3e 1 Business Ethics

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An organisations Policies & Standards established to assure certain kinds of behaviour by its members

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3e 1 Business Ethics

  1. 1. “ Business Ethics” & the Internal Auditor
  2. 2. Frauds / Irregularities (Internal Auditors as an Investigator) Individual ethics Business ethics Corporate Governance Internal Auditor as the great ‘ombudsman’
  3. 3. “ Arthasastra” <ul><li>“ The fundamental principle of economic activity is that no man you transact with will lose: then you shall not” </li></ul>
  4. 4. <ul><li>“ In business, if one safeguards other’s goods as his own goods and conducts his business, then this will be considered as a good business” </li></ul><ul><li>-Thirukkural </li></ul>Å¡½¢¸õ ¦ºöÅ¡üÌ Å¡½¢¸õ §À½¢ô À¢È×õ ¾Á §À¡ø ¦ºÂ¢ý ¾¢ÕìÌÈû - ¿Î× ¿¢¨Ä¨Á
  5. 5. What is individual ethics? <ul><li>Moral Principles & Standards of conduct adhered to by an individual. </li></ul>
  6. 6. Manager (Individual Values) <ul><li>M - Mind of men </li></ul><ul><li>A - Awareness of ‘Atma’ </li></ul><ul><li>N - Nature of Nation </li></ul><ul><li>A - Aspects of Environment </li></ul><ul><li>G - Guidelines of Goodness </li></ul><ul><li>E - Enquiry of Ethos </li></ul><ul><li>R - Role of Rules </li></ul>
  7. 7. What is business ethics <ul><li>An organisations Policies & Standards established to assure certain kinds of behaviour by its members </li></ul>
  8. 8. Business Ethics <ul><li>Thinking in terms of Business Ethics </li></ul><ul><li>is really </li></ul><ul><li>“ Thinking Leadership” </li></ul><ul><li>Therefore it is imperative that this is </li></ul><ul><li>“ TOP DRIVEN” </li></ul>
  9. 9. Is it only, <ul><li>Forsaking Material prosperity? </li></ul><ul><li>Obeying law? </li></ul><ul><li>Spreading profits around by doing social work & philanthropy? </li></ul><ul><li>How do they really connect with business? </li></ul>
  10. 10. What is Business Ethics and What is not? <ul><li>Is not about morality but about establishment of transparent norms of inter-relationship </li></ul><ul><li>Is socially aware entrepreneurship and not just philanthropy </li></ul><ul><li>Is respectful of the stake holder & not just the shareholder </li></ul><ul><li>Is concerned with a code of ethics & not just with a code of conduct </li></ul><ul><li>Is about establishing employee morale and not just about establishing compliance </li></ul><ul><li>Is committed to quality arising out of work satisfaction and not just for reasons of profit. </li></ul>
  11. 11. Two most critical features of Ethical Business <ul><li>Know one’s company / organisation </li></ul><ul><li>Frame explicit rules that apply to all! </li></ul><ul><li>“ Synergise the vision down the line with fundamental norms, rules of procedure & code of conduct” </li></ul><ul><li>(In the absence of explicit set of rules implicit rules gradually evolve) </li></ul>
  12. 12. ‘ Perspective on Ethics’ <ul><li>1. Definitions </li></ul><ul><li>Business ethics - an organisation’s policies and standards established to assure certain kinds of behavior by its members </li></ul><ul><li>Individual ethics - moral principles and standards of conduct adhered to by an individual </li></ul><ul><li>2. Areas of Concern Regarding Business Ethics </li></ul><ul><li>General business understanding of ethical issues </li></ul><ul><li>Compliance with laws </li></ul><ul><li>Conflicts of interest </li></ul>
  13. 13. ‘ Perspective on Ethics’… <ul><li>Entertainment and gift expenses </li></ul><ul><li>Relations with customers and suppliers (should gifts or kickbacks be given or accepted?) </li></ul><ul><li>Social responsibilities </li></ul><ul><li>3. Factors that may lead to unethical behavior </li></ul><ul><li>In any normal population, some people have less than </li></ul><ul><li>desirable levels of ethics. If these people hold </li></ul><ul><li>leadership positions, they may adversely influence </li></ul><ul><li>subordinates. </li></ul>
  14. 14. ‘ Perspective on Ethics’… <ul><li>Organisational factors </li></ul><ul><ul><li>Pressures to improve short-run performance may </li></ul></ul><ul><li>promote unethical behavior </li></ul><ul><ul><li>Emphasis on strict adherence to chain of command </li></ul></ul><ul><li>authority may provide excuses for ignoring ethics </li></ul><ul><li>when following orders. </li></ul><ul><ul><li>Informal work-group loyalties may subvert ethical </li></ul></ul><ul><li>behavior </li></ul><ul><ul><li>Committee decision processes may make it possible </li></ul></ul><ul><li>to abstain from or avoid ethical obligations </li></ul>
  15. 15. ‘ Perspective on Ethics’… <ul><li>External factors </li></ul><ul><ul><li>Pressure of competition may compromise ethics in </li></ul></ul><ul><li>the interest of survival. </li></ul><ul><ul><li>Wrongful behavior of others may force a </li></ul></ul><ul><li>compromise of ethics </li></ul><ul><ul><li>Definitions of ethical behavior may vary from one </li></ul></ul><ul><li>culture to another. For instance, bribes to overseas </li></ul><ul><li>officials or buyers may be consistent with some </li></ul><ul><li>countries’ customary business practices </li></ul>
  16. 16. ‘ Perspective on Ethics’… <ul><li>General Guides to Ethics </li></ul><ul><ul><li>Golden Rule - Do unto others as you would have them do </li></ul></ul><ul><li>unto you. </li></ul><ul><ul><li>Maximise good - Act to provide the greatest good for the </li></ul></ul><ul><li>greatest number </li></ul><ul><ul><li>Fairness - Act in ways that are fair or just to all concerned. </li></ul></ul><ul><ul><li>Maximise long-run outcomes - Act to provide the best long-range benefits to society and its resources </li></ul></ul><ul><ul><li>General respect - Act to respect the planet and the rights of </li></ul></ul><ul><li>others because business decisions have widespread effects </li></ul>
  17. 17. ‘ Perspective on Ethics’… <ul><li>Simplified Criteria for Evaluating Ethical Behavior </li></ul><ul><ul><li>“ Would this behavior be acceptable if people I respect knew I was doing this?” </li></ul></ul><ul><ul><li>“ what are the consequences of this behavior for myself, other employees, customers, society?” </li></ul></ul><ul><li>Ethics are individual and personal, influenced by </li></ul><ul><ul><li>Life experiences (rewards for doing right, punishment for </li></ul></ul><ul><li>wrong) </li></ul><ul><ul><li>Friendship groups (professional associations, informal </li></ul></ul><ul><li>groups) </li></ul><ul><ul><li>Organisational pressures (responsibilities to superiors and </li></ul></ul><ul><li>the organisation) </li></ul>
  18. 18. ‘ Perspective on Ethics’… <ul><li>Codes of Ethical Conduct </li></ul><ul><ul><li>An organisation’s code of ethical conduct is the established general value system the organistion wishes to apply to its members’ activities by </li></ul></ul><ul><ul><ul><li>Communicating organistional purposes and beliefs </li></ul></ul></ul><ul><ul><ul><li>Establishing uniform ethical guidelines for members </li></ul></ul></ul><ul><ul><ul><li>[Including guidance on behavior for members in making decisions] </li></ul></ul></ul><ul><ul><li>Because laws and specific rules cannot cover all situations, organisations benefit from having an established ethical code. </li></ul></ul>
  19. 19. ‘ Perspective on Ethics’… <ul><li>The code, </li></ul><ul><li>effectively communicates acceptable values to all members </li></ul><ul><ul><li>[including recruits and subcontractors] </li></ul></ul><ul><li>provides a method of policing and disciplining members for </li></ul><ul><li>violations, </li></ul><ul><ul><li>through formal review panels </li></ul></ul><ul><ul><li>through group pressure (informal) </li></ul></ul><ul><li>establishes high standards against which individuals can </li></ul><ul><li>measure their own performance </li></ul><ul><li>communicates to those outside the organisation the value </li></ul><ul><li>system from which its members must not be asked to </li></ul><ul><li>deviate </li></ul>
  20. 20. ‘ On Ethics’ <ul><li>Ethical dilemma of a Manager- Law will be silent! </li></ul><ul><li>Eg: </li></ul><ul><li>Take a favour from one’s dealer to get your child admitted to a good school? </li></ul><ul><li>Use your office service provider to set up your home computer / cooling system? </li></ul><ul><li>Are you making off with company funds, if your travel agent can exchange your entitlement to a business class ticket in such a way that you and your spouse can travel together by paying economy fare? </li></ul>
  21. 21. ‘ On Ethics’... <ul><li>if the decision does not entail a monetary loss for the organisation, then is it okay? </li></ul><ul><ul><li>Company may not lose money, but a bad precedent is set! </li></ul></ul><ul><ul><li>The integrity of records has been tampered with. (It is the first wrong step that is most critical on most occasions) </li></ul></ul><ul><li>Each organisation must find adequate answers & develop common policies </li></ul><ul><li>Creating a definite cultural norms which can be translatable in practice. (culture is what one does in the open) </li></ul>
  22. 22. ‘ On Ethics’... <ul><li>Rules for exceptions: </li></ul><ul><ul><li>Seeking exception must not be made easy </li></ul></ul><ul><ul><li>Sanction at a very high level </li></ul></ul><ul><ul><li>Criterion of transparency </li></ul></ul><ul><ul><li>Exceptions should not break the law of the land </li></ul></ul><ul><ul><li>No exceptions should tamper with the integrity of records </li></ul></ul><ul><ul><li>[Thus achieve : Uniformity & Fairness] </li></ul></ul><ul><li>Business ethics works best when you are happy, comfortable & content to be in a fish bowl. </li></ul>
  23. 23. Manager to take the lead! <ul><li>opportunities for exercising leadership! </li></ul><ul><li>Eg: trivial, but demonstrative exercise in leadership has quite an impact down the line </li></ul><ul><ul><li>Misuse of office stationery </li></ul></ul><ul><ul><li>Office punctuality </li></ul></ul><ul><ul><li>personal calls on the company paid phones </li></ul></ul><ul><li>Bigger you are the harder you fall! </li></ul><ul><li>(those in high levels of market respectability should be more clearer than those around them. Transparency & integrity) </li></ul>
  24. 24. ‘ On Ethics’... <ul><li>Rule of thumb </li></ul><ul><ul><li>imagine what it would be like if the act you are contemplating were to appear as ‘headline news in the morning papers! </li></ul></ul><ul><ul><li>Would you be able to face the work? Your friends? Your subordinates? Your colleagues? Your family? </li></ul></ul><ul><ul><li>If you can, then go ahead, if you cannot stop right there! </li></ul></ul>
  25. 25. Three principles of Business Ethics <ul><li>Standardization </li></ul><ul><ul><li>Rules / norms flowing from business ethics should be applicable to all </li></ul></ul><ul><li>Workable </li></ul><ul><ul><li>Should show tangible benefits (Policy statements – available to all) </li></ul></ul><ul><li>Driven from Top </li></ul><ul><ul><li>Top managements’ complete & demonstrated commitment (It is not being legal but about being ethically correct) </li></ul></ul>
  26. 26. Corporate Governance & Ethics <ul><li>Best practices in Corporate Governance emerge – with good principles of ethics </li></ul><ul><li>They both promote greater transparency of functioning & accountability within business hours </li></ul><ul><li>Leads to financial success in business </li></ul>
  27. 27. The ethics of whistle blowing <ul><li>To be encouraged </li></ul><ul><li>(if it had been encouraged, Enron would not have damaged the lives of so many innocent employees / stock holders around the globe) </li></ul><ul><li>Investigate every complaint </li></ul><ul><li>Not to fear ‘Crank calls’ </li></ul><ul><li>Institutionalise complaint investigations (setting up an ‘ombudsman’s’ office – Leopard skinchief model) </li></ul>
  28. 28. Internal Auditor’s role – New Standards! <ul><li>IIA’s Practice Advisory : 2130 – 1 </li></ul><ul><li>Role of Internal Audit Activity & Internal Auditor in the Ethical culture of an organisation. </li></ul>
  29. 29. 2130 - Governance <ul><li>The internal audit activity should contribute to the organisation’s governance process by evaluating and improving the process through which </li></ul><ul><li>1.Values & goals are established and communicated </li></ul><ul><li>2. The accomplishment of goals is monitored </li></ul><ul><li>3. Acceptability is ensured and </li></ul><ul><li>4. Values are preserved </li></ul>
  30. 30. Related Standard 2130 – A1 <ul><li>Internal Auditors should review operations and programs to ensure consistency with organisational values </li></ul>
  31. 31. Role can vary depending on…… <ul><li>The existence, lack of or degree of development of the organisation’s ethical culture. </li></ul>
  32. 32. Governance & Organisational Culture <ul><li>Compliance with society’s legal & regulatory rules. </li></ul><ul><li>Generally, accepted business norms ethical precepts, social expectations </li></ul><ul><li>Overall benefit to society </li></ul><ul><li>Reporting fully & truthfully to owners, regulators, other stack holders & general public. </li></ul>
  33. 33. Governance & Organisational Culture <ul><li>‘ Governance Process’ is the way in which an organisation chooses to conduct its affairs to meet the above from responsibilities. </li></ul><ul><li>These practices reflect a unique / ever changing ‘culture’ that, </li></ul><ul><ul><li>Affects the roles </li></ul></ul><ul><ul><li>Specifies behaviour </li></ul></ul><ul><ul><li>Sets goals & strategies </li></ul></ul><ul><ul><li>Measures performance </li></ul></ul><ul><ul><li>Defines the terms of ‘accountability’ </li></ul></ul>
  34. 34. Shared responsibility for ethical Culture <ul><li>All people associated with the organisation share some responsibility </li></ul><ul><li>Each individual employee should be encouraged to be an ethics advocate </li></ul><ul><li>Codes of conduct & statements of vision / policy are important declaration of the organisation values & goals, behaviour expected of people. </li></ul><ul><li>‘ Chief Ethics Officer’ – counselor of executions – for doing ‘the right thing’ </li></ul>
  35. 35. Internal Audit Activity as Ethics Advocate <ul><li>They should take an active role in support of the ethical culture </li></ul><ul><li>They possess a high level of thrust & integrity within the organisation </li></ul><ul><li>They have the required skills, competence & capacity to appeal to the enterprise’s leaders, Manager & other employees to comply with the legal, ethical & social responsibilities </li></ul>
  36. 36. Internal Audit Activity as Ethics Advocate <ul><li>Role </li></ul><ul><li>Chief Ethics Officer (may affect the independence) </li></ul><ul><li>Ombudsman </li></ul><ul><li>Compliance Officer </li></ul><ul><li>Management Ethics Counselor </li></ul><ul><li>Ethics expert </li></ul><ul><li>Member of an internal ethics council </li></ul><ul><li>Assessor of organisation’s ethical climate </li></ul>
  37. 37. Internal Audit Activity as Ethics Advocate <ul><li>Assessment </li></ul><ul><li>Periodically assess the state of ethical climate of the organisation & the effectiveness of its strategies, tactics, communications & other processes </li></ul><ul><li>Evaluate the effectiveness of the following features of an enhanced highly effective ethical culture </li></ul>
  38. 38. Acknowledgement <ul><li>Dipankar Gupta’s “Ethics incorporated” </li></ul><ul><li>IIA’s – Practice Advisories </li></ul><ul><li>Thirukkural </li></ul><ul><li>‘ Man Management’ – Sri Satya Sai </li></ul>

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