Corporate Governance & Ethics - Study Notes

Module 1:

Accounting, business and ethics Introduction People often think of financial scandals as presenting a problem of trust. Can those who run the financial world (accountants and auditors, bankers and analysts, underwriters and actuaries) be trusted? Yet when the issue at stake is not one of blatant fraud, answering this question requires us to explore what exactly it is that we trust these individuals to do. We trust accountants, in particular, to construct the knowledge on which financial decisions are based (Gill 2009, p. 1). 2 Welcome to the study of business ethics. This course is of value to anyone interested in a career in business, not just accountants. However, accountants get a special mention in this course because they are not just the people who count the numbers: they are the people who provide the language and grammar of business. And therefore, accountants feature prominently in the central issues of truth and trust. The concepts of truth and trust are critical to any understanding of business ethics. As you progress through this course, you will be become aware of how the various topics return to the central themes of truth and trust. Firms who are not truthful in their communications with stakeholders do not last long in business. Businesses who lose the trust of their customers will soon be broke. Ask yourself: would you buy a watch or a computer from a business you did not trust? Of course not. When large businesses collapse, business ethics (or the lack of them) becomes a hot topic in the national media. But of course, good business ethics is an everyday concern. In this course, we will learn what business ethics are, and how they are different from personal ethics. The concept of corporate governance is central to business ethics: how the ethical tone is set from the very top of the organisation, and how governance mechanisms are 3 used to ensure that an ethical culture is filtered down to all levels. With corporate governance comes the concept of the stakeholder. In this course you will encounter stakeholders in terms of their relationship with the business and the board of directors, and also in terms of their role in determining what is right and what is wrong. Business ethics is the study of ethics at the organisational level. Yet the organisation is not a person: it has no morals or values on its own. Business organisations are just legal constructs. How can an organisation have ethics? This course will show you that organisations are made up of individuals (who most certainly have values and morals), and the challenge is to have ethical frameworks that guide all of those individuals into having an “ethical whole”. But stakeholders play a special role in this: it is the stakeholders that decide if a decision or action is ethical or not. This will be explored further in this course. Objectives On completion of this module, you should be able to: 4 1. conceptualise business ethics from an organisational perspective 2. understand why ethics is important in business life 3. gain insight into the extent of ethical misconduct in the workplace and the pressures for unethical behaviour. The importance of business ethics Business ethics considers whether business practices are acceptable or unacceptable. Identifying what is acceptable or not acceptable is not always straightforward. These practices, however, will ultimately be judged by stakeholders such as investors, employees, customers, interest groups and the community as right or wrong, ethical or unethical. As discussed in Ferrell, Fraedrich and Ferrell (2013), there have been a number of high profile corporate collapses in recent years. The resultant enquiries into why these collapses occurred identified a number of unethical practices including deception and fraud. As stakeholders became aware of these practices they deemed 5 them as unacceptable and unethical. Consequently, these corporate scandals have led to a demand for improved business ethics and corporate accountability. The importance of business ethics to accountants and business professionals Please download and read the chapter placed on Course Resources Online called “Accountant’s Choice”. The author of Accountant’s Choice presents a compelling case for accountants and business professionals to be fully aware of the need for proper ethics in business. Why? Because the people who depend on ethical business (the stakeholders) will be depending on us! Business ethics defined Your textbook provides a number of definitions on page 7. It is generally accepted that business and individuals in business are expected to maintain high ethical standards and demonstrate moral principles. However, it is also important to understand that businesses are required to make a profit to ensure their ongoing survival. Hence there may, at times, be a trade-off between the objective of making a profit and the organisations obligation to the society in which it operates. 6 From this, Ferrell, Fraedrich and Ferrell (2013, p. 7) define business ethics as comprising ‘the principles and standards that guide behaviour in the world of business’. It is important to note that business ethics is not simply an extension of the ethics of the individuals within an organisation. Organisations develop their own cultures which may become distinct from those who work within them. Furthermore, many ethical issues we face in our work environment differ from those in our non-working lives. As an employee enters a new organisation they will be faced with a new ethical culture and ethical situations that will need to be resolved. The development of business ethics Your text provides an overview of the development of business ethics in the US during the 20th and 21st centuries on pages 11 to 16. Many of these developments may be attributed to changing societal concerns and values. While progress has been made it is also apparent that some executives and managers have not embraced society’s desire for high ethical standards in business. Recent corporate collapses and the accompanying accounting scandals around the world suggest that ‘falsifying financial reports and reaping questionable benefits had 7 become part of the culture of many companies’ (Ferrell, Fraedrich and Ferrell 2013, p. 14). Many countries have responded to the ethics crisis by implementing corporate governance reform through the establishment of best practice guidelines and/or mandated requirements. For example, the US responded to community and investor concerns following the collapse of Enron by enacting legislation known as the Sarbanes-Oxley Act. Australia adopted a less prescriptive approach in providing guidelines and recommendations on corporate governance best practice which we will examine in a later module. Developing an organisational and global ethical culture Organisational ethics is not always a legal issue. In fact, there is a trend away from prescriptive legislative measures towards making ethics part of an organisations core values. It is the organisational culture which embraces ethics as part of its core corporate values. Ferrell, Fraedrich and Ferrell (2013, p. 16) state that the ‘ethical culture can be viewed as the character or decision-making process that employees use to determine whether their responses to ethical issues are right or wrong’. This culture ‘creates shared values and support 8 for ethical decisions’ (Ferrell, Fraedrich and Ferrell 2013, p. 16). The benefits of business ethics The authors suggest that there is research and examples from the business community that indicate a link between an organisations ethics and its financial performance. Some of the benefits of business ethics can be summarised as: - Ethics contribute to employee commitment: ethical culture matters to employees and it reflects in their loyalty to their employers and their own self esteem. - Ethics contributes to investor loyalty: investors are looking for good returns and ethical companies are more viable than unethical companies. - Ethics contribute to customer satisfaction: public trust is an essential part of maintaining good long-term relationships with customers and customer satisfaction is an essential ingredient of any successful business strategy. - Ethics contribute to profits: evidence shows that being ethical can equate to better financial performance just as there are many examples of 9 declines in financial performance for companies that have not been ethical. Conclusion In this module we were introduced to the concept of business ethics. Business ethics have been evolving over time. It has become an increasingly important topic in recent years due to high profile corporate collapses which affected many stakeholders around the world. As a consequence, legislators and governing bodies have addressed the issue of business ethics. While in some countries such as the US the response was prescriptive, other countries have adopted an approach that preferred to instil values rather than impose strict requirements. Regardless of the approach, there appears to be evidence that improved business ethics may result in improved financial performance and vice versa. You should now complete the review questions to assess your understanding of the material in this module. How to do case studies Case studies are used to provide a real-life or factual representation of issues you are studying in the course 10 material. The case studies included in this course require you to identify, analyse and/or solve ethical issues in the cases. In completing the case studies you should consider the following: - Read the case study carefully. - Identify the key features of the case including the ethical issues/dilemmas and the stakeholders. - Read the questions being asked carefully. - Define any key terms included in the questions. - Identify the key features of the case which relate to the questions asked. - Link the relevant features of the case to those of the definition/s you provided for your key terms/ models/theories. - If you are being asked to solve a problem identify the various alternative solutions available and the pros and cons of each. - If you are asked to make a decision about the case between different models or theories in your course material, outline your answer and justify 11 it with evidence from the case and the definitions. - If you are asked to provide a solution to a problem state your answer clearly and explain why you chose this solution over the other possible alternatives. Case studies do not always have a single correct answer. In such cases the suitability of your response will depend on the assumptions made and the justifications provided. Additional information on how to analyse and write up case studies is available in the Guide for Students and on the Communications Learning Centre website. Links to these are provided on the course website. References Ferrell, OC, Fraedrich, J & Ferrell, L 2013, Business ethics: ethical decision making and cases, 9th edn, SouthWestern Cengage Learning, USA. Gill, M 2009, Accountant’s Truth: Knowledge and ethics in the financial world, Oxford University Press, Oxford, UK.

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