Ethical Issues in the Business Environment - Essay Example

The Paper is divided into the following sections I. Ethical Issues in the Business Environment II. Organizational and Individual Ethical Behaviour- Critical Evaluation III. Corporate Governance Failures-an Evaluation IV. The Case of Oil Industry (Shell, BP, Exon) I) Ethical Issues in The Business Environment Business ethics is concerned with attaining the objectives of the organization in a way so as not to come into conflict with the interests of stakeholders of the business, society or certain groups or individuals (influence groups). When the business effects the interest of many groups including the internal and external groups, conflict of interest is common which give rise to several ethical issues. If we consider the example of an organization in the business of any product utilizing animal products say a fast food joint, in the eyes of its customers, stakeholders, suppliers etc it may be an ethical organization but the animal rights activist groups or the individuals who are vegetarians could look upon the activities of the organization as being highly unethical just as the cannibals are regarded as unethical by the majority of people. The subject of business ethics touches upon the frontiers of many subjects which are controversial, in fact it touches upon the controversy of human life, the dilemma of the creation into which we all have been born . To go into detail into even any one of these subjects is beyond the scope of this paper but it is helpful for the reader to be aware of all the other subjects which effect business ethics. II) Organizational and Individual Ethical Behaviour- Critical Evaluation Organizations do have some individual values; if they strive for profit making then the value behind it may be self reliance and striving for excellence, this drive for excellence may be highly supported by certain cultures, but in the process the organization may be producing certain outcomes which may not be desirable for certain groups and even for the society at large. For example an organization individually may be releasing very little pollutants in the environment but there are other organizations who also have the same individual value system and the urge to strive for excellence who are also releasing the pollutants and when summed up leads to a huge amount of pollutants in the environment which are harmful to a large number of people, thus raising the need for legal interventions and code of ethics in this case restricting the organization from polluting beyond a certain limit or charging higher environmental tax to the larger polluters. Also the organizations are forced to comply to ethical standards when they come under pressure from various groups, when they are made to realize how the pursuit of their own interests are harming others or when they are threatened to stop pursuing their own objectives which is proving to be harmful to others then there is a compliance to a certain code of ethics. The compliance and acceptance of ethical codes is an adjustment process of both the organization and its immediate environment with which there is a conflict of interest, the pressure groups may also have to adjust their interest and the means to achieve them with respect to the organization as per the situation. For example people may be prohibited to enter beyond 20 km range from that of a nuclear factory or the construction of residential plots may be prohibited within a certain periphery of the industrial cluster. Thus while solving ethical issues there is focus on the common objectives and how to attain these objectives without entering into a conflict. Business ethics is closely related to corporate governance and corporate social responsibility. According to Robbins( 1996,p.20,.p.157), ethical dilemmas are situations where managers or decision makers have to decide what is right and what is wrong and ethical decision making revolves around three criteria-utilitarianism that is providing the greatest good for the greatest number; focus on rights(of individuals) and focus on justice (to individuals).Corporates manage their business through groups of conflicting interests and its success depends on meeting its objectives by keeping in balance a mesh of interests often through the use of power and politics. What some groups may see as ethical conduct others may perceive as unethical and this gives rise to various political issues, as someone has correctly said ‘The personal is the political’. When any organization trips over this fine balancing act, and some groups scream ‘foul’as their interests are hurt and if they gather sufficient power and even the attention of the government, law and media then the organization is blamed for unethical practices. III) Corporate Governance Failures-an Evaluation According to the International Federation of Accountants, USA: Corporate Governance failures has been investigated in terms of the role of the chief executive, the role of the board of directors, executive compensation and the culture and ethics of the top management and these factors have been found to be interrelated. The table below summarizes the contribution of the various factors in corporate governance failures. Table 1 – What went wrong?– corporate governance issues Ethics/culture/ tone at the top CEO Board of directors Internal control/ compliance/ risk management Aggressive earnings management Ahold (Netherlands) •• ••• • ••• ••• Enron (US) ••• ••• ••• ••• ••• WorldCom (US) ••• ••• ••• ••• ••• Xerox (US) ••• ••• ••• ••• Vivendi (France) ••• •• ••• Cable & Wireless (UK) •• ••• ••• D Tripcovich (Italy) ••• •• France Telecom (France) •• •• •• •• ••• = issue had relatively minor significance in the case study ••• = issue was of moderate significance ••• = issue was of major significance (Source: IFA, USA) According to The Cato Handbook for Congress, USA and International Federation of Accountants, USA and Deakin and Konzelmann (2003, pp. 2-17) Large corporate failures like that of Enron have been mainly attributed to the inability to resolve conflict of interests which became impelling in the face of the changing environment and laws. What was once regarded as strategic alliance and smart management became ‘a no one’s baby’ when circumstances changed each party being concerned only about their own interest and the disappearance of common objectives. The corporate governance failure of Enron became manifested in the stock market crash and few other accounting activities which were held as being fraudulent by the investigators following the aftermath. It is said that experience is a hard teacher. After a few disasters attributed to corporate governance the interested groups including the government became extra cautious and started seeking signs or symptoms which foretell disasters and various committees came together to formulate a code of ethics in various part of the globe. This formulation of a code of ethics was a tedious process as it required arriving at a few generalizations after extensive investigations of specific cases which are indeed very complex. In the case of UK, (Jones and Pollitt 2001, pp. 2-82) the country started realizing increasingly the significance of corporate governance in the event of few shocking failures in the 1990s as a consequence of which several committees were set up namely the Cadbury committee, the Greenbury Committee, the Hampel Committee or Cadbury II, the Turnbull Committee and Internal Control and The Company Law Review. The assessments of these committees as per what factors have influenced the corporate governance debates in UK are summarized in the table below: Committee Influences on Corporate Governance Debates (Influences of groups and exogenous factors) Overall Assessment Nature of Issues Business Community Authorities Public Opinion Exogenous Factors Quality of Process Impact of Process on Outcome Cadbury Specific – related to high profile failure Varied High Initially High High – economy unfavourable Very high Very high - visionary Greenbury Specific – related to cases High High High High – Cedric Brown’s pay rise Very poor High – inconclusive Hampel General – revisiting Cadbury Varied Low Low Low–economy favourable Initially medium, later improved High – low key outcome Turnbull Technical – of professional concern Varied Low Low Low Focussed and efficient Very High – professional Company Law Review General – motivated political views in opposition Varied High at official level, declining at political level Varied – linked to Greenbury initially Low Consultation comprehensive Very high – unlikely to be radical Source:(Jones and Pollitt,2001) IV) The Case of Oil Industry (Shell, BP, Exon) Industries like the oil extraction industry and other industries engaged in tapping the natural resources of a region or country are expected to be more socially responsible than other industries as even a small fluctuation in the industry like sudden rise in prices, shortage or crisis of the product etc has the power to influence the whole social economic and political conditions, or it can be said that these industries have a very huge impact on the social and economic conditions of an entire region or nation, especially nations which are dependent on these natural resources, and in fact changes in the availability of such scarce resources is not only felt in the region but across the entire world. Scarce resources upon which the functioning of the whole world matters affect the functioning of the whole globe and are manifested by severe conflict of interests due to the resource being scarce and demand being huge and all interested parties(countries, organizations) trying to get control over the scarce resource gives the industry a political hue. For peaceful coexistence it was felt important that the oil extraction industries comprising the leading oil extraction companies and the nations with which they work integrate social responsibility in their mission vision and objectives. According to Skjaerseth et all (2004,pp. 2-23) : Statistical evidence shows that rapid inflows of oil revenues are directly linked to high levels of corruption, military spending, violent conflicts and civil wars. It has been observed that the social and economic development of the common people of regions and countries rich in natural resources lag far behind those that are poorer in natural resources. Since the 1980’s the social responsibilities of the Oil industry in terms of environmental sustainability and human rights has increased as the oil industry has been linked with making ‘obscene’ profits during crisis and causing accidents harmful to human life and the environment. The leading companies of the oil industry Exxon Mobil, Shell, BP and Total Final Elf have to varying degrees realized and accepted and are fulfilling the social responsibility associated with the industry. The organizations have expressed their social responsibility in micro ways by undertaking community welfare programs like building of schools etc which have infact have macro impacts as well as undertaking macro activities like transparency in reporting system and fighting against corruption. The companies have been careful enough not to be tempted to over commit and have fulfilled responsibilities by and large as per the promises as over commitment does fetch the opportunities but inability to fulfil them has a high risk of exposing the organizations to devastating consequences. The variance towards the acceptance recognition and implementation of corporate social responsibility existed mainly because the companies were at different internal stages and different stages of socialization, they were differently affected by political situation in their home countries as well as the countries in which they operate, and being multinationals they were affected by the international/institutional context in which they operate. The table below summarizes the variations in the corporate social responsibility strategy adopted by these four companies. Table 1: Level of commitment: Summary of the macro CSR strategies of Exxon Mobil, Shell, BP and Total Fina Elf* Company Recognition Consideration Goals Organizational response Level of commitment Exxon Mobil Yes No Narrow/micro CSR Business (almost) as usual Low/medium Total Fina Elf Yes No Narrow/micro CSR Business as usual Low Shell Yes Indirectly, by emphasising transparency of investments Broad/macro CSR Social concerns (claimed to be) integrated in management systems Medium BP Yes Indirectly, by emphasising transparency of investments Broad/macro CSR Social concerns (claimed to be) integrated in management systems High Source: (Skjaerseth et all, 2004) Thus while the focus and commitment of Exxon Mobil and Total Final Elf is to provide affordable and environmentally clean fuel and investments in the countries they operate, the commitments of BP and shell are larger as expressed by their one liners ‘a force for good’ -BP, and ‘will strive to build a better world’ -Shell. Bibliography Robbins, SP 1996, Organizational Behavior, 7th edition, Prentice Hall of India Pvt. Ltd ,New Delhi, India. A publication of International Federation of Accountants, USA, Enterprise Governance Getting the Balance Right, Executive Summary, viewed 10 May, 2007. A publication of CATO handbook for Congress, Washington DC, USA, Enron WorldCom and Other Disasters, Policy Recommendations for the 108th Congress, viewed 10 may, 2007. Deakin and Konzelmann 2003, Learning from Enron, viewed 11 May, 2007, working paper no.274 pp 2-17, ESRC Centre for Business Research, University of Cambridge, UK. Jones and Pollitt, 2001, Who influences debates in business ethics? An investigation into the development of corporate governance in the UK since 1990, viewed 11 May, 2007, working paper no.221, pp 1-82, ESRC Centre for Business Research, University of Cambridge, UK Skjaerseth et all, 2004, Limits to Corporate Social Responsibility: A comparative study of four major oil companies, viewed 11 may,2007,report no. 7,The Fridtjof Nansen Institute, Lysaker, Norway. Read More