses and benefits may or may not be part of the package.
Employment is employeesÊ access to a fair share of material resources, so at

minimum, their jobs should provide wages and benefits at a level that will assure
they live in some minimal but decent set of conditions.
In any case, since it is not possible to require a particular business to pay wages
higher than it can legitimately afford, what these people cannot earn towards
their minimally decent standard of living needs to come from the government as
a matter of distributive justice. That amount will be based on appropriate
economic statistics, such as „what it takes to sustain a family of four‰.

ACTIVITY 8.1
During the 1997 economic crisis in Malaysia, many organisations

were forced to downsize their businesses, resulting in many workers
losing their jobs.
Discuss the above statement in relation to the moral right to

employment.
8.2.5 Equal Pay for Equal Work

The principle of „equal pay for equal work‰ is currently established as part of
United StatesÊ labour law. This principle states that people performing the same
kind of work must be paid the same salaries as well. However, the principle is
not taken into consideration when the employees can do the work faster or more
efficiently than other employees; which justifies paying them more. Race, gender,
age and handicaps have no bearing on pay treatment where equal work is
concerned.
Does social justice require that employees with dependents (with family
members that need to be taken care of) be paid more than people with no
dependents (single people) but who are doing the same amount of work?
(a) It is unlikely that such unequal treatment would ever be accepted in the
United States;
(b) Single people would surely argue that an employer only has to pay the
market wage for a particular job and is not in the business of caring for
social justice; and
(c) If distributive justice is at issue, then the obligation falls on the society.
Special welfare or family-subsidy programmes might be necessary and the
responsibility should be shared by everyone in the community on an
equitable basis.
8.2.6 Equal Pay for Comparable Work

In recent years, the notion of „equal pay for comparable work‰ has influenced
some states in the United States to pay civil servants the same salaries if it can be
demonstrated that jobs involving different responsibilities, such as tree trimmers

and lorry drivers, require the same relative levels of education, skill, knowledge
and experience.
Do you think that equal pay for comparable work is a requirement of justice? The
answer is no as the market is still the most efficient allocator of jobs. Even though
skill and knowledge requirements may look the same for many jobs, other factors
(e.g. long working hours, varying risk factors and physical environment) also
have to be considered.
What is morally required is that no class of people is excluded from obtaining

high-paying jobs on irrelevant grounds. This approach to determining salaries
came about because women have for years been paid lower wages for many
kinds of work which require the same skills and knowledge like their male
counterpart. If women were excluded from these jobs just because of their
gender, then this discriminatory practice has to be corrected in order to give
equal opportunity for women.
ACTIVITY 8.2
What is your opinion on equal pay for equal work and equal pay for
comparable work? Discuss with your coursemates.
8.2.7 Share of Returns on Resources

There is a relationship between the amount of material resources a company uses
and its obligation to distribute the return realised from those resources to the
societyÊs members. That return does not depend solely on the amount of
resources used but also on how well a company manages them and how
productive its workers are.
Managers and workers, then, have the right to a fair share of the returns in
proportion to their contribution to the enterpriseÊs success. Top managers usually
think they make the biggest contribution and, as a result, expect to receive the
biggest share of wages and bonuses paid by the enterprise.
Shareholders, of course, have the right to a fair share of their companiesÊ return.
They have first claim on the returns and the right to the largest share. The
shareholders, through their investment, are simply accessing resources and are
entitled to a fair share of the returns on the resources.

SELF-CHECK 8.3
In relation to fair hiring practices, explain the viewpoints of the
following ethical theorists:
(a) Natural law moralist;
(b) Utilitarian; and
(c) Cultural relativist.
8.3 RANKING AND RATING

How well employees are paid generally depends on how well their supervisors
think they are doing their jobs. While performance on the job and potential for
advancement are not the same thing, a person who is able to handle increased
responsibility will probably not move up in the company without performing
well in his current assignment.
All employees are subject to some kind of performance appraisal, whether formal
or informal. Let us see how appraisal works in small and large organisations:
(a) Informal Appraisal

In small businesses, employers generally are able to observe the
performance of their employees directly and the appraisal process is not
very complex.
(b) Formal Appraisal

Large companies, particularly those with many people in management,
grade, rank and rate employees in various units of the business against
their co-workers. Those deemed better performers than others at the same
level in the unit generally receive better pay.
ACTIVITY 8.3
What are some of the criteria used by higher management in

measuring employeesÊ performance?

8.4 ETHICAL IMPLICATIONS FOR

PERFORMANCE APPRAISAL
People express their dignity and worth as individuals through their work. Their
work provides them with a means to achieve personal goals and contribute to
their own well-being, as well as the well-being of their family and society. The
formal or informal public recognition of their work received from the various
communities to which they belong is a powerful constituent of their self-image
and of „who they are‰. No opinion is more important to them than what their
employers think of their work performance.
Managers have a duty to prepare sound performance appraisals. If employees

question the fairness of their remuneration, their morale and performance will be
affected. However, there is also a moral dimension to this responsibility. We need to
consider the impact of appraisals on the persons being evaluated and on their
perception of their self-worth as measured by what their supervisors think of them.
The companyÊs appraisal plan which outlines the ground rules for preparing
performance evaluations constitutes a moral contract with employees because it
is a promise. It normally stipulates that how well an individual meets the
standards established in the plan will determine how much he or she will be
paid. A supervisor who fails to follow the appraisal plan acts unjustly towards
his subordinates who have a right to be assessed in line with their provisions and
standards.
To ensure ethical treatment of employees in the appraisal process, some

fundamental guidelines need to be observed. Although the guidelines shown in
Table 8.1 may seem like basic good management skills, it is important to bear
them in mind because they directly affect human beings whose dignity requires
that they be treated justly and with respect.
Table 8.1: Key Ethical Guidelines for Performance Appraisal
Guidelines Explanation
Set the Subordinates need to have clear and concrete objectives set out for the
objectives appraisal period, and they need to provide their own input to these
objectives.
Get the Employees have the right to get feedback on their performance on a
feedback regular basis. It would be unfair to wait until the end of the appraisal
period to tell someone that he or she is performing poorly. A
subordinate whose performance is poor or unsatisfactory has to be
made aware of the fact. It would be unkind and unjust to let a person
think that he or she is doing a good job when that is not the case.

Use valid Performance must be measured against valid criteria. It would be

criteria unjust to knowingly measure an employeeÊs performance using a plan
which does not apply in some significant respect to the operation being
managed.
Have the Only those who have a good knowledge of what an employee is doing
essential should be allowed to rate his or her performance. Supervisors need to
information bring adequate anecdotal information on a subordinateÊs
on accomplishments and failures to ranking and rating sessions.
subordinate Employers who fail to make a respectable case for subordinates by
relying on half-remembered details from incidents occurring during the
appraisal period may cause their employees to lose out in the
competition for merit pay treatment with their co-workers whose
employers can support-well on their performances.
Subordinates Subordinates have a right to counselling, coaching and training to help
have the improve their performance.
right to
improvement
Now, let us try to do the exercise below.
EXERCISE 8.1
1. What moral claims and rights do employees have against their
employers as far as employment and wages are concerned?
2. Conduct a comparison between affirmative action and
preferential treatment.
3. What are the factors to be considered in employeesÊ performance
appraisal?
4. „Performance appraisal systems have an ethical dimension‰. Do
you agree with this statement? State your reasons.
5. Indicate some key ethical guidelines for performance appraisal.
An economic system is an ongoing process where people exchange material

goods and personal services in support of an entire range of human interests.
If managers want to hire and retain productive and loyal employees, they
need to offer competitive salaries and benefits, adequate training and
feedback on performance, opportunities for promotion, a fair way of

remedying injustices without fear of reprisal and safe working conditions.
Managers and their agents are obliged to follow fair hiring practices, and to
avoid discrimination against people on grounds of gender, race, age and
disabled status when those characteristics are irrelevant to the job.
Affirmative action deals with employment and promotion opportunities

being open to all, regardless of gender, race, religion, age and so forth.
Preferential treatment is the practice of hiring or promoting members of

minority groups in preference to those from non-minority groups.
Managers, workers and shareholders have a claim to a fair share in

proportion to their effort to use resources efficiently and productively in the
enterprise.
All employees are subject to a formal or informal appraisal process. However,

performance appraisal systems have an ethical dimension. People express
their dignity and worth through work; formal and informal public
recognition of their work affirms their self-worth.
There are several key ethical guidelines in relation to performance appraisal:

Have the right for improvement;
Get the feedback;
Use valid criteria;
Have the essential information on subordinate; and
Set the objectives.
Affirmative action Material resources

Cultural relativist Natural law moralist
Economic system Performance appraisal
Employment Preferential treatment
Equal pay Utilitarian
Fair hiring practices Wages

Topic Employees and
9 the Workplace
LEARNING OUTCOMES
1. Define employeesÊ right to privacy;
2. Identify the moral grounds a company has to take prior to hiring
employees; and
3. Identify instances leading to violations of privacy.
INTRODUCTION
During an interview, the interviewer may request the job applicant to take a drug
test. Why do you think a drug test is necessary? What is the rationale behind this
request?
Companies want to protect themselves, their employees and their customers

from avoidable harm. As a result, they believe that they need to know about the
personal history and habit of their employees to guard against fraud, theft of
proprietary information or harmful acts that employees might do under the
influence of alcohol or drugs.
Does a company have the right, in its own interest, to this kind of information or
is it an unwarranted intrusion on the employeesÊ privacy? This is an issue which
we will explore in this topic.

122 TOPIC 9 EMPLOYEES AND THE WORKPLACE
9.1 RESPECTING EMPLOYEES’ RIGHT TO

PRIVACY
Any company has the right to protect itself from fraud, loss of proprietary
information and trade secrets, and from harm to its facilities, employees,
customers or to the public it serves.
Since employees can be a potential source of these harms, managers often need to
investigate the personal history of their job applicants. Some companies use pre-
employment tests to get a reading on their employeesÊ level of honesty.
Polygraph tests, for example, were used in the past by many companies as a pre-
employment screening device but the practice is now illegal.
Figure 9.1 shows a man undergoing a polygraph test, which is used to determine
an individualÊs level of honesty.
Figure 9.1: Polygraph test

Source: http://www.akhbarassociates.com
Managers may also want to monitor or even attempt to restrict the private life
activities of those on the payroll to ensure that they do not pose a threat to the
business. These questions arise:
(a) How far can managers invade a prospective or current employeeÊs privacy
in the interests of the enterprise?
(b) Does a companyÊs right to protect itself always override an employeeÊs
right to privacy?

TOPIC 9 EMPLOYEES AND THE WORKPLACE 123
ACTIVITY 9.1
Check with your Human Resource Manager. Find out the extent to
which your employer can test his or her employees. Compare your
findings with your coursemates. Then, summarise the findings by
using a mind map.
Companies may install sophisticated devices such as closed-circuit television

(CCTV) or computer software to monitor the movement of their employees in the
office and in the computer network.
Figure 9.2 shows the image taken by a closed-circuit television which enables the
employer to monitor employeesÊ movement.
Figure 9.2: Monitoring of employeesÊ movement through closed-circuit television

Source: http://isafesoft.com
ACTIVITY 9.2
Discuss the following questions.
(a) How far can employers invade a prospective or current
employeeÊs privacy in the interests of the organisation?
(b) Does an organisationÊs right to protect itself always override an
employeeÊs right to privacy?

ACTIVITY 9.3
There are cases in Malaysia where employers are found to check on
their employeesÊ social life through social networking sites such as
Facebook.
Discuss the above statement in relation to the intrusion of employeesÊ

right to privacy.
Source: http://itblog.ws
9.2 SUBSTANCE ABUSE

No company wants to be placed in jeopardy by employees who cannot perform
their duties due to the influence of drugs or alcohol. Nowadays, due to the
widespread abuse of alcohol and drugs, many employers fear they may
unwittingly hire an addict or alcoholic. Consequently, testing for drug use is a
pre-employment requirement in many businesses. The question is: do companies
have a moral right to drug-test employees?
The right not to have oneÊs privacy invaded is not absolute in the sense that a
person may never waive it. In the interest of showing a potential employer that he
or she is not a possible threat to the company, a job applicant may agree to be
tested for drugs.
Likewise, a company is morally justified in insisting on testing job applicants for

drug use as a protective measure, especially where the safety of customers and
other employers is at stake. The company requiring the tests, however, needs to
ensure that:
(a) The tests are accurate; the applicant is permitted to provide evidence that
he or she is taking drugs with a legitimate medical prescription.

(b) The results of the tests remain confidential and will be made known only to
those who have a legitimate need to know.
If these precautions cannot be reasonably observed, then the company has no

right to demand the drug tests.
The following are two questions related to employeesÊ drug testing:
(a) What about testing people already on the payroll?

(i) That means training supervisors in proper techniques of
recognising signs of abuse;
(ii) It may also mean testing „after the fact‰, if an employee has been
involved in an accident that has harmed others or has caused
extensive property damage; and
(iii) It is small comfort to find out that an employee was high on drugs
or drunk after he or she had caused a fatal airline, train or bus
accident. That unhappy conclusion explains why employers
sometimes resort to random testing of all employees in
occupations where the risk of harm to people or property is high
should employees make a mistake.
(b) Is random testing of employees morally justified?
The principle of probable cause seems applicable, meaning that testing
for drug abuse is legitimate only if an employer has a valid suspicion
that an employeeÊs work performance is being adversely affected by
drug use.
It is arguable that only two circumstances could justify any testing of

employees:
(i) Valid suspicion that a particular employee is on drugs; or
(ii) Statistically valid evidence that the incidence of drug use among
the suspected employees is significant.
It would be particularly applicable in jobs where the safety of other

employees, customers or the general public would be threatened by impaired
job performance. If random testing ensures satisfactory results, it seems that it
is morally justified as long as all employees are equally subjected to it.

SELF-CHECK 9.1
What are the factors that need to be considered before an organisation
intends to conduct a drug test on its employees?
9.3 ABUSING EMPLOYEES

Have you ever been in a situation whereby in a fit of anger, your employer scolds
you loudly in front of your co-workers? As shown in Figure 9.3, it is probably not
uncommon for bosses to fly into a rage at their subordinates.
Figure 9.3: An employer scolding an employee

Source: http://www.inmagine.com
Bosses may scold their subordinates for a number of reasons, usually due to
failures related to work. However, employees may even be threatened with the
loss of their jobs for such failures as:
(a) Not agreeing to falsify financial statements;
(b) Refusing sexual advances;
(c) Not trying to get out of jury duty; or
(d) Refusing to commit deception on behalf of a union or company.

Such instances involve a clear violation of privacy. It is certainly necessary to let

an employee know that he is not performing satisfactorily. However, that is not
something other employees or managers, who are not in the personÊs direct line
of supervision or who will not likely ever supervise that person, have a right to
know.
Everyone is entitled to a good public reputation. Finally, using threats to force

employees to violate the law is a kind of invasion of privacy. It intrudes into the
personÊs realm of conscience and puts him in legal jeopardy.
For the natural law moralist or any rights-based moralist, these instances are
evidence of employee abuse, of violations of human dignity and respect for
persons. Therefore, they are considered as immoral. It is unlikely that a utilitarian
moralist would ever argue that these practices are morally justified and would
produce good results on the whole. As for a cultural relativist, it is unlikely that
social customs anywhere in the world would accept this kind of treatment at the
workplace.
SELF-CHECK 9.2
What are the aspects that might be regarded as an intrusion of
employeesÊ privacy?
To reinforce your understanding, answer the following questions.
EXERCISE 9.1
1. In your own words, describe your understanding of employeeÊs

right to privacy.
2. As a personnel manager of a company, what would be your
preparation prior to hiring prospective employees?
3. Under what circumstances is random drug-testing of employees
morally justified?

An employee has the right to privacy and no one, not even the employer,
has the right to intrude into the employeeÊs privacy.
Companies want to protect themselves, their employees and their

customers from avoidable harm.
Companies need to know personal details such as the history and habit of
their employees in order to guard against fraud, theft and harmful acts that
employees might do.
Random testing for substance abuse may be morally justified if there is

valid suspicion and strong evidence that a significant number of employees
may be abusing alcohol or using illegal drugs.
Scolding employees in public for poor work performance is a violation of

their privacy. Everyone has the right to his public reputation, and only those
who need to know about a personÊs performance should hear about it.
Threatening a person for refusing to do something immoral or illegal

invades a personÊs conscience or puts him into legal trouble and is a
violation of privacy.
Natural law moralists would regard any abuse of an employee as morally

wrong, while utilitarian moralists would find it justified only in extreme
circumstances where the overall good demands it. Cultural relativists
would have to determine whether the particular community in which the
abuse occurs would tolerate it.
Drug test Polygraph tests

Employee abuse Random testing
Employee privacy Substance abuse

Topic Loyalty to a
10 Company
LEARNING OUTCOMES
1. Define loyalty to a company;
2. Explain internal and external whistle-blowing;
3. Explain circumstances under which internal and external
whistle-blowing is morally permissible, if not obligatory; and
4. Discuss the impact of improper loyalty on a company's daily
operations.
INTRODUCTION
What do you see in Figure 10.1? It is a scene from a wedding ceremony; the
bridegroom and the bride are rushing away to celebrate this wonderful occasion.
During the ceremony, the bridegroom and bride made marriage vows which
among others included the question of whether they would be loyal to each
other. Loyalty is vital for a happy marriage.

130 TOPIC 10 LOYALTY TO A COMPANY
Figure 10.1: Wedding ceremony

Source: http://www.nomoho.org
Do you think loyalty is important in the workplace? In business too, employers

value and expect loyalty from their employees. Loyalty here signifies the moral
obligation of employees to discharge their duties competently, to obey the
legitimate orders of their superiors, to keep proprietary information and trade
secrets confidential, and to avoid any conduct that is in conflict with the
companyÊs rightful interests.
In this topic, we will look into aspects related to loyalty:

(a) Loyalty to employer;
(b) Whistle-blowing;
(c) Morality of terminating whistle-blowers; and
(d) Improper loyalty.

TOPIC 10 LOYALTY TO A COMPANY 131
10.1 WHAT LOYALTY MEANS

As mentioned earlier, loyalty is required from an employee by the employer.
However, what is loyalty to employer? Let us look at what it means.
Loyalty indicates the moral obligation of employees to:

Discharge their duties competently;
Obey the legitimate orders of their superiors;
Keep company information and trade secrets confidential; and
Avoid any conduct that is in conflict with the companyÊs rightful interests.
Do you know that loyalty is a prized virtue, at least as far as employers are
concerned? Once a person accepts a job with a company, he is considered to owe
his loyalty to the company, both while employed and under certain conditions,
even after leaving the company.
Is loyalty to oneÊs employer a moral obligation? The answer depends on how you
define loyalty. If it means that people are expected to do their job at some
acceptable level of competence or to do what their supervisors tell them to do,
whether in terms of their job description or day-to-day directives, then loyalty is
a matter of moral obligation because these expectations are the very essence of
the employment contract.
Furthermore, doing oneÊs job includes understanding that the employee will
keep trade secrets, marketing plans, strategic decisions and personnel
information confidential. It also means that the employee will not share the
confidential information with outsiders, whether friends, family members or the
media.
Any manager who violates the terms of the employment contract is subject to
disciplinary action by the company up to and including dismissal, as official
company documents frequently caution. A manager who discloses company
information to outsiders may even face a lawsuit by the company for damages.
Clearly, loyalty in this sense involves a moral obligation.
Managers may not carry on activities that conflict with their companiesÊ interests,
unless directly permitted by the companies for good reasons. Furthermore,
managers should not provide off-hours consulting services to competitors, nor
attempt to patent inventions or sell technical processes they may have developed
largely from information derived directly from their employment or by using
company materials and facilities.
Future managers may ask the following questions in order to shed light on
matters related to loyalty:
(a) Are these restrictions limited?

(b) Can companies compel managers to sign agreements that appear to be
all-inclusive in restricting outside activities?
It is doubtful that companies have the right to insist on such sweeping

limitations. It seems perfectly acceptable for an accountant, management
specialist, engineer or personnel specialist to offer his professional expertise to
people or organisations who are not competitors or potential clients of his
company.
ACTIVITY 10.1
1. In your opinion, what is the most effective way for a company

to ensure its employee remain loyal to the company?
2. Visit the website below for more information on the „Loyalty

Contract: Employee Commitment and Competitive Advantage‰:
http://www.ups.com/europe/ch/news/speech/gerloyalty.html
Analyse how workplace loyalty can translate into better overall

company performance.
SELF-CHECK 10.1
What does loyalty to employer mean? Explain briefly.

10.2 WHISTLE-BLOWING
Who is a whistle-blower? Read the explanation below in order to learn more
about whistle-blowers.
A whistle-blower, in the business world, is one who reports on the illegal or

immoral actions of fellow employees, supervisors or company officers.
Figure 10.2 shows how a whistle-blower can have a very significant position in
an organisation.
Figure 10.2: A whistle-blower may have a significant position in an organisation

Source: http://www.cartoonstock.com
Whistle-blowing can be divided into two categories:
(a) Internal Whistle-blowing

The accusation is made through the lines of supervision or other designated
channels within the company.
(b) External Whistle-blowing

The accusation is reported to people or agencies outside the company, like
government authorities or the media.

The most likely justification for blowing the whistle is in situations where
somebody in a company is engaging in or tolerating an activity that will harm
employees, stockholders or the public. The only way to stop the activity is to
inform the appropriate supervisors in the company or, if that channel is blocked,
one can go to the authorities or the media. So you need to answer these two
questions.
(a) When is whistle-blowing morally justified?

(b) Is it morally obligatory?
Since the answers to these questions vary depending on whether the whistle-
blowing is internal or external, each variety will be treated separately in the
following sections.
10.2.1 Internal Whistle-blowing

Imagine yourself as an executive in a big company. Suppose you have good
reasons to suspect that a manager at your firm is committing one of the following
offences:
Falsifying expense accounts;
Taking bribes from suppliers;
Using company resources or equipment for personal use;
Stealing supplies and materials from the company; or
Working for a competitor.
You may consider it as a mark of loyalty to your company to blow the whistle on
your manager who is obviously doing an illegal action. However, is it
permissible for you to blow the whistle on this person who is a manager of the
firm where you are working?
The answer is certainly yes, provided you observe caution, as outlined in

Table 10.1.

Table 10.1: Justification for Internal Whistle-blowing
Justification Explanation
Significant harm It should be evident that the harm to the company is significant.
Accurate facts The whistle-blower has to be sure of his facts. Wrongful accusation
may seriously damage the reputation of the accused, even if it is
proved later that the allegation is false.
Activity already The whistle-blower should try to find out whether the suspectÊs
known by the activity is already known by the higher management, perhaps as a
management result of audits or discreet investigations carried out by the company
security.
Reasonable There should be some reasonable expectation that blowing the
expectation of whistle will be effective; that the suspectÊs supervisor will put a stop
effectiveness to what is going on because he believes that the offence is as serious
as the whistle-blower thinks it is.
Impact on The whistle-blower has to consider the possible damage to his own
oneself reputation and prospects in the business. Will the action be seen as a
mark of loyalty, trivial talk, an act of spite, or simply a chance to
smear a rival for promotion? Will the whistle-blower be labelled as a
troublemaker, however good his intentions may be?
Finally, the whistle-blower might discover that, in some instances
Moral obligation such as using company equipment for personal use, simply
confronting the guilty employee with his wrongdoing might be
enough to stop it.
Is it morally obligatory to blow the whistle on a manager? The answer
to this question begins with establishing who has the primary
obligation to watch out for and investigate any questionable action by
any employee.
Let us say that if a manager signs an agreement with the company
acknowledging a responsibility to report, through the proper lines of
supervision, all instances of possible wrongdoing he or she might
encounter. Then, there would be moral obligation to blow the whistle
whenever the need arises. However, such explicit formal agreements
are rare.
ACTIVITY 10.2
What actions would you take if you suspect disloyalty from a
manager in your company?

10.2.2 External Whistle-blowing

A manager who reports company wrongdoing to government authorities or the
media is engaging in external whistle-blowing. When do you think external
whistle-blowing is permissible? Is it ever obligatory?
In addition to the criteria of justifications listed earlier for the internal whistle-
blower, several others are required before external whistle-blowing is justified, as
shown in Table 10.2.
Table 10.2: Criteria of Justification for External Whistle-blowing
Criteria of
Explanation
Justification
Internal report It must be ensured that effort has to be made to report wrongful
of wrongful conduct internally, through proper lines of organisation. The
conduct company concerned should have a chance to clean up its act before
the whistle-blower goes public.
External It must be evident that external agencies like auditors or public
agencies regulatory bodies are unable or unwilling to report what is going on.
Significant case A significant case of harm to stockholders, employees or the public
of harm has to be at issue, such as fraud, embezzlement, unsafe working
conditions or illegal dumping of hazardous materials.
Degree of harm The degree of harm that the company will suffer as a result of
whistle-blowing should be proportionate to the harm its wrongdoing
is causing.
Only when these conditions are satisfied, would external whistle-blowing be

justified.
We have looked at the required criteria of justification for external whistle-

blowing. However, when would it be morally obligatory?
The primary obligation for preventing and stopping wrongdoing lies with the
degree of supervision. The more responsibilities a manager has for company
operations, the stronger that obligation is. A manager would be obliged to report
wrongdoing to outsiders only if serious harm is at issue and if it is evident that
appropriate levels of supervision are unable to stop it.
In the United States, government employees who blow the whistle are protected
by law against retaliation. The government appears to think that whistle-blowers
demonstrate a high degree of loyalty when they report wrongdoing. In the

private sector, however, whistle-blowers seem to be regarded as little better than

informers.
SELF-CHECK 10.2
Explain the two types of whistle-blowing briefly.
Enhance your understanding by attempting the exercise below.
EXERCISE 10.1
Differentiate between internal and external whistle-blowing. What

would be the causes for their necessity?
10.3 MORALITY OF TERMINATING

WHISTLE-BLOWERS
Do you think that companies are justified in firing, demoting or cutting short the
careers of whistle-blowers? The answer is no. As long as whistle-blowers have
reported a genuine case of misconduct through appropriate channels, or have
gone outside the company (as a last resort), there are no legitimate grounds
whatsoever to discipline them.
However, a company would be justified in taking action against a staff:

(a) who is a whistle-blower if he lied about a case or knowingly
misrepresented it so that it looked more serious than it really was;
(b) As an act of revenge on a fellow employee or supervisor;
(c) As a protest over an unfavourable company policy; or
(d) To discredit a rival for the purpose of promotion.
A whistle-blower, whether internal or external, performs a morally praiseworthy

act if he steps in to prevent serious harm to the people or the environment, a
harm that could not be justified by company officials. Therefore, it would be a
clear case of injustice or immoral act, to punish that person for doing what is
morally right just to get revenge on him or to please higher levels of management
who might dislike the truth being exposed.

10.4 IMPROPER LOYALTY

Sometimes managers believe that loyalty to the boss means covering up for his
serious mistakes or even wrongdoing. That belief is simply false. A manager has
a fiduciary duty to the owners of the business. Thus, it would be a violation of
that duty to cover up actions by a supervisor who is harming the ownersÊ
interests in any serious way.
A subordinate has to carry out the legitimate orders of his supervisor and keep
him informed about the progress of his work or task. The subordinate may even
be obliged to tell the supervisor about actions of other persons or groups that
may adversely affect boss's operations. However, wrongdoing by his boss should
not be ignored.
Let us now see how much you have understood from your reading by
attempting the following exercise.
EXERCISE 10.2
1. Define the term „loyalty to a company‰.

2. Under what circumstances would internal whistle-blowing be
morally justified?
3. „It is a false belief that loyalty is taken to mean covering up for
errors or wrongdoing committed by our superior‰. Do you
agree with this statement? Discuss.
Employers value and expect loyalty from their employees.
Employees have a moral obligation to be loyal to their employers by doing

their job competently, obeying the legitimate orders of supervisors, keeping
company information and trade secrets confidential, and avoiding acts that
conflicts with a companyÊs rightful interests.
Employers should not ask managers to show their loyalty by committing

illegal or immoral actions, engaging in deceitful advertising, or harassing,
demoting or even firing employees for non-job-related reasons.

The obligation to blow the whistle internally depends on who has primary
responsibility for discovering and investigating an employeeÊs questionable
actions.
An employeeÊs immediate supervisor has to be alert to any seriously

questionable actions a subordinate might perform. A companyÊs security
organisation, if it has one, is responsible for helping to protect the companyÊs
assets.
A decision to blow the whistle externally, to some outside party, is justifiable

when all the conditions for internal whistle-blowing have been satisfied, and
if the company supervision knows about but refuses to take action to remedy
the harm posed to the interests of the shareholders, employees or the public.
There is no moral justification for firing whistle-blowers who uncover cases

of wrongdoing that involve serious harm to people or the environment that
could not have been prevented through the usual company channels. To do
so would be to unjustly punish someone for doing what is morally right.
Loyalty is sometimes mistakenly taken to mean covering up for a

supervisorÊs errors or wrongdoing.
Loyalty Whistle-blowing
Whistle-blower

140 REFERENCES
References
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stakeholder management (6th ed.). Ohio: South-Western.
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Concepts, evidence, implications. Academy of Management Review 20(1),
65-91.
Elkington, J. (1997). Cannibals with forks: The triple bottom line of 21st century
business. Oxford: Capstone Publishing.
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Pitman Publishing.
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Global Reporting Initiative. (2007). About GRI. Retrieved from

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Hosmer, L. (1991). The ethics of management (2nd ed.). Boston: Irwin.
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public policy (13th ed.). Singapore: McGraw-Hill.

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Malaysian Code of Corporate Governance (Revised 2007). (2007).

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http://www.sc.com.my.
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About MAICSA. Retrieved from http://www. maicsa.org.my.
Malaysian Institute of Corporate Governance. (2007-2008). Company profile.

Retrieved from http://www.micg.net.
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identification and salience: Defining the principle of who and what really
counts. The Academy of Management Review, 22(4), 853-886.
Securities Commission Malaysia. (2010). About us. Retrieved from

http://www.sc.com.my.
Thorne, D. M., Ferrell, O. C., & Ferrell, L. (2008). Business and society (3rd ed.).
Boston: Houghton Mifflin.
Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: A blueprint for
maximising stakeholder value. London: Pitman Publishing.

142 ANSWERS
Answers
TOPIC 1: MORAL REASONING AND ETHICAL THEORY
Exercise 1.1
1. In utilitarian theory, the term refers to our perception of the net benefits
and costs associated with a given act. Utilitarianism differs from the
economic concept of cost/benefit analysis in that the distribution of the
costs and benefits has to be included as well. That is, these are net benefits
to society, and each individual within the society has to be considered and
treated equally in the distribution.
The deontological theory / universalism states that the moral worth of an

action cannot be dependent upon the outcome because these outcomes are
so indefinite and uncertain at the time of the decision to act is made. The
moral worth of an action has to instead depend upon the intentions of the
person making the decision or performing the act. If you wish the best for
others, then your moral actions are praiseworthy, even though you happen
to be an unimpressive and clumsy individual who always seems to be
doing the wrong thing.
2. Weaknesses of some ethical theories

(a) Eternal law
Each religion provides moral standards for their members and many
of the members observe those standards in daily life. However, the
standards differ between groups, and there is no infallible way to
determine which one is right or best or proper for society. Even the
Golden Rule, that simple, elegant, sensible guide to life, cannot be
applied universally at all times.
(b) Utilitarianism
Utilitarianism fails because of these factors:
(i) In reality, it is about these two principles: the greatest good and
the greatest number. At some point in our decision-making on
important matters, these two principles come into conflict. Then,

ANSWERS 143
we have no single means of determining what is the right or

proper act.
(ii) We can probably agree that there are some actions that are
simply wrong, despite great apparent net benefits for a huge
majority. For example, killing an innocent child for the benefit of
bringing happiness for the whole human race. No one should
ever have to accept that kind of cruel act.
(iii) It is impossible to balance the benefits of the majority against the
sacrifices of a minority.
(c) Universalism
(i) It is a useful method of moral reasoning but there are no
priorities and no degrees.
(ii) It is difficult to treat others as ends and not as means all the time,
particularly when many serve as means to our personal ends.
Storekeepers are means of procuring our groceries; customers
are our means of earning our livelihoods; employees are the
means of staffing our factories.
(d) Distributive Justice Theory

It is entirely dependent upon the acceptance of the proposition that
social cooperation provides the basis for all economic and social
benefits. Individual effort is downplayed, if not ignored.
(e) Personal Liberty Theory
It is based on a very narrow definition of liberty which is limited to
the negative right not to suffer from the intrusion of others. The right
to life, for instance, is the right not to be killed by others. However, it
may also include the right to continue living through access to some
minimal level of food, shelter, clothing and medical assistance, which
come from personal initiative, rather than social cooperation.
Exercise 1.2
1. Ethics can generally be defined as the principles of morally acceptable
conduct of individuals. Ethics also means an individualÊs personal beliefs
about right and wrong behaviours. Individual ethics formed through
various factors.
Refer to Figure 1.1: Factors that form individual ethics.

144 ANSWERS
2. According to Immanuel Kant, in a moral universe, every person has certain

basic rights free consent; privacy; freedom of conscience; freedom of
criticising and fairness.
Refer to Table 1.2: Kantian Rights.
3. The Golden Rule is a Christian principle based on verse in the Bible „Do
unto others as you would have them do unto you‰. This principle can also
be found in most, if not all, world religions. It requires identifying various
courses of action and choosing the one that treats others the way you would
want to be treated. In terms of business organisation, the ÂothersÊ refers to
the organisationÊs stakeholders. Stakeholders include the organisationÊs
investors, partners, employees, unions, customers, suppliers and
governments.
As to Islamic teaching, Muslims are also required to give the best of

themselves towards others especially in relation to working in a
organisation. As employees, they have been paid for doing their job,
therefore they have to give their best.
4. Refer to Figure 1.1: Factors that form individual ethics.
Students need to discuss which factor is the most important and give
reasons for the answer.
TOPIC 2: STAKEHOLDER RELATIONSHIPS
Exercise 2.1
1. Market stakeholders are individuals or groups which have a direct interest
in the organisation as well as engaged in economic transactions with the
organisation as it produces its goods and services.
Non-market stakeholders include individuals and groups who are not

engaged in a direct economic transaction with the organisation but are
affected by or can affect its actions.
2. Customers, employees.

ANSWERS 145
Exercise 2.2
Yes, stakeholders management is very important. Stakeholder management
refers to the process of managing the expectations of the individuals and groups
who have an interest in your organisation or will be affected by the
organisationÊs activities. Failing to address the concern of stakeholders can
damage a firmÊs reputation and ultimately affect its bottom line.
Exercise 2.3
1. True
2. False, one more responsibility is philanthropic responsibility.
TOPIC 3: NATURE OF ETHICS IN MODERN BUSINESS
Exercise 3.1
1. Ethical problems are managerial problems because they represent a conflict
between an organisationÊs economic performance and its social
performance. There should be a right or proper balance between economic
performance and social performance. Thus, the managementÊs dilemma is
to strike a balance between economic and social performances.
2. Features/characteristics of ethical problems in management:
(a) Extended consequences
(b) Multiple alternatives
(c) Mixed outcomes
(d) Uncertain consequences
(e) Personal implications
Exercise 3.2
1. (a) Economic analysis
(b) Legal analysis
(c) Ethical analysis

146 ANSWERS
2. Examples of ethical problems:

(a) Pricing level
(b) Advertising messages
(c) Product promotions
(d) Working conditions
(e) Customer service
(f) Workforce reductions
(g) Environmental pollution
(h) Community relations
(i) Suppliers relations
Exercise 3.3
1. Maintaining the quality of a product. Some stakeholders wants to produce
the product in a short period of time which may affect the quality of the
product. Despite this activity being in conflict with the law, it still occurs
widely.
2. Discussion must cover all the characteristics of ethical problems in
management which includes:
(a) Most ethical decisions have extended consequences.
(b) Most ethical decisions have multiple alternatives.
(c) Most ethical decisions have mixed outcomes.
(d) Most ethical decisions have uncertain consequences.
(e) Most ethical decisions have personal implications.
TOPIC 4: MANAGERIAL ETHICS AND RULE OF LAW
Exercise 4.1
1. The law is a set of rules established by a society to govern behaviour within
that society. The law can be defined as a consistent set of universal rules
that are widely published, generally accepted and usually enforced.

ANSWERS 147
2. Characteristics of Law:
(a) Consistent
The requirements to act or not to act have to be consistent to be
considered as part of the law. For example, if two requirements
contradict each other, both cannot be termed as a law, because
obviously people cannot obey both.
(b) Universal
The requirements to act or not to act also have to be universal, or
applicable to everyone with similar characteristics and who are facing
the same set of circumstances.
(c) Published
The requirements to act or not to act have to be published and put in
print so that they are accessible to everyone within the society. No
doubt that not everyone has the time to read up or understand
everything that is published. However, trained professionals such as
attorneys are available to interpret and explain the law. Hence,
ignorance of the law is not a valid excuse.
(d) Accepted
The requirements to act or not to act in a given way have to be
obeyed. If most members of the society do not voluntarily follow the
law, they would have to be compelled to do so.
(e) Enforced
The requirements to act or not to act in a given way have to be
enforced. Members of the society have to understand that they will be
compelled to obey the law, if they do not choose to do so voluntarily.
People have to recognise that, if they disobeyed the law, and if it is
noted and can be proven, they will suffer from loss of convenience,
time, money, freedom or life. There is an element of persistency about
the law. There is also or should be an element of certainty as it defines
what will happen if we do not follow the rules.
Exercise 4.2
1. Students have to discuss the processes involved in formation of law which
includes:
(a) Individual process
(b) Group process

148 ANSWERS
(c) Social process

(d) Political process
2. Social Institutions and their responsibilities:

Legislatures and councils Law formation
Attorneys and paralegal personnel Law explanation
Courts and agencies Law interpretation
Topic 5: Organisational Approaches in Improving

Ethical Behaviour
Exercise 5.1
1. Ethical codes are statements about the norms and beliefs of an organisation
2. Ethical codes do not really work. The problem is that it is not possible to
state clearly and explicitly the norms and beliefs of an organisation relative
to the various constituent groups (employees, customers, suppliers,
distributors, stockholders and the general public) without offending at least
one of these groups. For example, it is not possible for a company to say
that it considers its employees more important to the success of the firm
than its stockholders. By saying that, the company sends the message that
profits and dividends come second, which goes against the goal of many
business organisations. Consequently, codes of ethics are usually written in
general terms, noting obligations to each group without stating which of
them takes precedence in any given situation. The basic difficulty with
codes of ethics is that they do not establish priorities between norms and
beliefs. Priorities are the true values of a firm.
3. Ethics training usually involves lectures offered by a company trainer and
is usually given to managers. To be effective, ethics training should be
related to actual situations that employees may experience in their job and
possible ethical solutions to those problems. Ethic training are effective if
educate the organisation employees about the firmÊs policies, expectations,
the relevant laws and regulations, and general social standards. An
effective ethics training would also make employees aware of the available
resources, support systems and personnel who can assist with ethics and
legal advice.

ANSWERS 149
4. Structural causes of unethical problems are divisionalised and decentralised

structures in a big company.
Exercise 5.2
There are no complete satisfactory means of changing the planning, control and
motivational systems to ensure that the moral standards of senior executives will
be followed. What we can do are using Multiple analysis (using economic, legal
and moral forms of reasoning) appears to make the issues clearer, and the
proper, right or just decision more apparent. However, the process does not
guarantee unanimity as the values and the priorities arising from economic, legal
and moral outcomes differ among members of every organisation.
The other measure is to put less emphasis on the financial measures of

performance (sales revenues, variable costs, fixed expenses and quarterly profits
and more on numerical measures (customer complaints, quality rejections,
workforce absenteeism, community attitudes and delay in responding to
dividend inquiries).
TOPIC 6: SOCIAL RESPONSIBILITY

Exercise 6.1
1. There have been three critical turning points in the evolution of thinking
about social responsibility:
(a) Entrepreneural Era
(b) Depression Era
(c) Social Era
2.
Supporting Social Responsibility Opposing Social Responsibility
Businesses create problems and The purpose of businesses is to
should therefore help to solve them. generate profit for owner.
Corporations are citizens in our Involvement in social programmes
society. gives businesses too much power.
Businesses often have the There is a potential for conflict of
resources necessary to solve problems. interest.
Social responsibility can enhance Businesses lack the expertise to
profits. manage social programmes.

150 ANSWERS
3. Refer to Figure 6.7: How organisations and government influence each

other.
4. For the formal approaches that organisations can use to manage social
responsibility, please refer to Table 6.5: Formal Organisational Approaches.
TOPIC 7: CORPORATE GOVERNANCE

Exercise 7.1
Besides Securities Commisions which plays very important roles in promoting
practices of corporate governance in Malaysia, there are other two important
bodies supporting the best practices of corporate governance. They are:
(a) The Malaysian Institute of Corporate Governance

The Malaysian Institute of Corporate Governance (MICG), which is
established in 1998, is a non-profit public company. One of the objectives of
MICG is to be a leading establishment for promotion of best practices and
corporate governance development through continuous education
programmes for major corporate figures such as company directors, chief
executive officers (CEOs), company secretaries, company advisers,
company auditors, accountants, lawyers, members of audit committees and
investors (Malaysia Institute of Corporate Governance, 2007-2008).
Refer to Figure 7.4: The mission of the Malaysian Institute of Corporate

Governance.
(b) The Malaysian Institute of Chartered Secretaries and Administrators

Established in 1958, Malaysian Institute of Chartered Secretaries and
Administrators (MAICSA) sets out to produce qualified company
secretaries and at the same time ensuring the professionalism of its
members (Malaysian Institute of Chartered Secretaries and Administrators,
2010). MAICSA seeks to maintain the highest standard of integrity and
ethics among its members within the profession. It also aims to act as a
change catalyst by involving actively in enhancing corporate governance in
the corporate field. In addition, it sets out to champion the best practices in
corporate governance and its importance by educating the Malaysian
corporate sectors.
Refer to Figure 7.5: Mission of MAICSA.

ANSWERS 151
Exercise 7.2
In order to have good corporate governance in the organisation, the
management should look into the following aspects:
(a) Involvement of Board of Directors

Board of directors will be held responsible for developing the corporationÊs
mission and vision, which take stakeholdersÊ interest into careful
consideration. In the business arena, the board of directors need to be alert
that corporations do not operate in isolation.
(b) Perform Self-Assessments

Apart from that, board members are required to perform self-assessments.
This is set out to reflect on how effective the boards are in governing the
corporation. By conducting self-assessments, they are also able to realise
how relevant they are in the corporate decision-making process.
Increasingly, board member selection will be more formalised.
(c) Enhanced Role of Nomination Committee

As spelled out in the 2007 revision of the Code, the role of the nomination
committee is enhanced. The committee is expected to play a more active
role in nominating qualified board members. Based on the fact that board
members operate in committees, they tend to work independently which
affects the corporate governanceÊs function of oversight. Consequently,
boards are expected to perform more effectively as a team.
(d) Well-elaborated Explanation

It is expected that more narrative information will appear in the annual
report. Corporations are expected to explain more of their decisions and
justify their actions and to report not only of their accomplishments but also
of their weaknesses and failures.
(e) Shift of the Model

A shift to the stakeholder model as opposed to the shareholder model will
be more apparent.
(f) Conduct Training and Seminar

A series of training and seminar are organised for corporations to realise
the importance of having a broader view of those whom they should be
accountable for.

152 ANSWERS
(g) Greater Management Support

There will be greater management support for corporate governance as
they begin to realise the importance of good corporate governance
practices.
(h) Well-informed Shareholders and Stakeholders

Shareholders and other stakeholders are now more well-informed and
educated. They are more sensitive towards current happenings in the
business world.
(i) Greater Government Involvement

Besides corporations, there will also be greater government involvement
and presence in promoting good corporate governance practice in light of
economic reform efforts. Good corporate governance practice will ensure
continuous support for businesses, which in turn will strengthen the
nationÊs economy.
TOPIC 8: MORAL DIMENSIONS OF ECONOMIC

SYSTEM
Exercise 8.1
1. Every human being has a moral right to acquire and use some share of
material resources to ensure they live at a decent level of physical and
psychological well-being. It seems to follow that if most people are subject
to an economic system in which a job is the means to obtain resources, then
they have a moral right to the job; the economic system owes them
employment.
In a capitalistic economic system, like in the United States, the private

sector provides most of the job opportunities. Hence, the responsibility of
actualising the moral right to employment falls on the private employers.
In a capitalistic system, this freedom includes the right:

(a) To hire and keep on the payroll employees who are needed in order to meet
the demands of a particular business; and
(b) To operate efficiently at a satisfactory level of profit.
Given this assumption, the freedom of employers to hire and retain

employees as they see fit means that no member of the society in which

ANSWERS 153
they operate has a moral claim on any specific job offered in the private
sector.
2. Affirmative action may range all the way from setting specific numbers of
minorities to be moved into positions over a given time period. The
proportion of the positions they hold begins to approach their numerical
distribution in the general population, to establishing the overall principle
that employment and promotion opportunities are open to all, regardless of
gender, race, religion, age or disability.
Preferential treatment is the practice of hiring or promoting members of the

minority groups in preference to those from the non-minority groups.
Preferential treatment commits the very offence they are supposed to
remedy, namely, selection of a person purely on the basis of characteristics
which have nothing to do with his performance in a function or job. Setting
specific quotas for minorities can be regarded as an immoral act.
3. Yes, agree with the statement that performance appraisal systems have an
ethical dimension. There is a moral dimension to this responsibility. We
need to consider the impact which appraisals have on the persons being
evaluated and on their perception of their self-worth as measured by what
their supervisors think of them. The companyÊs appraisal plan which
outlines the ground rules for preparing performance evaluations constitutes
a moral contract with employees because it is a promise. It normally
stipulates that how well an individual meets the standards established in
the plan will determine how much he or she will be paid. A supervisor,
who fails to follow the appraisal plan, acts unjustly toward his subordinates
who have a right to be judged in line with their provisions and standards.
To ensure ethical treatment of employees in the appraisal process, some
fundamental guidelines need to be observed.
4. Refer to Table 8.1: Key Ethical Guidelines for Performance Appraisal.
TOPIC 9: EMPLOYEES AND THE WORKPLACE

Exercise 9.1
1. Every employee has the right to privacy. However, employers also want to
want to protect themselves. Therefore, they believe that they need to know
about the personal history and habit of their employees to guard against
fraud, theft of proprietary information or harmful acts that employees
might do under the influence of alcohol or drugs.

154 ANSWERS
It is certainly necessary to let an employee know that he is not performing

satisfactorily. However, that is not something other employees or
managers, who are not in the personÊs direct line of supervision or who will
not likely ever supervise that person, have a right to know. Everyone is
entitled to his good public reputation. Finally, using threats to try to force
employees to violate the law is a kind of invasion of privacy. It intrudes
into the personÊs realm of conscience and puts him in legal jeopardy. For
the natural law moralist or any rights-based moralist, these instances are
evidence of employee abuse, of violations of human dignity and respect for
persons. Therefore they are considered as immoral. It is unlikely that a
utilitarian moralist would ever argue that these practices are morally
justified and would produce good results on the whole. As for cultural
relativist, it is unlikely that societal customs anywhere in the world would
accept this kind of treatment at the workplace.
2. To use preemployment tests to get a reading on their employeesÊ level of

honesty and to test the ability and capability of the prospective employee.
3. The principle of probable cause seems applicable, meaning that testing for
drug abuse is legitimate only if an employer has a valid suspicion that an
employeeÊs work performance is being adversely affected by drug use.
Only two circumstances could justify any testing of employees:

(a) Valid suspicion that a particular employee is on drugs; or
(b) Statistically valid evidence that the incidence of drug use among the
suspected employees is significant.
It would be particularly applicable in jobs where the safety of other

employees, customers or the general public would be threatened by
impaired job performance. If random testing ensures satisfactory results, it
seems that it is morally justified as long as all employees are equally
subjected to it.

ANSWERS 155
TOPIC 10: LOYALTY TO A COMPANY

Exercise 10.1
(a) Internal Whistle-blowing
The first category occurs when the accusation is made through the lines of
supervision or other designated channels within the company.
(b) External Whistle-blowing

Meanwhile, this second category occurs when the accusation is reported to
people or agencies outside the company, like government authorities or the
media.
Companies need whistle blowers in situations where somebody in a company is

engaging in or tolerating an activity that will harm employees, stockholders or
the public. The only way to stop the activity is to inform the appropriate
supervisors in the company or, if that channel is blocked, one can go to the
authorities or the media.
Exercise 10.2
1. Loyalty to a company means the moral obligation of employees to
discharge their duties competently, to obey the legitimate orders of their
superiors, to keep proprietary information and trade secrets confidential,
and to avoid any conduct that is in conflict with the companyÊs rightful
interests.
2. Refer to Table 10.1: Criteria of Justification for Internal Whistle-blowing.
3. That belief is simply false. A manager has a fiduciary duty to the owners of
the business. Thus, it would be a violation of that duty to cover up actions
by a supervisor who is harming the ownersÊ interests in any serious way. A
subordinate has to carry out the legitimate orders of his supervisor and
keep him informed about the progress of his work or task. The subordinate
may even be obliged to tell the supervisor about actions of other persons or
groups that may adversely affect boss's operations. However, wrongdoing
by his boss should not be ignored. The wrongdoings should be reported.

MODULE FEEDBACK
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1. E-mail your comment or feedback to modulefeedback@oum.edu.my
OR
2. Fill in the Print Module online evaluation form available on myINSPIRE.
Thank you.
Centre for Instructional Design and Technology

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OUM Business School

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Module Writers: Dr Ho Jo Ann

Dr Tee Keng Kok

Moderator: Tuan Fatma Tuan Sulaiman

Developed by: Centre for Instructional Design and Technology

First Edition, August 2011

Copyright © Open University Malaysia (OUM)

Topic 1 Moral Reasoning and Ethical Theory 1

Topic 2 Stakeholder Relationships 19

Copyright © Open University Malaysia (OUM)

Topic 3 Nature of Ethics in Modern Business 31

Topic 4 Managerial Ethics and Rule of Law 47

Topic 5 Organisational Approaches in Improving Ethical Behaviour 65

Copyright © Open University Malaysia (OUM)

5.1.4 Ethics Training 70

Topic 6 Social Responsibility and Organisations 76

Topic 7 Corporate Governance 95

Topic 8 Moral Dimensions of Economic System 106

Copyright © Open University Malaysia (OUM)

8.2.5 Equal Pay for Equal Work 115

Topic 9 Employees and the Workplace 121

Topic 10 Loyalty to a Company 129

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

COURSE GUIDE DESCRIPTION

As an open and distance learner, you should be acquainted with learning

Copyright © Open University Malaysia (OUM)

Table 1: Estimation of Time Accumulation of Study Hours

Topic 1 aims to introduce the learner to fundamental concepts and theories of

Copyright © Open University Malaysia (OUM)

Topic 2 focuses on stakeholder relationships. Stakeholders are individuals or

Topic 5 focuses on unethical behaviour in an organisation and the causes of

Topic 10 discusses the meaning of loyalty to a company or an organisation.

TEXT ARRANGEMENT GUIDE

Self-Check: This component of the module is inserted at strategic locations

Activity: Like Self-Check, the Activity component is also placed at various

References: The References section is where a list of relevant and useful

Copyright © Open University Malaysia (OUM)

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston:

Hosmer, L. 1991. The ethics of management. (2nd ed.). Boston: Irwin.

Copyright © Open University Malaysia (OUM)

TAN SRI DR ABDULLAH SANUSI (TSDAS)

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

1.1 MORAL REASONING AND ETHICAL

1.1.1 Meaning of Ethics

Ethics can generally be defined as the principles of morally acceptable

Although this simple definition communicates the essence of ethics, three

(a) Ethics is individually defined. People have ethics whereas organisations do

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1.1.2 Meaning of Business Ethics

1.1.3 Meaning of Professional Ethics

Professional ethics indicates the moral values that a group of similarly

Some organisations have many groups of professional employees such as nurses,

Answer the following questions on ethics.

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1.1.4 Why should Businesses be Ethical?

(a) Significant Influence on Environment and Stakeholders

(b) Enhance the Business Performance

A study conducted by the University of Washington found that companies

1.1.5 Formation of Individual Ethics

Figure 1.1: Factors that form individual ethics