Corporate Governance and Ethics - Case Study Example

? Corporate Governance and Ethics Executive Summary This report primarily involves the analysis of business ethics, corporate governance and moral code of conduct followed within an organization. The study is based on the cases of the company which highlights different issues which came into limelight in different time period. It provided the researcher with enough evidence on ethical lapses present within an organization particularly in the pharmaceutical sector. The report has been divided into two tasks. Task 1 is based on the case study, “GlaxoSmithKline experiences high cost of product quality issues” which identifies the ethical lapses that may have affected the product quality at GSK. In addition to that it also explains the causes of failure of the leaders of GSK in preventing ethical issues related to integrity failures. Task 2 explains bribery as an ethical issue particularly for companies undertaking international business. It also investigates the ethical and moral issues of bribery and the difficulties that cultural relativism introduces to business ethics. And finally task 2 comments on the steps that GSK should take in order to prevent future ethical dilemmas and reputational damage from perceived failures of ethical and moral conduct. Table of Contents Table of Contents 3 Introduction 4 PART A 4 PART B 7 Conclusion 10 Works Cited 11 Name of the Student Name of the Professor Course Number Date Introduction “The primary and only responsibility of business is to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game” - Milton Friedman (37) Ethics is a critical factor in the field of corporate governance and henceforth to the performance of a corporation. It can be associated in two different ways via ethical values and assumptions that support a specified regime or code of corporate governance. The second theory can be associated with the way corporations are expected to manage their ethical performances. The former association can be termed as ethics of governance whereas the latter can be termed as governance of ethics (Rossouw 5-9). Effective governance aligns a company’s strategy for generating profit with the social and environmental concerns. However, in today’s competitive market, this task is highly challenging (Appelbaum, Vigneault, Walker and Shapiro 526-539). The following section in this report will explain the theories of ethics and corporate governance from the perspective of a pharmaceutical company. PART A 1. It is evident from the case study that there have been quite a few ethical lapses as far as the corporate governance of GlaxoSmithKline is concerned. In the last decade, cases of ethical lapses have been witnessed in pharmaceutical companies. The company was accused of lapses in bribery, fraud and corruption, product safety, false marketing and advertising. Pharmaceutical companies were alleged to have breached the regulatory standards by selling and marketing products which did not meet the criteria specified by the board (Institute of Business Ethics, “Business Ethics Briefing”). As explained above, GlaxoSmithKline had similar ethical lapses. After studying the report carefully it can be suggested that the company fraudulently managed study designs in order to obtain favourable results. In addition to that, they have concealed results which were unflattering and were against the company’s favour. The company also failed to update people with the negative results thereby producing drugs which were detrimental to the health of the patients. GlaxoSmithKline was accused of hiding information related to the side effects of certain drugs produced by them. Promoting the usage of ‘off – label’ drugs has also been witnessed which led to misuse of medicines. Another ethical lapse noticed in the strategies adopted by the company is the use of promotions such as medical education programs, advisory boards, speaker events and grants. They were accused of using grants to promote drug product illegally. GSK were also alleged of violating federal fraud and abuse laws such as the Federal false claims act which is related to wholesale pricing. There were quality control issues as well which led to other ethical lapses within the organization. GSK faced a lawsuit regarding quality control when it allegedly sold more than 20 drugs which had potential safety issues manufactured at Cidra. In addition to that, a former quality control manager of their own company also filed a lawsuit against the firm accusing them of modifying the contents of certain drugs which resulted in some of them being very strong and the others being very weak. The company was also accused of using bacteria – tainted water and contaminating raw materials. These concerns were raised to the superiors by the quality control officer, but no steps were taken. This also highlights the ethical lapses present in the corporate governance of GSK. Bribes were offered in return for promises to prescribe drugs manufactured by the company. Researchers, whose results came as an obstruction to the company’s profit making strategies, were intimidated. This is evident from the fact that they fired their own quality control officer who tried to raise the quality control issues concerning the organization. These ethical lapses were witnessed because the company had an underlying objective of accruing huge profits but in the promise they compromised with the quality of products manufactured thereby putting human life in jeopardy. The case study highlights the clear ethical issue of disjunction between the growing health needs of public and profitability of the pharmaceutical companies. The above ethical lapses suggest that there is a lack of transparency between the company and the public in general which is the most crucial factor driving the success of a company (Kassirer 1-2). 2. An organization’s effectiveness depends largely on the kind of leadership employed. Terms like profit, productivity, market share, competitiveness can be associated with the phrase organizational effectiveness. A company’s performance is reflected in the profit that it generates, the quality of services and products that it provides and manufactures and the way it beats the competition in the market. However, it can be argued that not only words like profit, productivity, market share, competitiveness defines an organization’s effectiveness, but it depends to a huge extent on the company’s values and ethics, culture, goals and its governance framework (Tatum and Eberlin 303-310). In the last decade it has been noticed that, company’s can virtually go to any extent to achieve organizational effectiveness in terms of profit, productivity, market share and competitiveness thereby compromising on their values, ethics and goals. This is exactly what happened with the management of GSK. The question that arises from the report is can a company or rather does a company generate profit at the expense of its employees and customers? Various causes can be attributed to the failure of GSK’s leadership in preventing ethical issues related to integrity failures. One of them is an ineffective corporate social responsibility present within the work ethics of the management officials within the organization. Many researchers such as Rossouw (5-9) have pointed out the fact that, in recent times corporations have focused a lot on allocating resources into operations which are mostly associated with corporate social responsibility. Corporate social responsibility represents a set of ideas, beliefs and perspectives which when put into practice will yield favourable attitudes from stakeholders and the society in general thereby improving the corporation’s image as a whole. There is a strong interconnection between corporate social responsibility and the corporate ethics in an organization. This interconnection has largely been absent in the work culture of GSK as is evident from the study. Corporate social responsibility not only focuses on the corporate ethics of an organization but also focuses largely on aligning a business decision making process with social and environmental concerns which benefits not only the shareholders and the stakeholders but also ensures welfare of the society and environment in general (Jenkin 21-36). The leaders of GSK have failed to uphold the corporate social responsibility which is expected to be maintained by an organization of their stature. This is evident from the illegal and immoral practices conducted by the organization, where they have failed to maintain a transparency within the organization as well as with the external stakeholders. They have failed to contribute towards sustainable development, societal conditions as well as stakeholder interests which even include their own employees. Similar explanations have been provided by research scholars such as Laudal (234-256) and Jenkin (241-56). This can be attributed to the fact that the company’s underlying objective was to accrue benefits by any means and beat any upcoming competition in the market thereby compromising on the product and services quality. Corporate social responsibility can be explained at best from four dimensions: The economic responsibility to generate profits for the company. The legal responsibility to abide by local, state, federal and international laws. The moral and ethical responsibility to contribute towards other social responsibilities and expectations which are not specified under the law. This includes conducting a fair and just practice, respecting the moral rights of individuals and avoiding any harm to the society. The responsibility to fulfil other behaviours and responsibilities as is expected from the society (Tuan 547-560). GSK leadership failed to maintain these responsibilities. One example that can be cited from the case study is the fact that they fired their own quality control officer who raised product safety and quality concerns to her superior. This is where they failed to respect the moral rights of individuals. There was a flaw in the business ethics of the leaders employed ion GSK. Ethics relates to the interconnection between a company’s goals and the human needs. In case of GSK, their management were largely focused on generating good business for the company and emphasizing less on customer needs and satisfaction. An ineffective corporate governance framework can also be attributed to the failure of GSK’s leaders in preventing ethical lapses present within the organization. This is evident from the fact that, regardless of the companies, ethics, compliance and governance, severe misconduct has occurred. Medicines detrimental to human health were manufactured, marketed and sold with very little or no transparency. In addition to that, a conflict of interest among the leaders has also been noticed from the case study which might have affected the reputation of the company as a whole. GSK’s leaders were driven by single vested interest which resulted in the promotion of off label drugs. Moreover, they funded and conducted research on areas which were of relevant to them and they knew the yields from this research will satisfy their interests (Bell, H. Friedman and L. Friedman 4-8). The reasons for GSK’s downfall can also be explained by a faulty person – organization fit which can be because of the fact that they hired likeminded people (Appelbaum Vigneault Walker and Shapiro 526-539). In such context, there were no individuals who could contradict when illegal and immoral practices were being conducted. According to the author, a transparent leadership promotes unity and harmony within the organization. Loyalty, trust and integrity are terms which define a highly controlled and regimented work culture. GSK’s leadership failed to employ such moral terms into its business code of conduct. The alignment between employee ethics and corporate ethic is greatly influenced by a good quality senior leadership but this did not happen in case of GSK. One of the many reasons for their downfall was due to ineffective communication between their leaders and the employees. A company’s codes of ethics/conduct serve as a critical guidance tool for its employees and managers. However, having an effective code does not ensure that all the codes are being followed distinctively by the officials. These situations can be best observed in organizations where employer expectations are not in alignment with the code and similarly when the company’s ethical objectives are not synchronized with the actual behaviour. In case of GSK, there was no firm framework to ensure that all codes are being followed properly. They did not emphasize much on the ethical safeguards which serves as a critical factor and is to be regarded as a framework of effective decision making alongside ensuring a standard quality, profitability, performance and other strategic, social and environmental considerations. PART B 1. With the trend of globalization in the last decade, the global business floodgates have opened thereby leading to the inception of many new international businesses as well as extension of internal business departments in existing companies. This led to an unprecedented level of growth in revenues in the trade accounts of many nations. With this growth in transaction and revenue stream one constant force that has always been associated is the “seemingly unstoppable force of unethical behaviour in transnational business transactions” (J. Scott, Gilliard and R. Scott 2). It has been noticed that to beat a competition in a foreign market, companies restore to very different ethical standards than what they are used to follow. This convergence leads to a very common practice which has been witnessed among all nations and their respective organizations: which is the immoral practice of bribery. It is a common practice among many multinational companies which they do in order to stay ahead of their peers. However, it is unlawful for them to indulge in such practices. This has been noticed specifically in developing countries where different forms of corruption are considered an effective tool in order to do business abroad. The following quote explains the nature of unlawful practice that companies from developing countries participated in. “By greasing the right palms, so the thinking went, firms could achieve a concrete competitive advantage over their chief international rivals”(J. Scott, Gilliard and R. Scott 2). According to the author, Multinational companies adopted this strategy in order to gain a substantial level of offshore market share. They were even supported by their respective government to utilize this practice as a means to obtain foreign business as it would be beneficial for the country’s economy as a whole. Some companies were encouraged by their government to use bribery as a business development tool to such extent that they were even allowed to show the amount of bribes as business expense in their financial statements and thus they would get a rebate from corporate expenses. In the context of international business, the act of bribery involves illicit payments made by companies, belonging to a particular country, to public officials from other countries with a sole objective of accruing benefits. Bribery is defined as “the offering, giving, receiving, or soliciting of anything of value to influence action of an official discharging legal or public duty" (J. Scott, Gilliard and R. Scott 2). A similar definition has also been explained by OECD Observer (1-8). According to Sanyal and Guvenli (287-300), the issue of bribery and corruption is being drawn at the forefront by the national government, nongovernmental organizations. Inter governmental bodies, chamber of commerce, business executives and the society as a whole. The ethical issues of bribery stems from the fact that it imposes a certain amount of cost on doing business, it disrupts competition, underestimates the efficiency of the market and its predictability, misallocates resources, encourages unethical, immoral and illegal conduct, affects the public’s trust towards the law, disregards development projects and restricts economic growth. Bribery proves to be more costly to the economy of the country where it’s predominant rather than the country which is committing the act. However, the author also states that, it is a potential source of funding which is available to domestic governments in addition to foreign direct investment. As far as the internal market is concerned, “bribery involves a business firm from country ‘A’ offering financial or non-financial inducements to officials of country ‘B’ to obtain a commercial benefit” (Sanyal and Guvenli 287-300). According to the author, Bribery has two approaches: A. firms offering bribes B. individuals or entities receiving bribes The increase in the supply and demand for bribes is the reason for the heavy predominance of bribery in today’s world. However, this force has become seemingly unstoppable and needs to be curbed at the earliest. That is why many countries have taken initiatives to curb and eliminate the system of corruption and bribery. This can only be done once the reason and the source behind this act is identified. Similar situation has been noticed during the GlaxoSmithKline scandal that took place in China. It has been suggested that the GSK scandal will increase the compliance costs and henceforth will significantly reduce the revenue stream in China. The immoral practices conducted by GSK itself proved to be a critical factor in the failure of the Chinese health care reforms. This was one area where the Chinese Government significantly underfunded and overlooked in the light of making an economic modernization. This depleted the reforms made by the Government in the health sector and a host of bad practices came into being in the Chinese economy which was the starting point of the GSK scandal. The bad practices included extensive behind-the-door payments to doctors made by pharmaceutical, medical device and diagnostic firms to lure the doctors into prescribing their products. It also gave rise to an illicit payment system termed as the "red envelope" or hongbao in Chinese where payments were made by families directly to doctors in order to be treated on priority basis. This practice weakened the Chinese health care reforms and was the trigger point of the GSK scandal. In the onset of the GSK scandal, it will eventually be a letdown for the Chinese health care reforms; however, this event was necessary as it will prompt the government to take proper initiatives to ensure the stability of the Chinese health care reforms which serves as a medical insurance provider to most of the Chinese population (Shobert, “Why Glaxo’s China scandal needed to happen”). The best ways for China to curb and eradicate corruption and bribery is to bring about a change in the way patients, doctors and hospitals interact. To do this, the government has to shed light on the corrupt behind the-office dealings that have become a common practice in their system (Holland, “Nothing uniquely Chinese about Glaxo bribery case”). Cultural relativism is an idea which states that “right” and “wrong” could be explained by consensus. This view could vary from social group to social group, culture to culture, nation to nation (Lamond 1122-1131). This theory explains that the perception about what is right and what is wrong depends or rather varies from person to person. From a business’s point of view, it can be said that cultural relativism can have a significant impact on business ethics. It can be illustrated in this way that in an organization there would be a concentration of employees who are not like minded. One may perceive an action as just and fair while the other might find it to be against the ethics of the business. This will result in a conflict which might arise between the employees and trigger a chain of events detrimental to the performance of the business as a whole. The author has explained that a person passes through six stages of moral development which are: obedience, punishment orientation, self-interest orientation, conformity, authority orientation, social contract, universal ethical principles. This explains that a person or a group of people who will or might have disagreements in any of the stages of cultural relativism could pose difficulties for business ethics. 2. After doing a careful study of the case of GlaxoSmithKline, it can be said that the company should take rigid measures in order to ensure the prevention of future ethical dilemmas and reputational damage from perceived failures of ethical and moral conduct. In order to do that, GSK will have to introduce additional control measures that will ensure optimal quality of its products and manufacturing process. The company must lay down strict rules against the practice of bribery and formulate strict code of conduct and business ethics. To curb and eradicate bribery, the management will have to identify both dimensions of bribery. The determinants of bribery have to be addressed in such a way that proper control measures can be put into effect. A robust framework of corporate governance must be introduced in the corporate ethics and compliance department in order to prevent serious misconducts that had occurred previously. The company will have to go through a major revision of its oversight mechanism, compliance procedures and code of conduct in order to identify the loopholes and fix them accordingly. In addition to that, GSK will have to maintain an optimum level of transparency within the organization as well as with the civic society in general. They have to reveal all the information related to a product that they are selling including the side effects if any as their products are detrimental to the health and safety of the customers. GSK has to respect the moral rights of every individual working for their organization thereby hiring responsible officials who would cater to pay attention to the needs and concerns raised by the subordinate employees. They have to abide by the rules, laws and standards specified by the federal regulatory board in order to ensure that their operations are being carried out well within the limits specified. Following the measures explained above might help GSK to implement all its stated values into operations thereby restoring public’s faith towards the organization. Conclusion Business ethics, corporate governance and a moral code of conduct are critical factors contributing towards the performance of an organization. Companies will have to make sure that a strict moral code of conduct is being followed and that all the business operations within the organization are being carried out ethically. In order to do that, a robust corporate governance framework should be formulated in order to monitor that all operations are being carried out ethically and that the code of conduct is being followed strictly. They will have to lay down strict rules and penalties against the breach of conduct. Motivated officials will have to be given the responsibility of holding key positions within the organization in order to reduce any elements which may give rise to conflict of interest. An effective communication system should be established within the organization which will cater to identify the needs and concerns of every individual directly or indirectly related to the organization and will make sure that their needs are met and concerns are being dealt with. This will ensure that events which transpired in GSK will always be at bay if proper measures are followed and optimum transparency is maintained within an organization. Works Cited Appelbaum, Steven H, Louis Vigneault, Edward Walker, and Barbara T. Shapiro. Good corporate governance and the strategic integration of meso ethics. Social responsibility journal 5.4 (2009): 525-539. Print. Bell, Robert I., Hershey H. Friedman, and Linda W Friedman. Conflict of Interest: The Common Thread Underlying Ethical Lapses. Electronic Journal of Business Ethics and Organization Studies (EJBO) 10.1 (2005): 4-8. Print. Friedman, Milton. The Social Responsibility of Business is to Increase Its Profits. New York Times Magazine 13 September (1970): 32–37. Print. Holland, Tom. “Nothing uniquely Chinese about Glaxo bribery case.” SCMP, South China Morning Post Publishers Ltd, August 1, 2013. Web. 25 Sep. 2013. Institute of Business Ethics. “Business Ethics Briefing.” IBE, IBE 24 (2012): 1-4. 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