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Module :-2

Managerial Ethics

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Managerial ethics

• Managerial ethics are focused on workplace behavior ethics and ethics in leadership. Ethics and ethical reasoning are necessary characteristics for business culture

• Ethics is difficult to define in a precise way. In a general sense, ethics is the code of moral principles and values that governs to behaviors of a person or group with respect to what is right or wrong

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There are two broad areas associated with the concept of managerial ethics

1) Managerial mischief 2) Moral mazes."managerial mischief" includes "illegal, unethical, or

questionable practices of individual managers or organizations, as well as the causes of such behaviors and remedies to eradicate them" the "moral mazes of management" include the numerous ethical problems that managers must deal with on a daily basis, such as potential conflicts of interest, wrongful use of resources, mismanagement of contracts and agreements, and misuse of power and influence.

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Factors influencing workplace ethics

• Individual moral standards • Influence of mangers and co-workers• Effective control

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Managing ethics in workplace

• Integrated ethics management• Pro-active role• Open communication• Atmosphere of trust • Code of conduct & ethics• Policies /procedures• Group decision – making • Cross – functional teams• Ombudsperson• Grievance redressal

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Ethical issues in workplace

• Ethical dilemma• Business relationship• Conflicts interest • Fairness and honesty

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Ethical dilemma

• A situation that arises when all alternatives choice or behaviors have been deemed undesirable because of potentially negative consequences making it difficult to distinguish right from wrong.

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CORPORATE SOCIAL RESPONSIBILITY

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CORPORATE SOCIAL RESPONSIBILITY

• Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large

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Definitions and Relationships

• Corporate social responsibility (CSR) is the process by which businesses negotiate their role in society

• In the business world, ethics is the study of morally appropriate behaviors and decisions, examining what "should be done”

• Although the two are linked in most firms, CSR activities are no guarantee of ethical behavior

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Need for C.S.R• The iron law responsibility• Long term business interest • Better public image• Conversion of resistance into resources • Avoid government regulation or control• Avoid misuse of natural resources and

economic power• Minimize the environmental damage• Wealth creation

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Key developments of C.S.R

• Increased stakeholder awareness• Transparency and reporting • Value chain• Codes ,standards, and indicators• CSR and corporate governance• Investor Pressure and Market- based

incentives• CSR ‘’ROI”

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Arguments in Favor of CSR

• Long –run survival of the business concerns• Profitable for the business concerns• Moral and social commitment • Improvement in public image• Helps in avoiding government regulation• Resources

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Arguments Against CSR• Business is an economic activity• Quantification of social benefits • Cost –benefit analysis• Lack of skill and competence• Transfer of social costs(a) Increase in price(b) Reduction in wage(c) Reduction in profit • Sub- optimal utilization of resources

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Is CSR the same as business ethics?

• There is clearly an overlap between CSR and business ethics

• Both concepts concern values, objectives and decision based on something than the pursuit of profits

• And socially responsible firms must act ethically• The difference is that ethics concern individual actions

which can be assessed as right or wrong by reference to moral principles.

• CSR is about the organization's obligations to all stakeholders – and not just shareholders.

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There are four dimensions of corporate responsibility

• Economic - responsibility to earn profit for owners• Legal - responsibility to comply with the law

(society’s codification of right and wrong)• Ethical - not acting just for profit but doing what is

right, just and fair• Voluntary and philanthropic - promoting human

welfare and goodwill• Being a good corporate citizen contributing to the

community and the quality of life

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Social Responsibility...

• an organization’s obligation to maximize its positive impact on stakeholders and to minimize its negative impact

• includes legal, ethical, economic, and philanthropic (discretionary) dimensions

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Legal Dimension...

• refers to obeying governmental laws and regulations

• civil law: rights & duties of individuals and organizations

• criminal law: prohibits specific actions and imposes fines and/or imprisonment as punishment for breaking the law

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Ethical Dimension...• behaviors and activities that are expected or

prohibited by organizational members, the community, and society (not codified into law)

• standards, norms, or expectations that reflect the concern of major stakeholders

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Models of CSR

• Philanthropic model :-• European model:-

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Philanthropic model

• Focus on the nonprofit needs and its mission• Focus on tax benefit to company• Little relation to the business of business

Making money for shareholders• Competing for executives, and by default,

company’s attention

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Indian models of CSR

• Trusteeship model• Stakeholder model

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Theories of CSR

• Feminist theory• Stakeholder theory• Social contract theory• Ethics and nature• Pragmatism

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Ethics :- Individuals and The Organisation

• Rational organisations are those wherein the activities of a number of people are coordinated for the accomplishment of some common explicit purpose or goal, through the division of labour and function along with a hierarchy of authority and responsibility.

• In a rational model, ethics focus on the contractual obligations of the employer and employees.

ORGANISATION AND THE INDIVIDUALS

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• Political organisations, seldom look merely at the formal lines of authority and communication within the organisation.

• They do not behave in a purely rational way and do not accept that rationality is sacrosanct in achieving the business goals and objectives.

• These organisations view business as a system of competing power and formal and informal lines of communication for coalitions.

• In a political model, the central ethical issues are guided by the constraints of morals or laws of the land.

Cont…

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Co-existence of Political and Rational Organisation

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• Caring organisations are not engaged in the pursuit of profits and personal gains, but are involved in caring for those for whom the organisation has been designed, with whom it interacts, and the people in the organisation itself..

• In a caring organisation, the employers may grow closer to their employees and seek the ways to serve and care for whom they exist, e.g. employees, customers, society, stakeholders, etc.

Cont…

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Moral and ethical issues of individuals in an organisation are influenced by, and dependent on, the nature of the

organisation and its work culture.

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• In business, ethical behaviour and the obligations of individuals are mutual relationships based on the model of organisation, the law of the land, contractual duties and obligations, work environment, and codes of general ethics that are acceptable as moral and rational to general public.

• Employees at all levels are obliged (duty-bound) to the company to behave ethically as a part of their contracts and the relationships outlined by what is commonly called the ‘law of agency’.

• Law of agency specifies the legal duties of employees (agent) towards their employers (principals) and prohibits the agent (employees) to act in conflicts of interests with those of the principal (employer).

RIGHTS AND OBLIGATIONS OF INDIVIDUALS IN THE ORGANISATION

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• In India, the Industrial Disputes Act, 1947 and other labour laws have been enacted to protect trade union rights and the rights of individuals in employment.

• These laws are quite explicit about the duties and obligations of employees and employers as well.

Cont…

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• An organisation has the responsibility of designing ethical policy and programmes with a holistic view such that they serve and complement each part of the business organisation.

• Individuals, in turn, have the responsibility to follow and abide by the policy direction and programmes in their respective areas of work and responsibility.

• Ethics management mechanisms provide the people of the organisation with the moral power – more commonly known as ‘whistle blowing’ – to prevent any kind of wrongdoing.

ORGANISATION AND THE RESPONSIBILITY FOR ETHICS

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Creative Accounting

• What is creative accounting?

Creative accounting, also called aggressive accounting, is the manipulation of financial numbers, usually within the letter of the law and accounting standards, but very much against their spirit and certainly not providing the “true and fair” view of a company that accounts are supposed to.

– Can be done through:• Accounting induced operational and financial decisions• Choice of accounting policies• Manipulation of accounting estimates• Fraudulent transactions

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Impact of Creative Accounting• Creative accounting can be used to signal internal

information– Helps outsiders to understand more about the firm

• Creative accounting can be used to “undo” temporary situations, that are not expected to persist– US Government and manipulations

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Impact of Creative Accounting• Creative accounting can be used unethically, to

manipulate markets and benefit the preparer– Impact is often a failure of markets– Price protection: Would you buy leather jackets

from the trunk of a car? At what price?• Intent is what matter!

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Solutions to the Creative Accounting problem

• Limit the flexibility within GAAP– Transactions can be designed around/within GAAP– May reduce the usefulness of financial statements

in general• Change performance measure Cash flow is a

hard measure– Cash flow is easier to manipulate This is why we

have earnings• Give accountants an ethics course

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Solutions to the Creative Accounting problem

• Impose legal liability on those who get caught– Securities regulators may not have the resources– How do you define something illegal?– Sarbanes-Oxley Act

• Let the market forces work– Grant firms that commit to full disclosure a lower cost

of capital– Penalize firms that do not through a higher cost of

capital (price protect)– Increase investors’/analysts’ training– “Remove” “bad” managers from the job market

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Summary of cases of creative accounting in India

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Whistle-blowing

Definition of Whistle-Blowing One who reveals wrong-doing within an organization

to the public or to those in positions of authority. One who discloses information about misconduct in

their workplace that they feel violates the law or endangers the welfare of others.

One who speaks out, typically to expose corruption or dangers to the public or environment.

Types of Whistle-Blowing

Internal Whistle-Blowing

When an individual advocates beliefs or revelations within the organization.

External Whistle-Blowing

When and individual advocates beliefs or revelations outside the organization.

Characteristics of a Whistleblower

Utilitarian Uninterested in Altering Their

Behavior Allows Own Attitudes and Beliefs

to Guide Them Often are Well Educated and

Holds Professional Positions

Effects of Whistle-Blowing

• Forced to leave organization/demotion

• Credibility ruined• Family, health,

and/or life in jeopardy

• Outrage and divisiveness of people directly or indirectly involved

• Physical or psychological isolation

• Organization experiences loss of money, restitution, productivity, and positive reputations.

• Incarceration

Protection Laws

• The Whistleblower Protection Law ~ 1989

• The Whistleblower Act ~ 1994

2002: Year of the Whistleblower

Cynthia Cooper WorldCom

Coleen RowleyFBI

Sherron WatkinsEnron

Sherron Watkins

• Former Vice President of Enron Corporation

• Alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company

• Warned that Enron 'might implode in a wave of accounting scandals.'

• Testified before Congressional Committees from the House and Senate investigating Enron's demise.

• Lauded in the press for her courageous actions, but left her job at Enron after a few months when she wasn't given much to do

Coleen Rowley

• FBI staff attorney

• Wrote 13-page memo to FBI Director about pre-9/11 intelligence in May 2002

• Testified for the Senate Judiciary Committee

• Concerned the FBI was becoming more bureaucratic and micromanaged

• Helped government focus on better intelligence management

Fanny Pack

Cynthia Cooper

• WorldCom’s Director of Internal Audit

• Her team discovered $3 billion in questionable expenses

• Met with 4 executives to track down and explain the undocumented expenses

• Disclosed findings, WorldCom stock frozen, corporate credit rating went from B+ to CCC-

• Remained as VP of Internal Audit, not promoted, no gratitude, resented by employees

Image Source: Cartoonstock.com

The Manjunath case

27 year old Engineer and MBA from IIM-LMarketing manager in IOCL at Lakhimpur KheriA “nightmare” for petrol outlet owners“Manju was not the typical business school

wonder boy who had a way with cold statistics and fuzzy logics” – Prof. Debashish Chatterjee, IIM-L

People involved• Dinesh Seth & Rajendra Singh – Owner &

Manager of L D Service station respectively• Monu Mittal - son of the owner of Mittal

outlet• District supplies Inspector• Villagers in Lakhimpur village

Sequence of events

• “Most pumps in UP are political gifts given by politicians to their goons”

• PDS scam and siphoning of Kerosene widespread in Lakhimpur

• Mittal outlet and L D Service station closed for a month after failing adulteration tests.

• Monu’s license is cancelled• Manjunath gets informants among Lakhimpur

Villagers

The plot on Nov 19th• Manjunath checks samples in Mittal outlet at

4 PM• Leaves at 6 PM leaving the measuring

instrument in the outlet• Monu gathers accomplices to kill Manjunath

and waits till 8 PM for him to return• Manjunath turns up at 9:30 PM and gets

murdered

Aftermath• Mittal sentenced to death in an extremely fast

judgment and other accused get life term• Manjunath Shanmugam trust • Manjunath Shanmugam integrity award• Relook into the subsidy mechanism of

Kerosene by the Govt.• Govt. resolution empowering Central Vigilance

Commission – Whistle blower protection act

Learnings• Personal and External Whistle blowing done

by Manjunath• Rule Utilitarianism was followed• Actions coincide with Kant’s Deontology –

Universaliziblity and Reversibility

Conclusion

• Whistle blowing is beyond being morally defensible

• “What life is this if we have nothing to die for?” - Manjunath

• Strong faith in system, justice and reason force the whistleblowers’ actions

Delineations of Ethical & Professional Responsibilities

ACA TCA LPC SBECThe association is to clarify the nature of ethical responsibility held by members.

The association is to clarify the nature of ethical responsibility held by members.

A licensee shall not make any false, misleading, deceptive, fraudulent, or exaggerated claims about licensee’s services and services of the mental health organization.

The Texas educator shall comply with standard practices and ethical conduct toward students, colleagues, school officials and parents.

The association is to establish principles that define ethical behaviors that all members should adhere to.

The association is to establish principles that define ethical behaviors that all members should adhere to.

A licensee shall discourage a client and others whom the license does not control from effectiveness of services, practice, qualifications, associations or products.

The Texas educator should respect and obey the law, demonstrate personal integrity, and exemplify honesty

The Code of Ethics will serve as the basis for processing ethical complaints initiated against members of the association.

The Texas educator should exemplify just and equitable treatment.

A Closer LookACA TCA SBEC

H.2 When a Counselor possesses doubt as to whether or not a Counselor is acting in an ethical manner take appropriate action.

D.1.C Counselors must alert their employers to conditions that may be potentially disruptive or damaging to the counselors professional responsibilities or that may limit their effectiveness.

b.1.A,B,F /b.2.B, D,F,GThe educator shall not knowingly engage in deceptive practices, misappropriate, divert, use monies for personal gain, or falsify records or coerce others to do so.The educator shall not harm others by making false statements, interfere w/ political or professional responsibilities, use coercive means of special treatment, or retaliate against any individual who has filed a complaint.