Corporate Governance and Ethics Corporate Culture—Ethical Perspective

1. Corporate Governance and Ethics Corporate Culture—Ethical Perspective

2. Prologue In a global village such as the one are moving into, if a corporate has to survive, grow and wants to be counted, its vision should focus on the ways and means of becoming a responsible and responsive corporate citizen, its mission can no longer be as myopic as it used to be in the past. In modern financial and business world, good corporate governance is not and optional extra. Good corporate governance is fundamental to raising capital,satisfying investors and running businesses in increasingly global markets. Good governance also involves and encourages the levels of transparency, accountability and CSR that is increasingly necessary for the modern world

3. Corporate Governance • Corporate governance is typically perceived as dealing with the “problems that result from the separation of ownership from control”. • “Corporate governance is defined as holding the balance between economic and social goals and between individual and communal goals. The framework to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources”. • Fewer concerns are more critical to international business and development strategies than the corporate governance. Successive business failures and frauds, high profile scandals and the current financial crisis has brought corporate governance issues on the forefront across the globe.

4. What is Good Corporate Governance? Law and regulations alone cannot bring about changes in corporations and make them benefit all concerned through inspired societal values. The obligations are many fold: • Obligation to the society viz honest and ethical conduct, CSR, social concerns, environment friendliness, health and safety working conditions, trusteeship etc • Obligation towards investors • Obligation towards employees viz fair employment practices, equal opportunities, encourage whistle blowing, humane treatment empowerment etc • Obligation to the customers • Managerial obligations as they play pivotal roles in ensuring implementation of the policies

5. Organization Culture • Corporate culture is a synthesis of management styles, values and communication styles. It is generally understood as the ‘way things are done’ in an organization. It describes the situation not as stated but as practiced. Though the organizational structure, systems policy and strategy direct and channelize the work flow, the actual behavior of the people is conditioned by corporate culture. It is intangible and hard to quantify. • Organization Culture, therefore, refers to a system of shared meaning held by members that distinguishes the organization from other organizations. (Japanese consider lifetime contract, promotions are based on age and ability, formal greeting procedures, personal customs)

6. The iceberg of Organizational Culture Visible Formal (Overt) Aspects Goals, Technology, Structure, Policies and procedures Financial Resources Informal (Covert) aspects Perception, attitudes, Feelings (anger, fear, liking, despair etc) Values Informal interactions Group norms About Formal & Informal systems Invisible

7. Three view points of organizational situation • Organizations like clubs, societies, incorporated bodies, are made up of rocks, stones, trees and furniture but also have people as entities. These people are moral agents but the organizations are not. • Organizations may well be agents of a kind which makes sense to praise or blame for their actions, even though they are not agents exactly the same way as human beings. None the less it is not a good idea to lay social, moral or political obligations on them because of their inexperience in these fields. • Organizations have sufficient structural complexity to be agents whom it makes sense to call to account for their actions and the consequences of these actions. If a body can take decisions and implement them, they must be responsible for their consequences.

8. Dilemma of Human Behavior People, with very few exceptions, are moral agents. In other words, their actions are governed by rules, explicit or implicit, which can be subjected to ethical appraisal. We may praise them for being courageous, charitable, just, sensitive,or magnanimous, or may condemn their foolishness, envy or deviousness. We may neither praise nor blame, but wonder whether they were fully responsible for what they did. Perhaps they were coerced or pressured or, perhaps, just did not know what they did.Where on this spectrum do the organizations belong ?

9. Approaches to Ethical Organizations • How to take the moral pulse of organization whose work force exceeds the population of a small town and whose operations are often spread over many geographical areas • As organizations grow, the likelihood of someone, somewhere, behaving in an unethical way is likely to increase. How an organization responds to unethical conduct by one or many of its employees may be taken as an indicator of the strength of its ethical pulse. Three different approaches are in vogue • Theory of corporate moral excellence • Stakeholder theory • Issues of corporate governance

10. 1.Theories of Corporate Moral Excellence • “Values are the bedrock of any corporate culture”. They assert that values produce a sense of direction for the employees and help to guide and control their day-to-day behavior. However, one would need to differentiate between the “espoused value” and those “values in practice”. These values need to be built in the corporate culture. • Peters and Waterman studied successful companies which had achieved excellence and found among other characteristic took the process of value shaping very seriously. They concluded that it was not possible to be an excellent company without clarity on values and without having the right sort of values

11. 2. Ethics and Stakeholder Theory • Stakeholder theory asserts that companies have responsibilities and obligations beyond those of the shareholders (societal responsibilities – Social contract theory --1.Benefit consumers to maximize their wants 2.Benefit employee to maximize perks and remuneration 3.Ensure least damage to the environment) Paying attention to the needs and rights of all the stakeholders of a business is a useful way of developing ethically responsible behavior; all stakeholders should figure prominently in the decision making by the managers. • The responsibilities are fivefold; 1.Ethical, 2.Conceptual, 3.Technical, 4.Functional and 5. Operational. • The foundation of ethics in management .. lies in extension of the consciences of the corporations in a logical and moral extension of its principals.

12. 3. Issues of Corporate Governance • According to Anthony Jay, the theories of government (using of concepts such as accountability, authority, power, consent, responsibility, policy-making and administration) offer a way of understanding fully the behavior of large organizations. • Existence of a particular form of government is no guarantee of human happiness. People in positions of power and influence, within any system, needed to behave in ways which produced happiness, and this behavior was shaped by their intentions which were in turn shaped by their values and beliefs. • Some procedures are more likely to produce ethical behavior than others. However, mere existence of formal procedures will not of themselves produce ethical behavior

13. Issues of Corporate Governance - some concerns • Corporate governance has been defined by Cannon (1992) as “the sum of those activities which make up the internal regulation of the business in compliance with the obligations placed on the firm by legislation, ownership and control”. It incorporates the trusteeship of assets, their management and their deployment. This approach is based on the pursuit of the self interest of the owners and does not auger well for the development of an ethical organization(enhanced performance for higher returns – being ethical could be incidental) • The second concern is the concern with the excessive pay of the very senior executives. The relationship between company and executive pay has appeared to have broken down (great differences between the pay of the middle and senior level executives)

14. Issues of Corporate Governance - some more concerns • The companies are run on the basis of the guidelines provided by the various regulatory authorities which provide for a system of checks and balances (transparency, delegation, multi-polar authority) within the structure of the company with a view to assist the directors in fulfilling their duties and in conformity and in accordance with the perceived business virtues. Judgments about undesirable business practices are usually based on a notion of business virtues. • Clearly, perceptions of virtuous behavior differ over time and place. Equally clearly, perceptions that some forms of business behavior are unacceptable are based on a model or theory which indicates which is acceptable. These standards are what is seen as business virtues and may vary from countries to countries and business to business.

15. How to integrate Moral Excellence andEthical values in Organizational Culture • There is need to look for ethical issues or situations which raise ethical questions • Rational principles are applied to produce ethical strategies and procedures • Need to coordinate the the ethical strategies and procedures with other demands, interests and constraints • Implementation of the agreed ethical strategies and procedures. These produce actions or good deeds and involve integration within everyday way of doing things in the organization However, such an approach could be dangerous to individual moral autonomy if it takes place within a corporate culture which is too strong or prescriptive. Excellent organizations are driven by few key values and give space to individuals’ initiatives.

16. Kotter and Heskett’s Two Levels of Culture in an Organization Shared Values Important concerns are the shared goals that tend to shape group behavior, and often persists over time even with changes in group members Examples: Managers care about customers; executives like long term debts Harder to change Invisible Group Behavior Norms Common or pervasive ways of acting that are found in a group and that persists as the group members tend to behave in ways that teach these practices to the new members, rewarding those fit in and sanctioning those do not. Examples: The employees are quick to respond to requests from customers; participatory decision making procedure Easier to change Visible

17. Impact of Ethical Culture on Organization’s Future Kotter–Heskett Study – key issues of CG The results indicate that the culture has a strong and increasing impact on the performance of the organization. It had the following main conclusions: • Corporate culture can have a significant impact on a firm’s long term economic performance • Corporate culture will probably be an even more important factor in determining the success or failure of firms in the coming years • Corporate cultures that inhibit strong long-term financial performance are not rare; they develop easily even in firms that are full of reasonable people (peerless chit funds) • Although tough to change, corporate culture can be made performance enhancing • Some corporate culture are good at adapting changes and preserving the performance of the organization, while others are not.

18. Ethical Implementation Business values and principles have no meaning unless they are put into effect. Implementation processes and approaches are absolutely critical • Get real: To be effective, ethical management must be concerned with how real people behave at work. (fire-fighter) • Ethics before profit: Most of the companies are now embedding responsibility for ethics into business processes, so that decisions all around are taken with ethics in mind. (use of poly bags) • Linking ethics with behavior: Should ensure established ethics programs as a way of minimizing the risk of ethical misconduct or wrongdoing amongst the employees. Most companies now favor a value based approach

19. Ethical Issues in Strategic Management • Strategic management is the locus for the most far-reaching decisions that any organization makes. Hence in this sphere, ethics has most decisive role to play. Since strategic decisions have a major integrative and directive role for other functions, ethical compliance at this level will substantially impact the levels at other levels. Strategy tackles two major issues: Ends: What is the real purpose of this organization? (what is the scope and where do we want to go) Means: How are we going there? (What ethics and values will guide the process of change? What limits will be put on the means justifying the ends?)

20. Ethical Issues in HRM Increasingly, HRM professionals are becoming involved in more ethical issues. Some of the most serious issues involve differences in the way people are treated based on favoritism or relationship to top management. It is common for managers to encounter circumstances or situations in which various values, principles, rules and interests appear to conflict

21. Organizational Multiculturalism In the olden days, the organizations were generally monolithic. However, currently there are many different cultural backgrounds and factors that are important in organizations and that people from different backgrounds can coexist and flourish in the organization. Usually it refers to cultural factors such as race, ethnicity, gender, physical ability, age and sexual orientation and poses major challenges to corporate governance

22. Spheres of activity for managing cultural diversity – challenges b4 CG Organizational culture Valuing differences Prevailing value system Cultural inclusion HR management system Bias free in recruitment, Training, appraisal, promotion, compensation Mindsets about diversity Problem or opportunity Resistance or support Challenges met or avoided Management of Cultural diversity Higher career involvement of Women Dual career, sexual harassment Work family conflict Cultural differences Promoting cross cultural Education Opportunities in diversity Heterogeneity in race/ Ethnicity / nationality Effects in cohesiveness, bonding, Stereotyping, prejudice Education problems Improve schools Educate to value differences

23. Ethical Performance of Indian Corporations • Corporate governance seems to have favorably impacted only a handful of corporations whose leaders imbued with its lofty ideals have taken to such heights, while others have done nothing but cosmetic changes in their governance. In the beginning of 2004, as a part of the World Bank and IMF joint venture, a country wide assessment of India’s corporate governance was done. Some of the recommendations are: • Need for sanction and enforcement • Need for clear demarcation of controls • Lack of professionalism of directors • Role of institutional investors • Boards exhibit poor professionalism • Independent directors not so independent

24. Weaknesses of the Indian System of CG • Lack of Whistle Blower policy • Unlisted Investment Companies • Accounting Gimmicks • Poor shareholder participation • Obliging auditors • Other Problems: A soft state, lethargic and slow moving judicial system,a value system that is indifferent to moral turpitudes, an inefficient market regulator and poor enforcement of rules and regulations have all combined to ensure that though the ideal of corporate governance is kept at high pedestal, it is but occasionally put into practice

25. Conclusion Although ultimately ethics drives strategy, business still suffers from a low status, being viewed only as a quasi profession. With the traditional professions the driving ethic is easy to identify. For law, it is justice; for medicine, it is health ( and the Hippocratic oath); for priesthood it is spirituality. What is it for business?Most ethical problems faced by the managers are not the headline hitting issues that come out in the press; bulk of the managers do not face such dramatic issues. However, they continually face small, everyday matters which have ethical dimensions for which they have to look within. No one single ethical concept springs easily to mind. Suggestions such as sustainable development will remain sidetracked until there are legal changes, such as annual reporting of results (actual). If the wages were on the profit side (contribution to the economy), and businesses’ free use of the ‘commons’ was properly costed in, then the ethics that drive business strategy would be taken more seriously

26. Bibliography • The Ethical Organization by Alan Kitson and Robert Campbell • Ethics and the Conduct of Business by John R Boatright • Business Ethics – An Indian perspective By A.C.Fernando • Ethical Management by Satish Modh