Effects of unethical management practices on modern corporations

¶ … UNETHICAL Management PRACTICES HAVE on CORPORATIONS in TODAY'S Business ENVIRONMENT?

INTRODUCTON

Ethical corporations are those not in each day's new reports presently and are those receiving very little attention at this time. However, corporations that are unethical are receiving a great amount of attention of late and most individuals understand what is considered to be unethical in today's business world however, an understanding of what precisely is considered to be ethical conduct is a little hazy or so it appears from current events in the U.S. mortgage market and even beyond the United States to the United Kingdom.

EFFECT of ETHICAL CODES on CONDUCT and BEHAVIOR

The work of Dr. John O. Okpara entitled: "Can Corporate Ethical Codes of Conduct Influence Behavior? An Exploratory Study of Financial Managers in a Developing Economy" states that in "today's competitive business environment, a corporate code of ethics should serve as the foundation upon which employees make decisions based on honesty, integrity, confidence and trust." (2003) Okpara states that providing a code of ethics in written form assist employees in understanding of "what their organizations expect from them in terms of responsibilities and behavior." (2003) a code of ethics further serves as a reflection of standards of the corporation as well as establishing "realistic modes of behavior that applies to everyone in the company, from the board of directors to the newest employee." (Okpara, 2003) Okpara relates the statement of Solomon and Hanson (1985) who relate that the code of ethics is important "because it provides visible guidelines, stability to an organization, and a point of focus for everyone in the organization." (Okpara, 2003)

II. GROWING IMPORTANCE of ETHICS and SOCIAL RESPONSIBILITY

The work of Gormus (2004) entitled: "Economic Analysis of Ethics and Social Responsibility in Today's Business Environment" states that ethical and social responsibility "are becoming increasingly important in today's business environment. Their effects on the profitability and the long-term survival of a firm are enormous." (2004) Gormus additionally states that it is extremely important "to investigate the various definitions of ethics. Ethics, using a contemporary definition, is the motivation based on moral ideas of right and wrong." (2004) Gormus states that there are three approaches that may be used in applying a definition to the parameters of ethics:

1) Utilitarian approach;

2) Religious approach and 3) Self-interest approach. (2004)

The emphasis of the utilitarian approach is "the direct and indirect consequences of an action to all other people. The main criteria for this approach is that morally correct course of action is one that brings the greatest good for the greatest number of people." (Gormus, 2004) Gormus states that the religious approach is "emphasized in Judeo-Christian tradition and the Muslim religion, is where a person should treat other people the same way he/she wants to be treated." (2004)

Finally, the emphasis of the self-interest approach is stated by Gormus to be "where an action is morally correct if it increases benefits for the individual in a way that does not intentionally hurt others." (2004) Gormus relates that the understanding of ethics today is "a combination of these approaches" and "it is clear that the utilitarian approach is a step higher than the other two where it pushes the limits from profiting self without hurting anybody else, to profiting others with actions one pursues." (2004) Gormus states that the validity of this argument is dependent upon "how...we, as consumers, perceive a firm to be ethical and socially responsible." Gormus states that the societal norms indicated that the ethical institution is characterized by the following:

The institution recognizes and respects the anti-trust laws;

The institution promotes employee retention;

The institution is socially responsible, and gives back to the community using both monetary and non-monetary approaches;

The institution does not fall into major scandals at the management level; and the institution satisfies the expectations of its shareholders, without compromising its ethical standards, thus making the firm a health business. (Gormus, 2004)

According to Gormus the consumer's perceptions concerning unethical or socially irresponsible firms "can be illustrated using, an example from the banking sector. Bank regulators have often been accused of being complacent and of allowing massive problems to develop in the industry, and this pattern has been seen in country after country. One of the issues that raised major ethical concerns and caused the international community to give more attention to the ethics of businesses was the Barings Bank scandal. In the Barings scandal, one broker put the bank out of business. The bank was completely collapsed by a rogue trader, Nicholas Leeson, who in a two-month period brought the institution to bankruptcy and disgrace. Leeson worked in the bank's Singapore office. He bet billions of pounds in Asian financial markets fiat Japanese stock indexes would rise, but instead they fell. The bank finally was unable to pay the estimated $1.1 billion Leeson lost, forcing the bank to sell its assets and threatening the jobs of 4,000 people." (2004) Gormus relates that there were numerous issues involving ethics in the Barings fiasco and that the Barings Bank in Britain after having existed for "233 years and amassed assets of $93.7 billion which in fact went down in flames." (2004)

III. INCORPORATION of ETHICS and SOCIAL RESPONSIBILITY

Ethics and social responsibility must be incorporated into the firm's business criteria." (Gormus, 2004) Public perception of a company stands to either do much in the way of damage or to alternatively further the company in its profits and success. Gormus states of the reputation of a firm "from an ethics and social responsibility perspective, is in fact another determinant of consumer demand just like price, income, accumulated wealth, availability of substitutes and complements." (2004) Gormus relates that the work of Poitras (1994) states that the shareholder wealth is directly dependent on the "price of common stock and, as a result, on the process by which the market for ownership claims incorporates information about ethical concerns." (2004) According to Gormus there has been recent and significant results "accumulated and sensitivity between household choice and socially responsible firms is observed." (2004)

Profit is achieved "when costs are subtracted from revenues. The basic problem arises "...when ethical judgments are tied only to the results of numerically-correct accounting calculations. A firm generates profits by utilizing the costs of production to efficient use of the factors which enter into production, and by making decisions which ensure efficiency." (Gormus, 2004) Decision making in business is intricately linked to efficiency and as well is "tied to ethics and social responsibility." (Gormus, 2004) Conversion of "...land, labor and capital into products and services involves responsibility. It involves behavior and an assessment of that behavior in terms of right and wrong." (Gormus, 2004) it also involves, "a certain kind of behavior, the behavior of doing business, and an assessment of that business behavior in terms of right and wrong." (Gormus, 2004)

IV. ETHICS for SURVIVAL in the GLOBAL MARKET

The work of William S. Kanaga (1998) entitled: "Corporations Must Act Ethically" states that the importance of "corporate citizenship in the modern world should not be taken lightly because it represents a business strategy for survival in global markets." (Kanaga, 1998) Kanaga states that the term that is more appropriate for 'corporate citizenship' is corporate leadership." (1998) This concept is stated by Kanaga to suggest "much more than the amount of money a company can donate to a worthy cause. Corporate leadership represents the recognition that actively participating in its community's life enhances its operating environment." (Kanaga, 1998) it is acknowledged among corporate leaders that the need exist to strengthen their own community base." Corporations are able to take the lead in the development of local economic conditions through the activities as follows:

Improving the local labor base by investing in education and training;

Working with local governments to enhance the business environment by improving infrastructure, regulations and enforcement; and Working with local suppliers to encourage regional economic development and the growth of an integrated and competitive economy. (Kanaga, 1998)

Kanaga states that policy measures that corporate leadership should consider in bringing about change when it is needed including the following:

1) Improve the policy environment for business. Active participation in the policy development process will ensure that private sector interests are taken into consideration;

2) Develop a local identity and strengthen community linkages. Corporate partnerships with local nonprofit organizations and governments help to build trust and communication;

3) Enhance the ability to respond to grassroots sentiment and concerns. By building trust and working with established community leaders, corporations can develop sensitive lines of communication that allow a problem-solving approach to emerging challenges. Improve public understanding of business-centered approaches.

Corporate involvement with community groups can directly and effectively broaden the social understanding of entrepreneurship and sound business management practices.

Establish a forum for public discourse. Partnerships can create a friendly community environment in which the benefits and costs of industrial development can be rationally discussed.

Strengthen the human resource base of a community. Training, outreach to local education groups and small capital investments can enable a community to develop vocational employment programs. These benefit the local company as well as the entire region.

Leverage financial and other investments in the community. Because nonprofit organizations mobilize vast reserves of goodwill, corporate investment in the community can have tremendous reach in building a better corporate profile and in strengthening public support of the private sector. (Kanaga, 1998)

The work of Nae and Grigore (nd) entitled: "An Overview of European Multinational Corporations" the social and political changes brought about by globalization have raised new questions as well as expectations about governance and social responsibilities. More and more companies of all sizes and sectors are recognizing the importance of their role in society and the real benefits of adopting a proactive approach to Corporate Social Responsibility (CSR)." (Nae and Grigore, nd)

V. FIDUCIARY DUTIES as a GUIDE to ETHICS

The work of Young (2007) entitled: "Fiduciary Duties as a Helpful Guide to Ethical Decision-Making in Business" states that the challenge for business ethics "is not so much enunciating the unyielding call of moral perfection but rather providing practical wisdom relevant to the needs of business decision-makers." (Young, 2007) Young states that while the applicable law "most closely associated with business ethics is fiduciary theory and practice...it is increasingly overlooked and slighted in legal studies and in business schools. In most contemporary law school curricula, agency is a marginal subject, passed over like cold toast on the breakfast tray in courses on corporate law and finance." (2007) Young states that tax planning "...in trust and estate courses...is given more emphasis than the fiduciary responsibilities of trustees." (2007) There is however, in every fiduciary relationship "a risk of abuse of power on the part of the fiduciary - from simple negligence or misunderstanding to intentional fraud theft. This risk is frequently noted as the cost associated with agency relationships." (Young, 2004) Agency relationships are those in which principals hire 'agents' for accomplishing tasks and this brings with it a risk. As well when partners engage other partners the business while enhanced by this joint enterprise creates a new level of ethical risk. The fiduciary is under requirements of the law to "act with self-restraint, with a view towards the advantage and interests of others."

The law refers to a duty of loyalty and a duty of care which demand selflessness, and the use of good sound judgment in making decisions, respectively. Young states that these duties as set out for the fiduciary are a good guide for measuring the level of ethical behavior of the individual or corporation.

Gormus states that there are four different stands a typical firm would take in incorporating ethics into the organization. The first is the decision in choosing or alternatively choosing not to incorporate ethics and then a time horizon is set for this incorporation of ethics. The following illustration shows the conception of Gormus of the four types of stands taken by typical firms in relation to organizational incorporation of ethics.

The Four Types of Stands Taken by Typical Firms in Relation

To Organizational Incorporation of Ethics

Source: Gormus (2004)

According to Gormus When any of the a, B, C, D options are chosen, the firm will face different profit curves. When option a is chosen, the firm will start at a higher profit level in the shortrun but profits will decline in the long-run as it has been suggested earlier in the paper. If option B. is chosen, the firm will start at a lower level of profits because of the opportunity costs of choosing to be ethical and socially responsible. Coming closer to long-run the profits will gradually increase but decline again in the long-run being parallel but at a lower marginal profit than a.

The reason for this is the fact that people will respond harshly to be let down and get the feeling of being fooled." (2004)

Ethical concerns are also global concerns and according to Phukan and Dhillon (2001) in the work entitled: "Ethical and Intellectual Property Concerns in a Multicultural Global Economy" When any of the a, B, C, D options are chosen, the firm will face different profit curves. When option a is chosen, the firm will start at a higher profit level in the shortrun but profits will decline in the long-run as it has been suggested earlier in the paper. If option B. is chosen, the firm will start at a lower level of profits because of the opportunity costs of choosing to be ethical and socially responsible. Coming closer to long-run the profits will gradually increase but decline again in the long-run being parallel but at a lower marginal profit than a. The reason for this is the fact that people will respond harshly to be let down and get the feeling of being fooled." (Phukan and Dhillon, 2001)