Business ethics

1. Chapter Three
Corporate Social Responsibility and Ethical Principles in Business
3.1. The concepts of Corporate governance
Corporate governance is the collection of mechanisms, processes and relations
by which corporations are controlled and operated.
Corporate governance has also been more narrowly defined as a system of law
and sound approaches by which corporations are directed and controlled focusing
on the internal and external corporate structures with the intention of monitoring
the actions of management and directors and thereby, mitigating agency risks
which may stem from the misdeeds of corporate officers.
Governance structures and principles identify the distribution of rights and
responsibilities among different participants in the corporation
such participants include board of directors, managers, shareholders, creditors,
auditors, regulators, and other stakeholders.
Corporate governance includes the processes through which corporations'
objectives are set and pursued in the context of the social, regulatory and market
environment.
These include monitoring the actions, policies, practices, and decisions of
corporations, their agents, and affected stakeholders.
Corporate governance practices can be seen as attempts to align the interests of
stakeholders. 1

2. Principles of Corporate governance
The following are some of the principles of Corporate governance:
1. Rights and equitable treatment of shareholders: respect the rights of shareholders
to exercise their rights by openly communicating information and by encouraging
shareholders to participate in general meetings.
2. Interests of other stakeholders: Organizations should recognize that they have
legal, contractual, social, and market driven obligations to non-shareholder
stakeholders, including employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
3. Role and responsibilities of the board: The board needs sufficient relevant skills
and understanding to review and challenge management performance.
4. Integrity and ethical behavior: Organizations should develop a code of conduct
for their directors and executives that promotes ethical decision making.
5. Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
stakeholders with a level of accountability.
Unlike the management of the organization, which should be focused in
operational management, governance is clearly focused on strategic management,
Good corporate governance increases the level of investment protection of
owners, fulfillment of the strategic objectives of the organization, fulfillment of
legal obligations, reduces many risks towards the owners. 2

3. 3.2. Corporate sustainability
Corporate sustainability recognizes that corporate growth and profitability are
important, it also requires the corporation to pursue societal goals, specifically
those relating to sustainable development such as:
environmental protection,
social justice and equity, and
economic development.
Corporate sustainability can be viewed as a new and evolving corporate
management paradigm.
The term ‘paradigm’ is used deliberately, in that corporate sustainability is an
alternative to the traditional growth and profit-maximization model.
It’s an evolving concept that managers are adopting as an alternative to the
traditional growth and profit-maximization model.
In recent years there has been significant discussion in the business, academic, and
popular press about “corporate sustainability.”
This term is often used in conjunction with, and in some cases as a synonym for,
other terms such as “sustainable development” and “corporate social
responsibility.”
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4. The four pillars or dimensions of corporate sustainability
Sustainable development,
corporate social responsibility,
stakeholder theory, and
corporate accountability theory.
 The contributions of these four concepts’ relationship to corporate
sustainability shortly described below.
1) Sustainable Development: Sustainable development is a broad, dialectical
concept that balances the need for economic growth with environmental
protection and social equity.
 The term was first popularized in 1987, in Our Common Future, a book
published by the World Commission for Environment and Development
(WCED).
 The WCED described sustainable development as development that met the
needs of present generations without compromising the ability of future
generations to meet their needs.
 It is a process of change in which the exploitation of resources, the direction
of investments, the orientation of technological development, and
institutional change are all in harmony and enhance both current and future
potential to meet human needs and aspirations. 4

5.  Sustainable development is a broad concept in that it combines economics, social
justice, environmental science, business management, politics and law.
 The contribution of sustainable development to corporate sustainability is
twofold.
a. First, it helps set out the areas that companies should focus on: environmental,
social, and economic performance.
b. Second, it provides a common societal goal for corporations, governments, and
civil society to work towards ecological, social, and economic sustainability.
2) Corporate social responsibility: Like sustainable development, corporate
social responsibility (CSR) is also a broad, dialectical concept.
In the most general terms, CSR deals with the role of business in society.
Its basic premise is that corporate managers have an ethical obligation to
consider and address the needs of society, not just to act solely in the
interests of the shareholders or their own self-interest
CSR contributes to corporate sustainability by providing ethical arguments
as to why corporate managers should work toward sustainable
development:
If society in general believes that sustainable development is a worthwhile
goal, corporations have an ethical obligation to help society move in that
direction. 5

6. 3) Stakeholder theory: The basic premise of stakeholder theory is that the
stronger your relationships are with other external parties, the easier it will
be to meet your corporate business objectives;
Strong relationships with stakeholders are those based on trust, respect, and
cooperation.
Stakeholder theory is a relatively modern concept and first popularized by Edward
Freeman in his 1984 book Strategic Management: A Stakeholder Approach.
Freeman defined a stakeholder as “any group or individual who can affect or
is affected by the achievement of the organization’s objectives.”
Unlike CSR, which is largely a philosophical concept, stakeholder theory was
originally and is still primarily a strategic management concept.
The goal of stakeholder theory is to help corporations strengthen relationships
with external groups in order to develop a competitive advantage.
The contribution of stakeholder theory to the corporate sustainability is the
addition of business arguments as to why companies should work toward
sustainable development.
Stakeholder theory suggests that it is in the company’s own best economic interest
to work in this direction.
Because doing so will strengthen its relationship with stakeholders, which in turn
will help the company meet its business objectives.
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7. 4) Corporate Accountability: The fourth and final concept underlying
corporate sustainability is corporate accountability.
Accountability is the legal or ethical responsibility to provide an account of
the actions for which one is held responsible.
It refers to one’s duty to explain, justify, or report on his or her actions.
In the corporate world, there are many different accountability relationships,
but the relevant one is the relationship between corporate management and
shareholders.
This relationship can be viewed as a contract in which the principal entrusts
the agent with capital and the agent is responsible for using that capital in the
principal’s best interest.
The contribution of corporate accountability theory to corporate sustainability
is that it helps define the nature of the relationship between corporate
managers and the rest of society.
It also sets out the arguments as to why companies should report on their
environmental, social, and economic performance, not just financial performance.
Not all companies currently subscribe to the principles of corporate sustainability,
and it is unlikely that all will, at least not voluntarily.
However, a significant number of companies have made public commitments to
environmental protection, social justice and equity, and economic development.
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8. 3.3. Corporate Social Responsibility
Definitions of Corporate Social Responsibility (CSR)
The ISO defines CSR as the responsibility of an organization for the impact of its
decisions on social and the environment, through transparent and ethical behavior
that contribute to sustainable development, health and the welfare of society.
It takes into account the expectations of stakeholders, compliance with applicable
laws and consistent with international norms of behavior, and is integrated through
the organization and practiced in its relationship.
The world business council for sustainable development defines CSR as an
organization’s commitment to discretionary behavior that leads to economic
development and contributes to the welfare of its employees, local community and
society at large.
Corporate Social Responsibility (CSR) is also defined as the way companies
integrate social, environmental, and economic concerns into their values and
operations in a transparent and accountable manner.
It is integral to long-term business growth and success, and it also plays an
important role in promoting values internationally and contributing to the
sustainable development of communities.
CSR is an evolving business practice that incorporates sustainable development
into a company's business model. What the public thinks of a company is critical
to its success. 8

9. Key elements (components) of corporate social responsibility (CSR)
The components of CSR were presented by Caroll & Buccholtz in a well
publicized and frequently cited Carroll article entitled “The pyramid of
CSR: towards the management of organizational stakeholders.” take the
following ladders in its implementation:
Discretionary
Power
Ethical
Responsibility
Legal Responsibility
Economic Responsibly
Figure 3: Carroll’s pyramid of CSR.
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10. Key elements CSR……………….Cont’d
1. Economic responsibility: The first one is acting in an economically
responsible manner. Such economic responsibility focuses on identifying
corporate citizenship opportunities.
With corporate citizenship activities companies can try to differentiate
themselves from competition and attempt to gain market share.
In the long term, CSR can also play a role in building customer loyalty.
In addition to meeting the standards set for ethical, environmental and
philanthropic practices, economic responsibility focuses on practices that
facilitate the long-term growth of the business.
An example of economic responsibility is when a company modifies its
manufacturing processes to include recycled products
which could benefit the company by potentially lowering the cost of
materials and also benefit society by consuming fewer resources.
2. legal responsibility: Business that complies with local laws and
regulations are mostly treated as corporate citizens and well accepted by
the citizens.
The notion of CSR is not a mere respect of the rules regulating businesses
but goes beyond a legal plus obligations 10

11. Key elements CSR……………….Cont’d
Building on a base of compliance with legislation and regulations, CSR
typically includes “beyond law” commitments and activities pertaining to:
corporate governance and ethics,
environmental stewardship,
human rights (including core labor rights),
sustainable development,
conditions of work (including safety and health, hours of work, wages),
industrial relations,
community involvement,
respect for diverse cultures and disadvantaged peoples,
corporate philanthropy and employee volunteering,
customer satisfaction,
adherence to principles of fair competition,
anti-bribery and anti-corruption measures,
accountability, transparency and performance reporting; and
supplier relations, for both domestic and international supply chains
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12. Key elements CSR……………….Cont’d
3. Ethical Responsibility: is about accepted norms, standards and
expectations that reflect a concern for what consumers, employees,
shareholders, and the community regards as fair.
Ethical responsibilities can do with embracing existing moral standards
or bringing new values and standards to the environment.
The primary focus on ethics is to provide fair labor practices for
businesses’ employees as well as the employees of their suppliers.
Fair business practices for employees include equal pay for equal work
and living wage compensation initiatives.
Ethical labor practices for suppliers include the use of products that have
been certified as meeting fair trade standards.
4. Philanthropic/discretionary responsibility: refers to corporations acting
as a good corporate citizen by contributing resources to the community
and improving quality of life.
The distinction between ethical and philanthropic perspective is that the
philanthropic one is not expected in an ethical or moral sense as it is
carried on the discretion of the organization .
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13. Developing and Implementing CSR Strategy
Once you understood what CSR is and its overall value it is expected that you
enter in to implementation. This calls for a development of strategy.
When developing CSR strategy, the business case for CSR within a company
likely rest on the following major issues:
a. Human resources: a CSR program can be an aid to recruitment and retention
particularly in a competitive manner.
b. License to operate: The license of the operation of organization in any
business environment considers local government rules and regulations and
also considers international regulations.
c. Motives- When we look into the motives of organizations we basically come
across two scenarios:
One is that organizations are created not for profit but for customer
satisfaction.
Such organizations are established for maximizing customers’ satisfaction
With this regard their CSR initiatives might focus on adding value as their
basic existence is not tailored to making profits.
Other organizations are those that exist to make profits.
The intention of such organizations might vary but they offer different
social services. 13

14. Implementing CSR Strategy………Cont’d
d. Social Awareness through Education-, development of community awareness
through education and dialogue. The traditional concept of CSR is challenged by
the more community-conscious Creating Shared Value concept (CSV), and
Such awareness is mostly used by businesses for the maximization of their
bargaining powers.
e. Ethics Training- ethics training is another driver credited with changing the
behavior and culture of corporations.
The aim of such training is to help employees make ethical decisions when
answers are unclear.
In this regard organizations install work area code of ethics with view of
ensuring CSR.
f. Laws and regulations- Another driver of CSR is the role of independent
mediators, particularly the government
This is to ensure that corporations are prevented from harming the broader social
wellbeing, including people and the environment.
g. Stakeholders Priority-Corporations are motivated to become more socially
responsible because their most important stakeholders expect them to understand
and address the social and community issues that are relevant.
Understanding the importance of employees is one priority because of employee
engagement 14

15. Implementing CSR Strategy………Cont’d
 Different companies use different methodologies to implement corporate social
responsibility because:
 there is no “one-size-fits-all” method for pursuing a corporate social
responsibility approach.
 Each firm has unique characteristics and circumstances that will affect how it
views its operational context and its defining social responsibilities.
 Each will vary in its awareness of CSR issues and how much work it has
already done towards implementing a CSR approach.
The implementation framework for corporate social responsibility mostly takes
the form of Deming’s Model commonly used in ISO quality management.
The model uses a PDCA (Plan, Do, Check and Act) cycle.
The framework is intended to help various decision makers to assess a firm’s
effects on society, and
the challenges and opportunities associated with taking these impacts into
account in decision making
a firm’s CSR approach should be an integral part of its core business objectives
and strategy.
the individual and collective activities of the business sector advance progress
towards internationally-agreed challenges, and create an environment where
business is itself sustainable. 15

16. 3.5. Principles in Business ethics
In context of business performance, there are certain principles and guidelines,
based on ethical conducts as given here:
1. Principle of Conscience – This principle is based on inner-feeling of persons
to analyze the sense of right and wrong.
this requires businessmen can determine different roles and behavior at their
levels.
2. Principle of Wish less Work – This principle emphasize that there is no need
to perform all the task to be self-centered or self-interest.
Accordingly, we should perform all the role and behavior to another person’s
for their esteemed interest.
We should be devoted to our efforts to do the work for others.
3. Principle of Esprit –businessmen should give due attention to make best
services and try to develop feelings of devotion and truthfulness in services.
All the behavior and activities should be based on values and service motive
in business.
4. Principle of Publicity –all the activities and performance should be well
informed to every person or organizations directly or indirectly attached with
business.
It aims to remove the doubtfulness and misunderstanding among people. 16

17. Principles in Business ethics………..Cont’d
5. Principle of Purity –This principle requires every businessman should be
polite, truthful and tolerant in developing the feelings of mental peace.
6. Principle of Humanity –every businessman should respect human values &
human dignity within their policies, programs and different working areas.
The ethical behavior may determine the path of humanity.
7. Principle of Universal Values – It is required every businessmen should
conduct different business activities based on universal assumptions, customs
and overall accepted norms and principles by society.
8. Principle of Commitment – According to this principle, every businessmen
should fulfill their commitments and assurances as given to other persons.
The implementation of commitments should be based on honesty and
responsiveness.
9. Principle of Rationality – On the basis of the ethical code of conduct, every
businessmen should analyze and evaluate the good or bad, right or wrong,
ethical or unethical aspects within their business transaction
They must follow the rational attitudes and behavior.
10. Principle of Communicability –there is a need to make effective means of
communication with internal and external persons engaged with business.
The communication should be in cleared, open and justified manners. 17

18. Principles in Business ethics………..Cont’d
11. Principle of non-Cooperation in Evils –businessmen should discourage the
evils, misconduct and unethical behavior with different customers & society.
12. Principle of Cooperation with Other – It is required that ethical norms
motivate the feeling of collaboration and team spirit.
on the basis of capacity and available resource, businessmen should make full
cooperation with other persons as per their good conduct and value based behavior
13. Principle of Satisfaction –create and develop the behavior to establish pleasure
and happiness with other persons and the society at large.
In businesses, the customers should be satisfied at every stage.
14. Principle of Coordinate Ends and Means –try to make a coordination or
balance the ends and means within the work performance and allied activities.
develop the venture within the limitations of resources and capacities.
15. Principle of Due Process – All the persons engaged in business are required to
follow a reasonable and justified working process
16. Principle of Liking in Expectations –to establish ethical norms and conducts in
business, perform some excellence examples as per the expectations of others.
17. Principle of Transparency – Ethics denotes the concept of purity and truth.
All the business activities and transactions should be well informed with
justified manners with their different stakeholders and society.
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19. 3.6. Common arguments arising from business ethics
Although business ethics is growing internationally there are scholars who
hesitate as well as oppose its existence.
The core arguments presented by those who claim business ethics as not
needed are the following
1. The profit social benefit link- According to certain scholars businesses are
bound to do the right thing if they plan to win customers.
It is in the best interest of a business to be moral in order to stay competitive
and avoid the ill fated bankruptcy.
It is then proper to argue the non essentiality of a separate ethical discourse
on business
Although non ethical businesses are likely to be exposed and end up being a
failed venture, it is still a reality many businesses engage in an unethical
practice yet stay successful in the profit making
2.The Loyal agent argument- Some authors call for an absolute loyalty of
employees to business entities.
 According to their claims an employee of a business is the agent of the
business, and he/she is duty bound to act in the best interest of the employer.
 The best ethical rule is therefore working as per the orders of the employer
to achieve goals of the business with no interference from ethical narrations.
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20. Common arguments……….Cont’d
3. Respecting Law argument- Businesses function in a legal system of a
country.
 So long as a company is working by the rules of the game set by
government, it is not proper to add another realm of responsibility under
the ethical dimension.
 This argument is acceptable to the extent it recognizes respecting law is
proper, but fails to assess the different areas of concern between law and
ethics.
 Some actions may be legal in as per the laws of a nation, but may be
considered unethical.
 The variation in scope in the major issues governed by law and ethics
calls for the need for business ethics together with business law.
 Obeying the law is business ethics, but business ethics has more to it than
simple adherence to law.
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21. Common arguments……….Cont’d
The following are the core arguments raised in support of business ethics:
1. Ethics governs all voluntary human action: business is one of the major
human activities that foster easy life on earth.
As ethics governs all human actions, business can be no special course to
deviate from a right or wrong debate.
In fact the involvement of monetary interest will increase the conflict of
interest leading parties to behave in a manner that may harm others or
society at large.
You remember recent scenarios where traders put construction materials
inside injera or mix butter with banana, pepper with clay and the like.
This are examples around us that call for ethics in business.
2. The need for minimal standards of ethical behavior- ethical standards
are set by business ethics studies with the aim of informing parties the least
expected in their acts when they deal with in the society.
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22. Common arguments……….Cont’d
3. Ethics does not go contrary to pursuit of profit- Business ethics is not against
profit. It just expects the conduct and acts traders are involved to earn profit to be
proper.
as long as traders are part of the public at large, it is expected they should take in
to account both the interest of the public at large and their gain agenda.
The two are not mutually exclusive, there is an ethical way of doing business and
those who claim profit making
4. Prisoners dilemma- in game theorem prisoner dilemma is raised to express the
benefit of cooperating with one another to a better solution than opposing one
another to a better personal gain.
The societal desired goal of aggregate benefit can only be achieved if all actors
in the business work towards ethical conduct rather than compete to an
individual gain.
In a society where ethical values are not respected there is no guarantee of
property right possessed by one. A simple act of theft may turn years of effort to
none.
5. Customers and employees care about ethics- The most glaring argument is that
major business actors care about ethical businesses.
Be it customers/clients or employees of business almost all are likely to side a
business entity in the path of ethical practice than unethical business. 22