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Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University : Aside from the requirement that organisations should run their operations in the most economical, efficient and effective manner possible to increase performance, today, there is an increasing insistence on the need for organisations to be ethical as well. Within the business framework, there is a clear relationship between corporate activities and other stakeholders within and outside the organisation, as indicated in the thesis’s conceptual framework .

In corporate relationships, it seems reasonable to expect that operating organisations should serve different stakeholders in an ethical manner. A corporation should engage with its internal and external stakeholders to determine its current ethical reputation amongst the stakeholders, as well as what their ethical expectations are of that organisation (Rossouw, 2010c:165). Thus, under the corporate governance requirements, a corporation should account for its ethical performance and duly report it to relevant stakeholders.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

In the wake of various corporate scandals and amid increasing concern about environmental sustainability issues, there has been a great deal of debate regarding the applicability of business ethics in the modern business age. The discussion on this topic was recently highlighted with the failures of giant corporations such as Enron, WorldCom and Parmalat, largely due to corporate governance issues (West, 2009:12). Recently, there has also been a corporate environmental scandal involving BP (British Petroleum), when oil spilled into the Atlantic Ocean in the Gulf of Mexico. As many as 5 000 barrels of oil a day spilled into the ocean waters, threatening the US and Mexican coastal areas and causing environmental alarm (BBC News, 2010a).

The state of Florida declared the incident a state of emergency. As a response to the oil spill, the US administration banned oil drilling in new areas on the US coast while the cause of the oil spill off the Louisiana coast was being investigated. Following such experiences, many parties interested in business activities have begun looking more closely at how corporations are supposed to behave in their operations and have begun to incorporate these considerations in their frameworks. This has led to a renewed emphasis on business ethics considerations. Ethical issues are usually debated in terms of corporate governance, environmental degradation and global warming, corporate social responsibility, and corporate conscienceness (Kleine & Von Hauff, 2009; Nakano, 2007:163). 

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

BUSINESS ETHICS

All organisations are engaged in some economic activity where they get inputs in the form of resources from the environment to produce goods and services using internal business processes. Organisations later exchange the final products with the customer and consumers that come from outside the business boundaries. In business transactions, it is expected that corporations act in an ethical manner in their interactions with different stakeholders.

The economic transactions with stakeholders should achieve a common good for the organisation, as well as for the other parties. Business ethics entails the study of the ethical dimensions of organisational economic activity on the systematic, organisational and intra-organisational levels (Rossouw, 2010b:20-22). Business ethics focuses on what is good and right in a particular economic activity, where an organisation engages in a moral analysis and assessment of such economic activities and practices.

Ethics refers to a set of rules that define right and wrong conduct and that help individuals distinguish between fact and belief, decide how such issues are defined and what moral principles apply to the situation (Hellriegel, Slocum & Woodman, 1992:146). Moral principles describe the impartial general rules of behaviour that are of great importance to a society, along with the values the society represents. Moral principles are fundamental to ethics. Ethical behaviour would be characterised by unselfish attributes that balance what is good for an organisation with what is good for the stakeholders as well.

Thus, business ethics would embrace all theoretical perspectives regarding the ethicality of competing economic and social systems. The study of business ethics is evolving, just as conceptions concerning the role and status of organisations are also changing over time. Business ethics as a field of study deploys moral analysis and assessments of economic practices and activities at the economic system (macro-economic) level, the organisational (meso-economic) level, and the intra-organisational (micro-economic) level (Rossouw, 2010b:16).

The first level is the macro-economic level, where business transactions occur within national or international frameworks (Rossouw, 2010b:20). Other business transactions occur at the meso-economic level, where an organisation interacts with other stakeholders, including society. Within the framework of societal interactions, business activities have an impact on different stakeholders, which includes suppliers, customers, the community and the natural environment. Finally, business ethics can also be applied at a micro-economic level, where the focus is on the moral dimensions of business practices, policies, behaviour and decisions executed within an organisation. Internal ethical dimensions include issues regarding the employees’ welfare in terms of their work environment, health and protection, and remuneration.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

GENERAL THEORIES OF ETHICS

Several theories have been developed to cover issues related to business ethics. Generally, three main philosophies of ethics have dominated discussions on ethics (Rossouw, 2010d:57-69). These three theories are Aristotle’s virtue theory, Kant’s deontological theory, and John Stuart Mill’s utilitarian theory.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Aristotle’s virtue theory

Aristotle’s virtue theory emphasises that what matters in ethical behaviour is the integrity of an individual’s character (Rossouw, 2010:d57-62). The theory is based on the premise that different goals can only be achieved if people love themselves first. It is argued that self-love is a pre-condition for reaching one’s full human potential of having a sense of well-being and joy. Thus, morality depends on the moral character of an individual.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Kant’s deontological theory

Kant’s deontological theory on ethics propagates that there are objective ethical standards of behaviour that everyone should respect (Rossouw, 2010d:62-65). Our moral actions in certain areas cannot be based on an individual’s practical experiences or natural instincts and needs, but is rather based on what general society expects. For example, people who are involved in corrupt practices cannot possibly offer moral guidance. Hence, the ethical focus should not be on the individual’s natural needs and inclinations, or a person’s present and past experiences. Instead, it should be based on the standard for good behaviour, which is realised through pure rational reflection. Obeying objective standards of behaviour from a sense of duty would be the hallmark of moral behaviour. The development of ethical guidelines and codes of ethics are premised on this doctrine.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Mill’s utilitarian theory

John Stuart Mill’s utilitarian theory focuses on the quality of actions as propagated by the deontological theory (Rossouw, 2010d:65-69). The difference between the two theories is that the utilitarian theory focuses on the practical consequences of an action in order to determine whether that action was right or wrong. An action is considered good when it results in the happiness of the majority of those affected by that specific action. The utilitarian theory posits that individuals should strive, not for their own happiness alone, but also for the happiness of society, as human beings are by nature social beings (Rossouw, 2010d:66-67). The theory recognises that external support is given to individuals, as everyone needs the support of others throughout life. One is likely to face a threat of rejection or even expulsion from the society in the absence of such external support. Hence, the utilitarian theory propagates that there should be natural inclination to sympathise with others through the manifestation of a moral conscience that prevents one from doing harm to others.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

APPLICATIONS OF BUSINESS ETHICS

The discussion of the business ethics dimensions are varied, depending largely on social and economic elements surrounding the organisations concerned. The view that prevails depends on the roles that organisations are supposed to play internally and in society in general. In macro-ethics, the central question is the fairness of the organisational choice of economic system and also ethical merit of the key elements of such a system (Du Plessis, 2010:114-127). Essentially, these key elements comprise the profit motive, private property, the limited liability of corporations, competition, and free markets.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

SHAREHOLDER-CENTRED CORPORATE GOVERNANCE

Proponents of the mainstream shareholder-centred approach to corporate governance base their argument on the private property rights paradigm (Stovall, Neill & Perkins, 2004:222), which implies that, as risk-taking owners and providers of financial capital, shareholders tend to prefer to promote their own interests over those of other stakeholders. It is contended that as primary owners of business, shareholders should hold the management team accountable to the primary goal of maximising shareholder wealth.

Thus shareholder-centred corporate governance is premised on the view that corporations exist purely to maximise profits, within the legal limits (Friedman, 1993). Friedman (1993) argues that corporations have no moral obligation towards any stakeholder, apart from making as much profit as possible for the shareholders. Thus, corporations are governed primarily to benefit the interests of shareholders, but other stakeholders would automatically also benefit through the trickle-down effects of the “invisible hand”. 

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

Arguments for a shareholder-centred approach

The fact that other stakeholders of the corporation are not considered the primary beneficiaries of a corporation should not lead to an overhasty judgement that shareholder-oriented corporate governance is premised on a very thin and exclusive ethic. Guided by Adam Smith’s “invisible hand” argument, advocates of shareholder-centred corporate governance regimes posit that the primary focus on shareholder interests streamlines corporate decision-making and improves the efficiency of companies, which ultimately directly or indirectly benefits all other stakeholders of the corporation, including society (Nakano, 2007:164).

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

STAKEHOLDER-CENTRED CORPORATE GOVERNANCE

The stakeholder-centred approach is founded on the premise that corporations operate through complex relationships and networks with many players, called stakeholders (refer to Figure 1, on p. 7 and Figure 3, on p. 29). The stakeholdercentred approach attempts to ascertain the interested groups that have different stakes in the affairs of a company and therefore need management’s attention (Prozesky, 2010:265). Apart from shareholders, there are other stakeholders, such as employees, suppliers, customers and local communities. These stakeholders have legitimate rights in the running of the business activities (Rossouw, 2010e:136). Under the stakeholder-centred approach, it is argued that stakeholder groups should be granted legal protection as well. For instance, employees have legally protected rights to bargain collectively.

Unit II Conceptual Framework Of Corporate Governance Ethics and Social Responsibility of Business MCOM sem 4 Delhi University

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