The Components

of
Ethical Business
Management Principles
Chapter 17
Learning objectives
LO 1: Describe the interplay between business ethics, corporate social responsibility and corporate governance;

LO 2: Define morality, ethics and business ethics at the hand of examples;

LO 3: Explain the three most common approaches to normative ethics;

LO 4: Describe how the micro-economic level and the macro-economic level impact on business ethics;

LO 5: Define and motivate the case for the narrow and broad view of corporate social responsibility;

LO 6: Discuss the reasons why organisations should take cognisance of the interests of stakeholder groups;

LO 7: List the strengths and weaknesses associated with the notion that the organisation is a citizen in society;

LO 8: Define the components of good governance and the values that underpin good governance practices;

LO 9: Compare the statutory with the voluntary approach to corporate governance;

LO 10: Describe South Africa’s governance model and the evolution of South Africa’s governance regime from King I to King IV

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LO 1: Interplay between business ethics, CSR
and corporate governance
• Relevant legislation and best practice guidelines addressing ethical business
• The Companies Act of 2008
• The Companies Regulations of 2011
• The King IV Report of 2016
• King IV: Good governance requires that leaders direct and control organisational
operations in an ethical and effective manner
• This is supported by
• Ethical leadership
• Ethical culture
• Responsible corporate citizenship
• Business ethics management practices, CSR and responsible citizenship practices, and
corporate governance practices function interdependently to
• Reduce organisational risk
• Promote sustainable business
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LO2: Morality, ethics and business ethics
• Morality
• A person or group’s standards for determining right and wrong, good and bad, and what
deserves respect and what does not
• Important sources of morality
• Law
• Family
• School
• Religious institutions
• Ethics
• The evaluation of moral standards
• Business ethics
• The investigation and evaluation of the moral dimension of business operations
• The study of business ethics can help us to better identify, analyse and propose solutions for the
ethical challenges that we face in the everyday practice of business
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LO 3: Normative ethics
• Normative ethics
• A branch of ethics that defines and systematises the principles that we
employ when making moral decisions and judgements
• Prescribes how people ought to act
• Different normative ethical theories prescribe different principles for morally
correct action
• Test case: Should a company cease, or continue with, operations in an unjust regime?
• Respond according to
• Utilitarianism
• Deontology
• Virtue ethics

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LO 3: Normative ethics cont.

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LO 4: The micro- and macro-economic level
impact on business ethics
• Descriptive ethics
• Describes how people act by empirically investigating the moral attitudes of
individuals and groups
• These moral attitudes are informed by contextual features, including:
• The internal operating environment (the micro-economic level)
• The external operating environment (the macro-economic level)
• The micro-economic level
• The level at which the economic activities within organisations are studied
and evaluated
• Includes the informal norms, formal policies, and leadership decisions and
actions that occur within organisations

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LO 4: The micro- and macro-economic level
impact on business ethics
• The macro-economic level
• The level of study and evaluation of the macro societal institutions that
determine ‘the rules of the game’, which enable and constrain business
activities and shape business practices
• Complex challenges at the macro-economic level
• COVID-19
• Climate change
• Technological developments
• The Fourth Industrial Revolution
• Shareholder and stakeholder activism

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LO 5: Corporate social responsibility (CSR)
• Meso-economic level
• The level of study and evaluation of the impact that business has on society
• Concerns corporate social responsibility practices, stakeholder engagement, corporate citizenship
• The narrow view of CSR
• The only social responsibility of business is to increase its profits as long as it stays within the
rules of the game (Milton Friedman)
• Rules of the game
• Elementary moral principles that rule out deception, force and fraud that may interfere with the effective functioning of
the market mechanism
• Premised on the promissory relation
• The agreement that executives will act in the economic interests of shareholders
• Extending CSR hampers the market mechanism and violates the promissory relation
• Shareholder money is used to further social objectives
• Constitutes an unfair and illegitimate ‘tax’ on shareholders

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LO 5: Corporate social responsibility (CSR)
cont.
• Arguments against the narrow view of CSR
• Shareholders often see extended CSR as consistent with sustainable business
and their long-term interests
• The diversification of corporate equity holding patterns has resulted in a shift
in the meaning of shareholder interests

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LO 5: Corporate social responsibility (CSR)
cont.
• The broad view of CSR
• Business has both negative and positive duties to society
• Negative duties
• Refrain from harming society
• Necessitates that business internalises its negative externalities
• that is, the negative impact that an economic transaction between two parties has on a third party
• Positive duties
• Actively and directly contribute to the welfare of society
• Premised on
• The social contract, whereby society gives business a license to operate in the expectation that
business will address certain social needs
• The enormous socio-economic influence of business
• The effects that organisations have on stakeholders

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LO 5: Corporate social responsibility (CSR)
cont.

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LO 6: Stakeholder theory
• The goal of business is to create value for its stakeholders by managing
conflicting claims between stakeholders and minimising trade-offs
(Edward Freeman)
• Why? Because business has a profound impact on stakeholders
• Narrow view
• Stakeholders are those groups that are vital to the success and survival of the
organisation
• Includes employees, managers, suppliers, consumers and shareholders
• Broad view
• Stakeholders are any group who affects, or is affected by, the organisation
• Includes government, competitors and society at large
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LO 7: Corporate citizenship
• Corporate citizenship
• Draws attention to the rights, obligations, privileges and responsibilities that
organisations have in the societies within which they are embedded
• In South Africa, and according to the King IV Report, business is expected to
contribute to socio-political reform and development by accepting societal and
stakeholder obligations
• The metaphor of citizenship: Weaknesses
• Extends the legal fiction of corporate personhood, but:
• Corporations do not have the same political rights afforded to natural citizens
• Corporations are not moral persons and therefore cannot be held morally accountable for
untoward behaviour in the way that natural citizens are held accountable
• Not accounting for these weaknesses, means that regulators may give corporations
too much liberty to self-govern
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LO 7: Corporate citizenship
• The metaphor of citizenship: Strengths
• Intuitively appealing metaphor
• Implicitly acknowledges the extended role of business in society
• Frames the duties of business beyond the narrow profit motive
• Resonates well with the governance requirements of King IV

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LO 8: Components of good governance
• Corporate governance concerns the systems and processes according to which
organisations are directed and controlled in an ethical and effective manner
• Direction requires future-orientated strategies
• Control demands conformance to codes and policies
• Tension between these functions
• Pillars of corporate governance (‘iCRAFT values’)
• Integrity (ethical leadership)
• Competence (effective leadership)
• Responsibility
• Accountability
• Fairness
• Transparency
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LO 9: The statutory and voluntary approach
to corporate governance
• The statutory approach (the ‘comply or else’ model)
• Governance requirements are legislated
• Quantitative box-ticking approach
• Example: Sarbanes-Oxley Act (2002, USA)
• Strengths
• Clearly signals that governance transgressions are not tolerated
• Holds boards of directors accountable
• Weaknesses
• Draconian
• Time-consuming

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LO 9: The statutory and voluntary approach
to corporate governance
• The voluntary approach (the ‘apply and explain’ model)
• Qualitative, principle-based approach
• Good governance practices are recommended, but companies have discretion in determining how
these practices are implemented
• Example: The King IV Report on Corporate Governance for South Africa (2016)
• Strengths
• Promotes intellectual honesty
• Promotes innovation (flexible)
• Allows for proportionality
• Promotes the substance of governance
• Promotes long-term learning
• Weaknesses
• Cannot guarantee ethical behaviour
• Prosecution rate is low
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LO 10: South Africa’s governance regime
• Features of the King Reports:
• Applicable to all organisations
• Stakeholder-orientated
• King I (1994)
• Comply or explain model
• Reinforces the fundamentals of a capitalist corporate system
• But also follows an inclusive approach
• King II (2002)
• Comply or explain model
• Places attention on non-financial governance concerns (stakeholders; sustainability)
• Recommends that companies issue sustainability reports
• Discloses social and environmental impact
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LO 10: South Africa’s governance regime
• King III (2009)
• Apply or explain model
• Promotes integrated reports
• Disclose both financial and non-financial performance in one report
• King IV (2016)
• Apply and explain model
• Promotes integrated reports
• Promotes inclusive capitalism
• Goal: shared prosperity
• Focus: six capitals
• Financial, human, intellectual, social, relationship, natural
• Scope: across economic, environmental and social contexts
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Chapter summary
• Ethical business is concerned with:
• Normative ethics and the philosophical foundations of, and justifications for, ethical
behaviour
• The micro-economic level, which concerns the implicit norms and explicit rules that define
organisational culture, and guide organisational activity
• The meso-economic level, which concerns businesses’ role in society as determined by
social responsibility imperatives, stakeholder management and corporate citizenship
• The macro-economic level, which focuses on the societal institutions that determine the
business ‘rules of the game’.
• These dimensions are institutionalised through good governance practices
• When organisations flout the components of ethical business, corporate scandals
follow
• See: The Steinhoff case study
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