Business Ethics Dynamics in a Modern Organization - Essay Example

? Dynamics of Business Ethics in a Modern Organization Table of Contents Table of Contents 2 Introduction 3 Business Ethics- Theoretical View 3 Ethical Structure 5 Ethical Process 5 Ethical Performance 6 Business Ethics in HSBC 6 HSBC-Brief Overview 7 Environmental Analysis 7 Environment Protection 11 Challenges for HSBC 11 Stakeholder Engagement 12 Sustainable Finance 12 Recommendations 13 Conclusion 13 Reference 15 Introduction The concept of business ethics is not a new one in the block because ancient literature provides the existence of business ethics among traders for almost 1000 years ago. For example, according to the limited knowledge of the researcher, Magna Carta of 1215 was the first legal reference for ethics in UK (Holme, 2008). However, magnitude of importance for ethical perspective of business operation has been increased manifold in recent years after the financial scams by corporate such as Enron, Lehman Brothers, Worldcom, Nortel and many others came to the light. In such context, it is crucial for management to realize the importance of business ethics in maintaining the sustainability of business operation. Hence the study has decided to look back at importance business ethics in context to modern organizational settings. The study has selected HSBC, which is a renowned bank, for understanding the importance of business ethics in the organization. Analyzing the impact of business ethics on internal and external stakeholders of HSBC will also be the part of the analysis. In the last section the study will provide recommendation to the bank for improving their current business ethics approach. Business Ethics- Theoretical View According to research scholars such as Geraint (2003), Moberg (2003) and Kidd (2003), business ethics play significant role in those cases where the organization is suffering from asymmetric turbulence in terms of business operation, controlling activities of agents or managers, fraudulent activities to achieve undue advantage and disregard of interest of shareholders and stakeholders. From academic viewpoint, business ethics can be subdivided into three parts such as, Descriptive Business Ethics- moral values of the business owner to run the business in transparent manner without hurting the interest of shareholders and stakeholders and Normative Business Ethics- supporting activities required to control and discourage unfair business practices by organizations (Brenkert, 2004). However, very few research scholars have actually tried to create demarcation between organizational structures driven business ethics from process driven business ethics. In this paper the study will try to identify the role of business ethics in context to organizational structure, organizational process and organizational performances. The proposed model can be viewed in the following manner. (Source: Svensson and Wood, 2011) There is no doubt that the concept of business ethics is multifaceted and number of research topics can synchronized in implicit or explicit manner with the ethical perspective of business operation. For example, maintaining business ethics in terms offering high value to external stakeholders such as customers (Svensson, 2009), performing corporate social responsibility (CSR) in order to become responsible corporate citizen who is ready to put serious effort to improve quality of life of unprivileged section of the society (Young and Kielkiewicz-Young, 2001), improve the sustainability by forcing the supply chain partners to follow human rights while treating with workers (Lippman,1999), following green purchasing policy to ensure environmental sustainability (Zsidisin and Siferd, 2001), sustainable supply chain management (Svensson, 2007), following corporate governance codes in order to ensure better governance and decrease the scope for the organization to commit financial fraud which can not only hurt the interest of shareholders but also affect the interest of stakeholders (La Porta et al, 1997 & Shleifer and Vishny, 1997). Ethical Structure Factors like ethical audits, code of ethics and ethics ombudsman etc come under the umbrella of ethical structure. Intention of creating ethical structure is to support the ethical concern of the organizations. Absence of ethical structures creates the scope for business officials to move away by committing unethical business practices in order to persuade personal interests. This support system helps to create an environment of ethics, trust and responsibility among employees across tactical, operational and strategic level. According to the research work of Le Jeune and Webley (1998) and Singh (2006), each organization creates their own set of code of ethics or follows industry best practices in order to ensure ethical perspective for operational activities such as fair treatment with the value chain partner, strict rules against in-disciplinary actions, restriction for using slangs within the office premises etc. McKendall et al (2002) have found that organizations perform in better manner while following ethical codes. In such context, Crotts et al (2005) and Garcia-Marza (2005) have suggested that organizations need to conduct ethical audit in order to in order to develop trust, communication and transparency among organizational members. Role of ethical audit can be understood by the following phrase, “Within this integrated system of ethics management in the organization, ethics auditing can respond to the basic objective of ethics management, which is simply to integrate economic benefit with social and environmental benefit” (Garcia-Marza, 2005, p. 211). According to Crotts et al (2005), organizations need to establish ethical committee or place ethics ombudsman who will take care of all the operational level ethical concern of the organization. Wood (2002) has suggested that shareholders, stakeholders or individual organizational members should act as whistle blower in order to report any kind of ethical violation or breaches by the organization instead of waiting for the system to detect the flaws in ethical system. Ethical Process Adhering to corporate governance codes of a particular country is the most important aspect of ethical process. There are various corporate governance codes such as Walker committee recommendation, combined codes, Cadbury recommendations Sarbanes–Oxley Act (SOX) which precisely state the ideal corporate governance structures for an organization in terms of various factors such as non-executive board of directors who will represent the interest of shareholders, audit committee who will detect the flaws or any fraudulent financial activity by the organization, remuneration committee who will decide the remuneration of directors etc (La Porta et al, 1997 & Shleifer and Vishny, 1997). However there are other facets such as ethical performance appraisal of employees who show integrity and honesty during their employment, providing training and education to staff to help them to perform daily operation in ethically efficient manner (Rampersad, 2003 & Trevino and Brown, 2004) which can help organizations to ensure sustainability of ethical performance. Thomas et al (2004) have stated that organizational leaders need to take steps in order to create strategic planning for ensuring successful implementation business ethics principals. Schwartz (2002) has pointed out that there should be penalty and enforcement of provisions which can take strict actions against individuals who violate the ethical principal of the organization. Ethical Performance Milton Friedman (1970, p. 37) has defined the responsibility of business in the following way, “.... use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud”. However, such stock market and shareholder driven definition of business responsibilities is needed adjustment in order to remain relevant in context to modern business environment. Heath and Norman (2004) and Joyner and Payne (2002) have stated that involving in CSR is no longer an voluntary option for organizations but it has become a strategic choice to ensure sustainability for business operation. Lovell (2002) has pointed out that organizational performance cannot be measure by profits only because earning profit is a natural outcome of business operations. Solomon and Martin (2004) have strongly argued that an organization can make profit even after following all the government norms such as taxation, legal protection to prevent monopoly, competition laws, environment protection laws etc, satisfying the need of internal stakeholders such as employees and external stakeholders such as customers, suppliers or performing CSR activities to improve the quality of social life and ensure environmental sustainability. In such background, the study will analyze the validity of theoretical argument regarding the importance of business ethics in context to a real world business entity in the next section. Business Ethics in HSBC The study will briefly describe the business matrix of HSBC in order to create a background for conducting ethical audit of different operational verticals of the global financial giant. HSBC-Brief Overview HSBC Holdings Plc is a renowned multinational banking and financial organization which is headquartered at Canary Wharf, London, United Kingdom. Although the company was established by Sir Thomas Sutherland during the year 1865 but official announcement for the establishment of the brand HSBC Holdings Plc came out during 1991. The company offers diverse product portfolio to customers such as investment banking services, global private banking, retail banking services and wealth management to customers. The banking giant also provides financial services like preferential banking services to high net worth customers (HN1), life insurance services, advisory services to business customers, financial advisors in merger and acquisition activities and fixed deposit schemes (HSBC, 2011). Intraday market capitalization of the company has been estimated as more than is $120 billion (Yahoo Finance, 2012). Environmental Analysis There is significant difference in ethical perspective of business operation for a product based company in contrast to a financial institution which extensively focuses on service delivery. Notable fact is that, HSBC is a service marketer which desperately needs involvement of external stakeholders such as customers. Two major external stakeholders for the company are customers and suppliers who directly engage in the service delivery process. Internal stakeholders of the company include employee, Board Committees, Senior Financial Officers and different sub committees under the corporate governance structure. In the conjunction of internal and external stakeholders, shareholders of the company play the key role to decide the object of the company. In this context, the study will try to understand the importance of finance model or principal- agent model in order to define the relationship between managers of HSBC and its shareholders. Jensen and Mechling (1976) have proposed the agency model by specifying shareholders as the principal and managers of the companies as the agent whose keep objective to protect the interest of principal. Keasey et al. (1997) and Eisenhardt (1989) have supported the objective of agency model by stating that stock market performance of a company is one of the key performance indicator hence managers should ensure the strong stock market performance of the company in order to serve the interest of shareholders. Hence, the London based financial giant has created efficient corporate governance codes which can direct the behaviour of agents and ensure the protection of interest of shareholders. HSBC has also play close attention to government norms, environmental policy while taking any business decisions hence local government, global financial institutions, environmental groups and media group can also be identified as indirect stakeholders of the company. Mendelow’s Power/ Interest Matrix can be used to locate the interest of stakeholders in the company. (Source: Account Director, 2010) According to above mentioned intersection of the Venn diagram (Interest Matrix), business and retail customers, PV capitalists are important stakeholders but their level interest to business operation of HSBC is relatively low in comparison to interest of private investors and hedge fund managers. The result is quite natural because majority customers feel satisfied if the company is offering him/her quality services and they do not want to know financial detail of business operation of HSBC. Particular section of shareholders and the board members of the company have the highest level of interest and power to direct the ethical perspective of the business operation. Careful analysis of the diagram reveals that although shareholders are one of the most important aspects of business performance but HSBC has large number of shareholders and these shareholders individually cannot direct the ethical perspective of business operation for HSBC. However, shareholders can play a significant role to direct the decision of board members regarding crucial business matter when acting in collective manner. HSBC is international banking leader hence international financial institutions, government of a particular country and Economic analysts pay close attention to the business operation of the company. Whereas, employees and mortgage advisors recruited by the company have the great interest in business operation of HSBC but they have very little power to direct the business operation of the company. In Mendelow’s Power matrix, competitors and ex-customers have emerged as the stakeholder group who have least amount of interest and power to direct business operation of HSBC. After identifying the internal and external stakeholders of HSBC, the study will try to shed light on actions taken by HSBC to plausible execution of business ethics and creating positive impact on stakeholders. Structural approach of HSBC to ensure highest possible execution of all the aspects of business ethics and corporate governance can be briefed in the following manner. Role of Board Committees Internal Ethical Control Operational Risk Management Employee Engagement There are number of committees such as Group Managing Directors, Audit committee, remuneration committee, non-executive directors and others which come under the umbrella of Board Committee. Separate responsibilities have assigned to each committee as par the corporate governance codes of a particular country. Conjoint effort of these committees ensures highest degree of ethical standard in the business operation of HSBC. Executive directors of the company take care of the internal control measures in order to prevent the bank from indulging any kind of fraudulent activities or disposing assets in unauthorized manner. Directors of the company take help of audit committee in order to ensure transparency in the published financial statement and fair accounting practices. HSBC uses periodic review technique in order to decrease its external debts, increase enterprise value and many others. Such rigorous steps have been taken by the financial giant in order to create a positive image among its external stakeholders such as International authority, local governments, stockbrokers and financial analysts. HSBC organizes knowledge session, employee-employer meet, seminars and many other techniques to communicate the business objective of the company to employees. Within the premise of the organization, the company takes care issues like health & safety, financial support to employees, work-life balance of employees in order to internal stakeholders happy and engaged. Shareholder Involvement Corporate Governance Measure Role of Senior Financial Officers Patriot Act of Government HSBC emphasizes heavily on communicating the financial performance of the company in a transparent manner to shareholders. Shareholders of the company can readily access the financial information and business performance related data with the help of published Annual reports, Interim Reports and business performance analysis reports available in the company website. In UK, HSBC follows the combined code or Walker committee recommendation in order to ensure integrity and ethical justification of the business operation. For example, the London based company appoints those non-executive directors who have significant amount of financial knowledge and expertise to report any kind of financial irregularities in the operation. In USA, HSBC follows code of ethics mentioned in Sarbanes-Oxley Act (SOX). Senior officials such as group chairman, finance directors, chief accounting officer and chief financial officers are obliged to follow the code of ethics during the course of business operation. Failure to follow the ethical code might lead to harsh monetary penalty or other kind of punishment. According to Patriot Act of any country, financial companies need to disclose information regarding involvement in any kind of money laundering activities, security exchange activities and corresponding accounting principles. Due to fair and ethical business practices, HSBC has already achieved Patriot Act Certification from various governments. Such feat is showing that the company places ethics at the zenith of the priority for conducting business. (Source: HSBC, 2012a) Although the above mentioned model reveals the extent of business ethics in the operation of HSBC but the model remains silent about the question that how HSBC delivers value to its Shareholders and stakeholders. The study has found value drivers for HSBC such as protecting the environment by involving in CSR activities and environment sustainability program and working close loop with stakeholders in order to satisfy their interest. Environment Protection HSBC recognizes the fact a financial organization must take a step forward to improve the quality of social life of unprivileged section and ensure environmental sustainability instead of putting all the resources to earn profit. The London based financial giant has created Global Environmental Efficiency Programme or GEEP in order to create environmental awareness among internal and external stakeholders. Incorporating the concept of green banking by HSBC for reducing the usage of papers in the operation can be seen as a part of GEEP. The company has established lending standard on the basis of involvement in environment sustainability activities for companies involve in freshwater mining, chemicals disposition and defence equipments manufacturing. The company doesn’t finance activities which involve deforestation, manufacturing chemical weapons which can not only perturb the environmental balance but also create threat for human civilization, manufacturing material without following IAEA standards and operating in World Heritage Sites as classified by UNESCO (HSBC, 2012b). Challenges for HSBC Although the study has found that HSBC emphasizes heavily on maintaining ethical conduct while conducting business there are two areas that needed to be addressed by the bank in order to ensure future sustainability of the business operation. These two areas can be identified as engagement with stakeholders to ensure implementation of ethical codes in holistic manner and incorporate practices like sustainable finance. Stakeholder Engagement HSBC emphasizes on creating a diversified employee pool irrespective of their ethnicity, gender, economic background or nationality. Such management approach has helped the company to contribute significantly to improve quality life of educated but unprivileged section of the society. However, it is a challenge for the company to create a committed workforce who regards customers as the highest authority and ready to serve these customers with delight. In retail banking section, the company needs to modify its product portfolio in accordance with the need of customers. There are two types of retail customers for HSBC such as affluent customers who are basically the high net worth (HN1) clients and non affluent customers. Now the question is that whether the same quality of service to both the segment of customers? To answer this question, HSBC needs to work with their most prominent external stakeholders such as customers in non-preferential manner in order to deliver similar kind of value to all the stakeholders. On the other hand, the company needs to work with its major shareholders in order to incorporate stringent corporate governance norms which can mitigate the chance of committing and financial fraud or accounting scandals. In the service supply chain, the company needs to ensure that value chain partners create health work environment for employees and do not use child labours in the operations. It will be daunting task for HSBC to monitor the activities of value chain partners and restrict their participation in the value chain if they fail to comply with the ethical standard and human rights norms. It will also be challenging task for the bank to motivate its marketing executives to follow ethical conducts such as do not disclose the privacy information of clients, do not disturb clients by repetitive telemarketing calls, permission marketing and specifying “Important Terms and Conditions” to customers while selling the financial services. Although the company might take steps to educate its employees regarding business and marketing ethics but there is always the possibility of violating the ethical norm of the company by employees in order to fulfil their personal interest. Sustainable Finance Maintaining sustainable financial performance is one of the key challenges that the HSBC is grappling with. The company has not improved its return on equity for investors in a consistent manner over the last couple of years. The company needs to increase its cost efficiency ratio by more than 50% in order to satisfy the interest of shareholders in sustainable manner (HSBC, 2012b). In such context, it will be challenging for the company ensure strong return on equity to shareholders without involving in any kind of unethical financial activities. Recommendations It is evident from the above discussion that there is very little room for HSBC to improve its business operation which is already in ethically sound position. However, there are certain issues which are needed to be handled by the company in better manner in order to satisfy the interest of stakeholders and shareholders. The company needs to conduct some regulatory reform in order to changing the existing complex regulations which is ultimately slowing down the growth potential of the company. For example, the company should incorporate some of the global best practices regarding capital deployment, low interest mortgage and central counterparty infrastructure in order to decrease the financial risk and provide better return to shareholders. Another important recommendation for HSBC is that they need to follow Volcker rule in order to restrict its managers from involving in unethical sponsorship of hedge fund, market speculation or fraudulent accounting tricks to show inflated financial results to investors. Although the company has taken stance for protecting the personal information of clients by using facilities like auto-changing ATM passwords and monitoring system which creates firewall for internet hacking but still there is possibility for the bank to strengthen its retail customer security. Conclusion HSBC gives significant importance of incorporating ethical principles at every verticals of business operation and it is expected from the banking giant that it would increase its contribution to environmental sustainability and social life improvement of stakeholders in future course of time. 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