BUSINESS ETHICS:Definition

Presented By Frank Gwavuya-UZ

Ethics is concerned with personal interaction.
Ethics seeks to distinguish ‘right’ from ‘wrong’, ‘good’
from ‘bad’ and what constitutes desirable conduct in a
particular set of social circumstances.
Specific quality of interaction
Ethics is concerned with specific quality of interaction.
The kind of interaction should ensure that the interests of
those involved are not prejudiced.
Or put it simply, ethics is concerned with respecting and
or promoting the interests of all involved in personal
interaction
Three Concepts around which ethics
revolves
The three main concepts around which ethics revolves
are the ‘self’, the ‘other’ and the ‘good’.
It is important that each of these concepts retains its
rightful place in the definition of ethics.
Neglecting or ignoring any of the concepts results in
serious distortions in the understanding of ethics
Continued
Should the concept ‘good’ be neglected, the unique
nature of ethics is eroded, because ethics is not merely
concerned with the interaction between ‘self’ and ‘other’,
but with a very specific dimension of interaction.
A similar distortion occurs when the ‘self’ is excluded
from the definition of ethics. In other words it is
dangerous to neglect one’s own interests, as one’s own
wellbeing is a prerequisite for ongoing quality interaction
with others.
Continued
Equally, the ‘other’ cannot be excluded from the
definition of ethics, as it will then degenerate into
egoism. A concern only for what is good for the self
ignores the very nature of ethics, which is to ensure that
the interests of both the self and the other party are
protected.
The Three Approaches to the Study of Ethics
In the academic study of ethics, three distinct approaches
can be discerned. They are descriptive, the prescriptive
and the meta-ethical approaches. Each of these
approaches makes a legitimate and essential contribution
to the theoretical study of ethics
Descriptive approach:- is about describing a certain state
of ethical affairs. Certain ethical values or characteristics
are described without making a value judgment about
them.
Three approaches continued
Prescriptive or Normative ethics: this approach entails
prescriptions or judgments about ethical issues. A
definite stand is being taken on what is good or bad, right
or wrong
Meta-ethics:-refers to what is related to ethical
judgments without being ethical judgments as such. It
includes, amongst others, the definition of concepts like
‘good’ and ‘bad’, affirmative action, justice, etc.
Economic Behaviour and Practices
Business ethics as an academic discipline applies the study of ethics
to economic behaviour and practice.
Within this broad area of economic behaviour and practice, three
distinct areas or levels of inquiry can be distinguished, namely: the
macro-economic, the meso-economic and the micro-economic
level.
The Macro-economic level:-where the focus is on the morality of
economic systems or macro-economic strategies. The various
economic systems are scrutinised for their moral justifiability.
Consider the debate over capitalism and socialism or debate on
indigenization and privatization.
Economic behaviour and practices
continued
The Meso-economic level-the focus is on the moral
responsibility of economic enterprises towards the
society. On this level of inquiry, the investigation deals
with the nature and extent of the responsibilities of
economic institutions towards the society.
The Micro-economic level-deals with moral issues that
occur within economic enterprises.
Why ethics in business?
• Business ethics became an increasingly fashionable field
of study in the 1990s.
• This represented excesses of the 1980s, to the central
emphasis on individual financial gain no matter how
achieved and ostentatious display of wealth that
characterized that decade.
• By the close of the 1980s, a range of factors, from
repetitive financial scandals to objective global
environmental damage, underscored the importance of
ethical conduct in business.
Continued
The emphasis on short-term profit maximisation in the
closing decades of the twentieth century, characterised
by corporate raids and hostile take-overs- in the name of
stockholder rights- and the resultant defensive
downsizing bloodbaths crippled many firms and injured
hundreds of thousands of loyal employees.
Without a sense of community and cooperation there
would simply be no firm.
Continued
The concept implies it:-by its very nature, a business has to
serve the needs or interests of others outside the confines
of the business merely in order to operate as a business. In
this way ethics, which is about considering the interests of
others, is inseparably intertwined with the way the idea of
a business.
Legitimacy demands: This ethical dimension, which involves
serving the needs or interests of others, is also a
prerequisite for qualifying for the title of business. A profit-
making operation also needs to be recognised as serving
the interests of society
continued
Survival and success depends on it: the ethical relation
between business and society is also a precondition for
its survival and long-term success.
Work and ethics
Working within a business means working with other people.
The ethical nature of work within a business is, however,
more than a harsh fact. It is a crucial factor in work, it is
crucial to the job performance of individuals.
The employment contract between an employee and
employer might stipulate the type and amount of work that is
expected of the employee.
It cannot however, determine the loyalty, dedication and
creativeness with which the employee will perform his or
stipulated tasks
continued
Persons who feel that they are respected, who receive
recognition for work well done, and who sense that their
creative contributions are appreciated, tend to work with
more dedication than those who are not treated likewise.
They are much more likely to unleash their true potential to
the benefit of the business they are working for. For them,
their employment contract represents a starting point.
The opposite is equally true, namely that persons who are
humiliated, who never receive recognition for their efforts,
tend to work with less dedication and creativity
Different philosophical approaches to
business ethics
CLASSICAL THEORIES
To make judgments on what is ethical or unethical, a
standard or criterion against which specific actions can be
judged is required. Ethical theories provide standards
provide standards for deciding whether a specific action is
ethical or not.
Ethical theories assist us in making a reasoned analysis of
specific actions and in providing reasons for why we
consider an action to be either ethical or unethical.
Three Influential Theories
Through centuries, the following theories have survived
and will remain influential and relevant today. These are
I. The virtue theory of Aristotle
II. The utilitarian theory of Mill
III. The deontological theory of Kant
Virtue theory
The Greek philosopher Aristotle(384-322 BC) is regarded as
the classical representative of the Virtue Theory.
Aristotle’s Virtue Theory commences from the assumption
that morality is both necessary and vital for human beings
It is impossible to live with human dignity without being a
well-developed moral being.
Morality is a pre-condition for living with human dignity.
Aristotle believed that everything in life has a special goal
People who forsake morality are, according to Aristotle,
debased beings who have not fulfilled their human potential.
Virtue Theory(continued)
Telos
Aristotle believes that everything in life has a specific goal.
He uses the Greek word telos when referring to the goal of
something
For example, the goal or telos of a knife is to cut, and the
telos of a pencil is to write.
In the same way all human beings share a common telos.
In order to live a life of human dignity, people should strive
to attain the telos of human life.
Virtue Theory(continued)
The Greek word that he uses to describe the telos of all
human beings is eudaimonia.
This is translated into English as happiness.
To reach the telos of eudaimonia, one has to live in a
society characterized by justice
It is the responsibility of political scientists and polticians
to work out and implement a just social order conducive
to attaining eudaimonia
You need good friends to surround and support you in
order to attain eudaimonia in the fullest sense.
Virtue Theory (continued)
Finally, you need to develop and cultivate your human
potential
The Self:- for Aristotle, morality starts with the self.
Morality hinges according to the character of the individual
Morality require people of good character. Only people with
good character are able to do good.
Aristotle insists that morality begins with self-love. Unless
you love yourself and are willing to invest in your own self-
realization, moral development cannot occur.
Virtue Theory(continued)
Virtues:- the way to develop your character is through
the cultivation of virtues.
A virtue, according Aristotle, is a character trait that
enables you to reach your telos. Aristotle defines a virtue as
an activity of the soul, implying a rational principle.
• The Mean:- Aristotle introduces the concept of the mean
to indicate what is implied by rationally controlled
dispositions.
Our natural dispositions tend to err in one of two
directions.
Virtue Theory(continued)
Either we are too much inclined to do something or we
are too little inclined to do it. This implies that we either
have excessive dispositions or deficient dispositions.
The mean is intended to correct these defective
dispositions
Aristotle describe the mean as the midpoint between
excessive and deficient dsipositions
This mean disposition can be achieved by taking rational
control of one’s dispositions
The mean is always relative to a specific person
Virtue theory-continued
For Aristotle morality starts with the self. Morality
requires man of good character. Only men with good
characters are able to do good.
Aristotle further insisted that morality must begin with
self-love. Unless one loves oneself and is willing to invest
in one’s own self-realisation, moral development cannot
occur.
The way to develop one’s character is through the
cultivation of virtues.
Deontological Ethics
Deontology has its foundations in the works of Immanuel
Kant(1724-1804).
Kant argued that we should impose on ourselves the
demand that all our actions should be rational in form.
To Kant, people must never be treated only as means, but
also as an end. As rational beings, however, humans are very
different from animals in that they are free and creative.
Although he regarded pure reason as the only sufficient
source of moral guidance, he also believed that something
else was required for consistent moral behaviour.
Deontology -continued
The dual nature of human beings: Kant believes that humans
are simultaneously natural beings and rational beings.
As natural beings, they are under the control of their natural
instincts and needs. In this respect, they are like animals who
obey the laws of nature. It is their ability to think rationally
that distinguishes humans from animals.
As rational beings, people can be creative and make free
choices.
Instead of being subject to raw instinct, they can gain insight
into the laws of nature and formulate their own guidelines for
behaviour
Deontological ethics-continued
The Goodwill:- although Kant believed that something else
was needed for consistent moral behavior. That something else
is a ‘good will’.
Our will is our capacity to decide what we want to do and
what we wish to become.
The human will is, of course, influenced by both our natural
and rational dimensions.
It is for this reason that Kant referred not merely to the human
will, but explicitly to the ‘goo will’.
The human will can be corrupted if it caves in to the demands
of our natural inclinations.
Deontological ethics-continued
The Categorical imperative:-
Kant’s quest into the domain of pure reason leads him to
the discovery of a universal and objective moral law that
applies to all rational human beings.
The first practical imperative-states that you should ‘act as
if the maxim of your action were to become by your will a
universal law of nature. By this practical imperative, Kant
wishes to reinforce that our moral actions should not be
guided by our own inclinations, but be guided by a sense of
duty to the universal moral law( the categorical imperative).
Deontological ethics-continued
The second practical imperative:- according to Kant, act as to treat
humanity, whether in their own person or in that of another, in
every case, as an end, never as a means only.
He argued that the categorical imperative requires us to act not for
the sake of our subjective goals, but for the sake of an objective
goal that applies to everyone.
The third practical imperative: every human will is a will which in
all its maxims gives universal laws. Kant wishes to emphasise that
the categorical imperative is not something alien to us, but is
something with which we can identify as being of our creation. In
our freedom as rational beings we can act with autonomy and
create the moral principles that should guide our lives
Utilitarianism
The utilitarian moral theory claims that the morality of
actions should be judged by their consequences. The
classical representative of this theory was John Stuart Mill
(1806-1873).
Mill was convinced that actions are good when they
contribute towards human beings reaching their ultimate
goal. This ultimate goal he defined as happiness.
Therefore, an action should be considered good when it
results in happiness for those which it affects.
Rights-based approaches
The rights-based approach holds that individuals have
certain basic rights that should, wherever possible, be
held, including life, liberty and a degree of freedom to do
as they choose(Beauchamp and Bowie, 1997)
This frame of reference is based on the assumption that
individual rights are paramount; the principal function of
the state should simply be to ensure that such rights are
not infringed
The Concept of a Right
In general, a right is an individual’s entitlement to
something.
A person has a right when that person is entitled to act in
a certain way or is entitled to have others act in a certain
way toward him or her
The entitlement may derive from a legal system that
permits or empowers the person to act in certain ways
toward that person.
Concept of Right-Continued
Legal rights are limited to the particular jurisdiction
within which the legal system is in force
Entitlement can also derive from a system of moral
standards independently of any particular legal system.
Moral rights, unlike legal rights, are usually thought of as
being universal in so far as they are rights that all human
beings of every nationality possess to an equal extent
simply by being human beings.
The Concept of Rights -Continued
Unlike legal rights, moral rights are not limited to a
particular jurisdiction.
If human beings have a moral right not to be tortured, for
example, then this is a right that human beings of every
nationality have regardless of the legal system under
which they live.
Sometimes the term “right” indicates that a person is
authorised or empowered to do something either to
secure the interests of others or secure his own interests.
Rights-Continued
An army or police officer, for example, acquires legal
rights of command over subordinates which enable him
to pursue the security of others.
While the property owner acquires legal property rights
which enable him/her to do as he/she pleases with the
property
Thus moral rights impose correlative duties on others,
either duties of noninterference or duties of positive
performance.
Moral Rights-Continued
Moral rights provide individuals with autonomy and
equality in the free pursuit of their interests.
That is a right identifies activities or interests which
people must be left free to pursue or not pursue as they
themselves choose
Moral rights provide a basis for justifying one’s actions
and for invoking the protection or aid of others.
If I have a moral right to do something, then I have a
moral justification for doing it.
Contractual Rights and Duties
Contractual rights and duties sometimes called “special rights
and duties”or special obligations are that limited rights and
correlative duties that arise when one person enters into an
agreement with another person.
Contractual rights are derived from Civil Law-the object of
civil law is the redress of wrongs by compelling compensation
or restitution.
For example, if I contract you to do something for you, then I
am entitled to your performance.
You acquire a contractual right to whatever I promised, and I
have a contractual duty to perform as I promised.
Contractual Rights Continued
Contractual rights arise out of a specific transaction
between particular individuals.
Contractual rights and duties depend on a publicly
accepted system of rules that define the transactions that
define the transactions that give rise to those rights and
duties.
Without the social institution of contract, individuals in
such situations would be unwilling to rely on the word of
the other party, and the transactions would never take
place.
ETHICAL ISSUES GOVERNING CONTRACTS
Both of the parties to a contract must have full
knowledge of the nature of the agreement they are
entering
Neither party to a contract must intentionally
misrepresent the facts of the contractual situation to the
other party
Neither party to the contract must be forced to enter the
contract under duress or coercion
The contract must not bind the parties to an immoral act
JUSTICE AND FAIRNESS
Disputes among individuals in business are often interrelated
with references to “justice” or to “fairness”.
This is the case for example, when one person accuses
another for unjustly discriminating against him or her.
Justice and fairness are essentially compartive
They are concerned with the comparative treatment given to
the members of a group when benefits and burdens are
distributed, when rules and laws are administered, when
members of a group cooperate or compete with each other
and when people are punished for the wrongs they have done
or are being compensated for the wrongs they suffered.
Justice and Fairness Continued
If a society is unjust to some of its members, then we
normally condemn that society, even if the injustices
secure utilitarian benefits for everyone.
If we think that slavery is just, even if slavery makes that
society more productive.
Greater benefits for some cannot justify injustices for
others
Categories of Justice and Fairness
Distributive justice-the first and basic category, is
concerned with the fair distribution of society’s benefits
and burdens.
Retributive justice-the second category, refers to the just
imposition of punishments and penalties upon those who
do wrong. A just penalty is one that in some sense is
deserved by the person who does wrong.
Compensatory justice-the third category, concerns the
just way of compensating people for what they lost when
they were wronged by others
Distributive Justice
Questions of distributive justice arise when different
people put forth conflicting claims on society’s benefits
and burdens and all the claims cannot be satisfied.
The central cases are those where there is a scarcity of
benefits-such as jobs, food, housing, medical care,
income and wealth as compared to the numbers and the
desires of the people who want these goods.
The fundamental principle of distributive justice is that
equals should be treated equally and unequals,
unequally.
Justice as Equality:Egalitarians
What is an Egalitarian?
Someone who believe in or based on the principle that all
people are equal and deserve equal rights and
opportunities
Egalitarians hold that there are no relevant differences
among people that can justify unequal treatment.
According to the egalitarian, all benefits and burdens
should be distributed according to the following formula:
Formula of Distribution of benefits and
Burdens
Every person should be given exactly equal shares of
society’s benefits and burdens because all humans are
equal.
All men are created equal according the egalitarian
Criticisms of The Egalitarian Approach
Critics claim that there is no equality that all human beings
possess in precisely the same degree
Human beings differ in their abilities, intelligence, virtues,
needs, desires and in all their other physical and mental
characteristics
If this is so, then human beings are unequal in all respects
If everyone is given exactly the same things, critics point
out, then that the lazy person will get as much as the
industrious one, even though the lazy one does ont deserve
as much.
Continued
If everyone is given exactly the same, the handicapped
person has less ability
If everyone is given exactly the same, then individuals
will have no incentives to exert greater efforts in their
work; as a result society’s productivity and efficiency will
decline.
Retributive Justice
Retributive justice concerns the justice of blaming or punishing
persons for doing wrong.
However, if people do not know or freely choose what they are
doing, then they cannot justly be punished or blamed for it.
A second condition of just punishments is certitude that the
person being punished actually did wrong.
Thirdly, just punishments must be consistent and proportional
to the wrong
Punishment is consistent only when everyone is given the
same penalty for the same infraction.
Compensatory Justice
Concerns the justice of restoring to a person what the
person lost when he or she was wronged by someone else.
The general understanding is that, when one person
wrongfully harms the interests of another person, the
wrong doer has a moral duty to provide some form of
restitution to the person he/she wronged.
Justice requires that the wrong doer as possible should
restore whatever he or she took
This implies that the amount of restitution should be equal
to the loss the wrong doer knowingly inflicted on the victim.
Corporate Governance and Business ethics
Gerry Johnson and Keva Scholes (1997) pointed that
corporate governance involves the determination of
“minimum obligations of an organisation towards its
stakeholders”.
Corporate governance refers to the act of governing an
organisation by senior management generally known as
“the board of directors”.
Corporate Social Responsibility
Cronje; Du Toit, et al (1997) said, “ being socially
responsible essentially means that an organization tries
to reconcile the interests of its different stakeholders with
each other. Thus, profit maximisation is the primary
concern of the owners/shareholders of enterprise, while,
consumers are mainly interested in quality products and
affordable prices.
What Influences an Organisation’s Social
Responsibilty
Employees
The government
Competitors
The Social responsibility of business
Economic responsibility:- the first and most basic
responsibility that a company has towards society is to be
economically successfully.
Merely by remaining a viable business, a company can
contribute in various ways to the wellbeing of society
By being economically viable the company creates value
for a wide range of stakeholders.
It provides a return on investment for shareholders as
well as income for those who are employed by the
company.
Economic responsibility-continued
It provides work for its suppliers, and goods and services
for its customers.
The community and society benefit from levies, taxes and
other contributions that companies have to pay to local
or national governments, which in turn can be invested in
the development of local and national infrastructure
Stakeholders stand to lose substantially should a
company fail to remain economically viable.
Social responsibility of business-continued
Formal obligations:- a second social obligation of
companies is to comply with formal standards is to
prevent companies from engaging in irresponsible
behavior that can jeopardize the functioning of the
market, society or the environment.
These controls can also be intended to protect vulnerable
stakeholders of companies, such as minority
shareholders, employees, suppliers, customers, or that
set standards for how companies should act with regard
to the environment
The Social responsibility of business-
continued
Social expectations:- there are three different reasons why
companies have to respond to these formal social obligations as
follows:
 In order to gain legitimacy:- companies would want to be
accepted by the society as a business. When it becomes apparent
that a business violates the interests of society, its legitimacy is
eroded.
 Strategic considerations:- in order to survive and flourish,
companies need to win and retain the cooperation and support of
their stakeholders. For example companies rely on the state to
provide them with the necessary infrastructure e.g transport and
communication networks.
continued
Ethical obligations:- as members of society, companies
share in the basic ethical obligations that all members of
society have.
All members of the society need to be treated with
respect and decency irrespective of their status or the
social power that they can exert over companies
Social Development (Corporate Citizenship)
Corporations find themselves from time to time in situations
where they are being presented with opportunities, to fulfil
roles that have previously been associated with the state.
This is the case when companies, especially in developing
countries, are expected or feel compelled to provide
facilities and infrastructure, like roads, hospitals and schools.
Similarly, when companies operate in jurisdictions where
there is very lax or no environmental regulation, companies
are either expected to be responsible, or feel responsible, to
set their own standards of sound environmental policy.
continued
They can take the form of laws, such as anti-competition laws
or they can come in the form of regulations such as insider
trading regulations issued by a financial services board.
Stock exchanges also can make special rules by which listed
companies have to abide, such as rules that determine what
listed companies have to disclose to their shareholders and to
the public at large
Other formal forms of formal standards that companies have
to adhere to are laws, rules or codes that stipulate the rights
of workers, customers or that set standards for how
companies should act with regar
Some Social Responsibility Activities
Providing assistance to employees in the fields of
education and training
Creating job opportunities for minority groups, e.g. the
disabled, women, etc.
Offering scholarships to specially selected members of
the society
Avoiding or reducing environmental pollution and taking
an active role in the environmental cleaning exercise
Providing medical cover to employees and their
dependants
Justification of Corporate Governance
Corporate governance is advantageous to an organisation
as it provides the crucial strategic thinking and
consciously strategy management through:
Providing better guidance to the entire organisation on
the crucial point of “what it is we are trying to do and to
achieve”.
Making managers more alert to the winds of change that
are inevitable, new opportunities, and threatening
developments within the operational environment
Continued
Providing management with a rationale for evaluating
competing budget requests for investment capital and
new staff. The rationale should argue strongly for steering
resources into strategy supportive, results producing
areas
Helping to bring together the numerous strategy-related
decisions by management across the entire organisation
Creating a more proactive management posture and
counteracting tendencies for decisions to be reactive and
sufficiently defensive.
The Role of the Boards
The board of directors should ascertain that the overall
task of managing strategy is adequately done.
The boards normally review important strategic moves
They officially approve the strategic plans submitted by
senior management. This function makes the board
ultimately responsible for the strategic actions taken.
The board should ensure that proposals from
management have been adequately analysed and
perceived to be superior to available alternatives
Continued
The boards withdraw/reject flawed proposals, from
management, which may end up being too expensive to
the organisation from many different fronts.
The boards evaluate the quality of senior executives’
strategy making and strategy implementation skills.
Where results of an evaluation are negative, the CEO may
be pressured to resign.
Board Committees
At any one time, there must be one or more committees
created to look after varied organisational issues.
For example the resources committee; audit committee;
nominations committee; risk management committee
among others.
Why Corporate Governance ?
The corporate governance frame work specifies the
distribution of rights and responsibilities among different
participants in the corporation, such as the board,
managers, shareholders and other stakeholders and
spells out the rules and procedures for making decisions
on corporate affairs.
Three factors behind corporate governance
Separations between ownership and control. In the past
most companies were managed by their owners or
closely monitored by a small number of shareholders.
The birth of the supernatural corporations. Multinational
Corporations are richer and more powerful than some
states and regions to cause economic or political
instability in some cases.
Increase in reported corporate failure and crisis
Corporate governance and the balancing of
divergent interests
The interests of those who have control over a firm, i.e.
those of management, may differ from the interests of
those who supply the firm with external finance,
legitimacy and other critical resources.
The rights of shareholders
The corporate governance framework should protect
shareholders’ rights.
These rights include the right to participate in the
management of the company proportionate to their equity
ownership.
The right to have relevant information about the company’s
state of affairs.
To be involved in decisions concerning fundamental corporate
changes
To have an opportunity to participate effectively and vote in
general shareholder meetings.
Rights of shareholders (continued)
The corporate governance framework should ensure the
equitable treatment of all shareholders, including
minority and foreign shareholders.
All shareholders should have the opportunity to obtain
effective redress for violation of their rights
Specifically , all shareholders of the same class should be
treated equally and insider trading and abusive dealing
should be prohibited.
Rights of stakeholders in corporate
governance
The corporate governance framework should recognise
the rights of stakeholders as established by law and
encourage active cooperation between corporations and
stakeholders in creating wealth, jobs and the
sustainability of financially sound enterprises.
The rights of the stakeholders should be protected by law
and respected.
Disclosure and Transparency
The corporate governance framework should ensure that
timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial
situation, performance, ownership and governance of the
company
Corporate governance and stakeholder
theory
According to the stakeholder theory, the firm needs to
consider the interests of all groups affected by the firm.
Stakeholder theory challenges the shareholder theory of
the corporation held by, amongst others, Milton
Friedman.
Shareholder theory dictates that corporations should be
managed for the sake of shareholders.
As agents of shareholders, management should maximize
the return on investment for shareholders.
Stakeholder theory-continued
William Evan, Freeman challenges this assumption and
critically reviews the question: ‘for whose benefit and
whose expenses should the corporation be managed?’
They rejected the then conventional answer to the
question which stated that it should be done for the
benefit and cost of the shareholders.
This rejection is based on both a legal and an economic
argument.
Stakeholder theory-continued
The legal argument:- the legal argument for the rejection of
the idea that a corporation should be managed solely for the
benefit of shareholders is based upon recent legal
development.
Evan and Freeman refer to a substantial number of court
cases which find that corporations have duties towards
stakeholders other than shareholders
They refer specifically to legislation and court findings that
give certain rights to employees
Similar arguments are also made with regard to suppliers,
customers and local communities.
continued
Recent laws and court findings acknowledge the
legitimate interests of these stakeholders groups and
grant them legal protection.
This is clear indication that recent legal developments
effectively constrain management to pursue the interests
of shareholders at the expense of other groups of
stakeholders.
Stakeholder theory-continued
The economic argument: the classic justification of free-market
capitalism is that in pursuing the interests of shareholders, the
greatest good of the greatest number of people will
automatically be served.
This is often referred to as the ‘invisible hand’ doctrine
The reality of the modern corporation and its impact on society
has undermined the credibility of this doctrine.
Evan and Freeman point out that this doctrine has lost its
credibility because, firms have sought to internalize the benefits
and externalize the costs of their actions. By externalities they
refer to the side effects caused by corporate actions.
Stakeholder theory-continued
Stakeholders: based on the legal argument, Evan and
Freeman conclude that different stakeholders of
corporations have rights that need to be respected by the
management of the modern corporation.
on the basis of the economic argument, they further
conclude that corporations are responsible to various
stakeholders for the consequences of their actions.
The conclusions are then formulated into the following
two principles that provide the basis for stakeholders
theory:
Stakeholder theory-continued
Principle of Corporate Rights: the corporation and its
managers may not violate the legitimate rights of others
to determine their own future
Principle of Corporate Effects:- the corporation and its
managers are responsible for the effect of their actions
on others (Evan and Freeman, 1993:79)
Categories of Stakeholders
Primary stakeholders-those who have a formal, often
official, or contractual relationship with the firm such as
suppliers, employees, shareholders, managers and so
forth.
All others are classified as secondary stakeholders having
a loose contract with the firm
According to the stakeholder theory, firms in the long-
term; benefit more from non-adversarial relationship
with stakeholders rather than focusing on short-term
shareholder interest.
Principles of stakeholder management
The Clarkson Centre for Business Ethics-University of
Toronto (2000) outlines the following core principles for
stakeholder management:
Principle Number 1: Management should acknowledge
and actively monitor the concerns of all legitimate
stakeholders and should take their interests appropriately
into account in decision making and operations.
Stakeholder Management Principle Number
2
Managers should listen to and openly communicate with
stakeholders about their respective concerns and
contributions, and about the risks that they assume
because of their involvement with the corporation
Stakeholder management Principle Number
3
Managers should adopt processes and modes of
behaviour that are sensitive to the concerns and
capabilities of each stakeholder constituency
Principle Number 4-managers should recognize the
interdependence of efforts and rewards among
stakeholders, and should attempt to achieve a fair
distribution of the benefits and burdens of corporate
activity among them, taking into account their respective
risks and vulnerabilities.
Stakeholder management principle number
5
Cooperate with other entities, both public and private to
ensure that risks and harms arising from corporate
activities are minimized and where they cannot be
avoided, appropriately compensated.
Principle number 6-managers should avoid altogether
activities that might jeopardize inalienable human rights (
the right of life) or give rise to risks which, if clearly
understood, would be patently unacceptable to relevant
stakeholders
Stakeholder management principle number
7
Managers should acknowledge the potential conflicts
between: their own role as corporate stakeholders; their
legal and moral responsibilities for the interests of
stakeholders and should address such conflicts through
open communication; appropriate reports and incentive
systems and where necessary, third party review.
Reforming Corporate Governance
The intention for reforming corporate governance was to ensure
that the directors or those managing the company act in the
interests of the shareholders or the directors act in the interests
of all to whom the company owe duties or the stakeholders
Creating a framework for the control of large and powerful
companies whose interests may not coincide with national
interests, e.g. large multinational companies with head offices
located outside Zimbabwe.
Controlling multi-nationals, which can dominate the local
economy, e.g. Anglo-American and other British or American
based firms
Corporate Governance Reform continued
Ensuring that companies are answerable to all
stakeholders, not just to shareholders
Ensuring that companies are answerable to all
stakeholders, not just shareholders
Ensuring that companies behave in a socially responsible
way
Protecting investors, who buy shares, in the same way as
investors who buy any other good causes, regional
development and employment
Corporate governance reform continued-
The Cadbury Report
This report was adapted by Williams (1998) from the
CIMA Management Accounting Control Systems
Knowledge
The Cadbury Committee on the Financial Aspect of
Corporate Governance was established in 1991 by the
London Stock Exchange, the Financial Reporting Council,
and the accounting profession, which were concerned at
the lack of confidence in financial reporting.
Cadbury Report Continued
Cadbury aimed to put forward practical ways of raising
financial control and reporting standards, which could be
put into effect without waiting for legislation
Cadbury Committee had a fairly narrow remit: the
financial aspects of corporate governance
The general approach was to make recommendations
based on current perceived best practice in the hope of
achieving consensus and voluntary acceptance
The view was that better governance would lead to
better economic performance
Cadbury Report Continued
Increasing disclosure was seen to be crucial in
maintaining public trust in the corporate system, and a
key part of raising standards
It could be seen as a means of encouraging effective
shareholder( and stakeholder) interest –checks and
balances against professional managers.
Specific Cadbury Proposals
Cadbury Committee-Code of Best Practices
The Board of Directors-The board should meet regularly,
retain full and effective control of the company and
monitor the executive management
The board includes non-executive directors of sufficient
calibre
The board should have formal schedule of matters
specifically reserved to it for decision to ensure that
direction and control of the company is firmly in its
hands.
Cadbury proposals continued
There should be an agreed procedure for directors in the
furtherance of their duties to take independent
professional advice if necessary, at the company, expense.
All directors should have access to the advice and
services of the company secretary, who is responsible to
the board for ensuring that board procedures are
followed and that applicable rules and regulations are
complied with.
Cadbury Proposals continued
Non-executive directors should bring an independent
judgment to bear on issues of strategy, performance,
resources, including key appointments, and standards of
conduct
Their fees should reflect the time, which they commit to
the company
Non-executive directors should be appointed for specific
terms and re-appointment should not be automatic
They should be selected through a formal process
Cadbury Proposals-continued
Executive directors’ service should not exceed three years
without shareholders’ approval
There should be full and clear disclosure of directors’
emolulements and those of the chairperson, including
pension contributions and stock options.
Separate figure should be given for salary and performance
related elements and the basis on which performance is
measured should be explained
Executive director’s pay should be subject to the
recommendations of a remuneration committee made up of
mainly non-executive directors
The Business of Meta-ethics
Usually only commences when ordinary moral
discourse breaks down or runs into difficulty.
For example, two persons differ on whether
justice demands that affirmative action be
implemented, and one of them poses the
question “ what is justice?”
The debate cannot be continued until a
satisfactory answer to this question has been
found.
Meta-ethics-continued
• Meta-ethics does not deal directly with the
moral wrongness or rightness of issues, but
with concepts and ideas indirectly related to
such ethical issues.
Is it possible to tell whether one ethical
theory is more valid than another one?
Unless there is agreement as to what
constitute e.g moral right
It becomes difficult to deal with conflicting
advice offered by the various moral theories.
Ethical relativism
The prominence of ethical relativism in the
modern era was fuelled to large extent by the
moral dissensus.
Where parties to a moral debate fail to agree on
what is morally right or morally wrong.
Some thinkers jumped to the conclusion that if
one cannot resolve the conflicting moral claims,
one might as well stop trying to do so altogether.
continued
They go one step further claiming that one should
indeed not judge the morality of other persons.
One is free to hold one’s moral views, but not to
judge the moral views of others.
One might know what is right for oneself, but
never what is right for others
The fact that something is right for me does not
imply that it is right for other persons as well.
Ethical relativism continued
ethical relativism was further fuelled by the
emergence of the global village
This had led to exposure to various cultures
People realise that what is right in one’s own
culture is not necessarily right in another
culture
For example the debate about homosexuality
in Zimbabwe
continued
This has fuelled reluctance to judge the moral
convictions of other cultures
Why ethical relativism is unacceptable
If ethical relativism is accepted , there is no obligation to
continue with moral debate
Moral debate can be dismissed as serving no purpose at
all
Moral debate will be impoverished when all moral views
are accepted without being challenged
Ethical relativism should also be rejected as unnecessary
because it is based on a false assumption, namely that
unless moral debate produces moral consensus, it serves
no purpose at all.
Ethical decisions in business
Rational interaction for moral sensitivity-one
of the more promising attempts to deal with
moral decision making amidst moral dissensus
was offered by a German philosopher, Jurgen
Habermas.
According to Habermas, modern rationality
excludes vast areas of human life from rational
discourse
Rational Interaction For Moral Sensitivity-
continued
He proposed consensus within an ideal
speech situation as the criterion for knowledge
According to his alternative conception of
rationality, knowledge is formulated in
controversial consensus established through
the interaction of rational participants
By this qualification he excludes all non-
discursive ideas on knowledge
Theoretical Assumptions
The RIMS strategy is based on the follwing
assumptions:
It assumes that moral dissensus is an inescapable
feature of our current culture
It assumes that moral dissensus does not
necessarily result in ethical relativism
It assumes that thorough dialogue, conflicting
moral views can be creatively harnessed to produce
morally sensitive solutions to moral dilemmas
Assumptions -continued
It assumes that a focus on the motives
underlying moral viewpoints cannot solve
moral dilemmas in a situation of moral
dissensus
The RIMS STRATEGY
Rims strategy entails the following steps:
Step 1-Generate and evaluate arguments
• Any moral argument that satisfies the following should be
taken into account in the decision-making process:
Step 2: Identify implications
Step 3: Find solutions
THANK YOU