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Strategic Management Business Ethics

Shi Wang Professor Date

Strategic Management Business Ethics Introduction Business ethics mean three things to corporations. For most organizations, business ethics is about making sure that their actions do not break any rules or criminal laws in any of their work-related activities. Secondly, business organizations try to avoid any activity that would result in any civil laws against them and thirdly avoids any form of action that will taint the image of the company (CityLocal 2011). Primarily, businesses are concerned about trying to avoid loss of profit and company reputation. This is the reason why many companies hire attorneys and public relations expert to help them out with their concerns about correct business conduct. However, this can be costly for a business because more money will be allotted to attorneys and experts. In this sense, most companies create a creed that every employee should follow that will allow them to follow the three definitions of what business ethics is for them (Fiser n.d.). Business ethics or corporate ethics is a form of applied ethics or professional ethics that assesses the ethical principles and moral or ethical problems within the business environment. Business ethics apples to all aspects of business conduct and are crucial to the conduct of individuals and entire organizations (Enderle 1999). Business ethics is mostly concerned about what is right and wrong in a business and determining the right thing to do from what should be avoided is an important aspect of every business because its impact to the business is immense. When a business operates, its impact can be felt in every aspect of the business such as the lives of the people that works for the company,

its suppliers and the community where it operates. By having a good business ethics, businesses create a lasting relationship with the people that surround the business (Calle 2000). Todays business organizations are growing on a global scale and because of this, it has become mandatory for them to think of their business ethics more than ever. Due to the demands of globalization, many business organizations feel the pressure of staying competitive in their own industries, which have caused some businesses to take on course of actions that will gain them a competitive advantage over other businesses and for some experts, having this kind of sustainable advantage can be attained gearing the business organization with business capabilities (Buller & McEvoy 1999). In this paper, we will focus on the two matters: the corporate events that led to the creation of some legislation that prompted business organization to comply with such policies to make sure that maintain ethical capabilities and corporate social responsibility to allow them to create a good image and maintain their reputation in the industry. There are many business ethics theory that business organizations can use in order to maintain their competitive advantage. One of these theories is the common good approach, which aims to promote the common values and moral or ethical principles found in a society. Business owners and managers implement these principles to make sure that the companys overall mission is in complete accordance to the beliefs of the society as a whole.

Corporate Scandals and Economic Events

There have been events in the corporate world that led to many businesses creating their own set of business ethics that each and every individual in the company should follow. These events have even led to the creation of new legislations that would ensure that business corporations follow certain business rules that would allow them to avoid any violation of criminal laws. The most notable of these scandals was the scandal that involved Enron Corporation in October 2001. The Houston, Texas-based energy company hired Jeffrey Skilling several years after the company was formed in 1985. Skilling developed a staff of executives that were able to hide billions in debt from failed deals and projects through the use of several accounting loopholes, special purpose entities, as well as poor financial reporting. The scandal Shareholders of the company lost almost $11 billion when the stock price of the company hit a high of US$90 per share during the middle of 2000 and nose-dived to less than $1 by the end of November 2001. An investigation was conducted by the U.S. Securities and Exchange Commission (SEC) and Dynegy, a rival energy company also based in Houston, bid to take control over the company for at a fire sale price (Called to Account 2002). This event eventually led to the bankruptcy of the Enron Corporation. Many of the executives at the company were accused of different charges that led to a prison sentence. The companys auditor, Arthur Andersen, was found guilty in a United States District Court and the majority of the customers of Enron Corporation were lost leading the company to completely shut down (Called to Account 2002). Because of the scandalous events like the one that happened to Enron Corporation, several politicians in the United States became wary that things like such would happen again in

the future. Scandalous events like that cost investors tremendous amounts of dollars by the billions when the affected companys share prices collapse, sending a terrible shake in the public confidence in the nations securities markets. This is the reason why in 2002, U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH) sponsored an act as a direct response to the accounting scandals that occurred not only with Enron Corporation but as well as with other companies such as Tyco International, Adelphia, Peregrine Systems and WorldCom. The act, enacted in on July 30, 2002, is called the SarbanesOxley Act of 2002. There are variety of intricate and complex scenarios that led to the corporate fraud events that took place between 2000 and 2002. The highly-publicized scandals that shook the industry involving large companies like Enron, WorldCom and Tyco uncovered noteworthy problems that made conflicts of interest and incentive compensation practices. The careful analysis of these complex situations became the root cause for the creation and the passage of the SOX in 2002 (Farrell 2005). According to the Senator Paul Sarbanes, the Senate Banking Committee assumed on serial hearings that discussed in details the problems in the markets that fronted the loss of tremendous amounts of money in market value. These hearings that took place became the stepping stone for the creation of the legislation. The hearing that took place for six weeks brought in some of the best people in the United States to testify on the case. Senator Sarbanes added emphasized that inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission were the common nature of the problem (Lucas 2004).

Before the enactment of SOX, auditing firms, who were considered as the primary financial watchdogs for investors, did not have any regulating bodies that regulated them, thus resulting to these firms being self-regulated. Most of these companies performed noteworthy non-audit or consulting work for the companies which they are providing auditing services for and many of this non-audit work were more profitable than the auditing work they have signed to work for. This kind of work presented conflict of interest for the auditing firms. An example of this would be an audit firm challenging the company's accounting approach might hurt the relationship between the client and the CPA. According to the careful examination of these cases, it turned out that these scandals identified that Board Members of the companies either did not have a clear understanding if the nature of the complexities of the nature of the business or did not exercise their responsibilities in terms of understanding the business (Lucas 2004). On a similar note to the conflict of interest of auditors, securities analysts, whose role is to buy and sell recommendations on company stocks and bonds and investment bankers, who also help in providing companies loans or handle mergers and acquisitions, give opportunities for conflicts to arise. When a securities analyst issues a buy or sell recommendation on a stock while at the same time providing a lucrative investment banking services creates at least the appearance of a conflict of interest (Lucas 2004). In the case of Enron Corporation, several major banks provided large loans to the company without any comprehension, or all the while ignoring, the possible risks of the company. The investors of the banks that lent Enron loans as well as their clients were hurt by such bad loans, which resulted in large settlement payments by the banks. The willingness of the

banks to provide loans to Enron were seen by investors as a sign of health for the company, which in turn led them to invest more on the company, but due to the scandal, such efforts were put to waste as the company soon crumbled, thus hurting investors in the process. The sharp decline in technology stocks that began in 2000 have allegedly led to certain mutual fund managers to purchase technology stocks, while quietly selling them led to losses that contributed to the general anger among investors (Lucas 2004). The pressure to manage earnings, which stemmed from the stock option and bonus practices, in combination with stock prices volatility also contributed to the adoption of the Act. Some companies did not consider stock options as compensation expense therefore leading to the encouragement for the formation of this compensation (Lucas 2004). As a result, it has become mandatory for these corporations to become aware of their actions and make sure that these practices are in accordance with the laws created by the authorities. Guaranteeing that business organizations follow these rules means that they are following the guidelines of their business ethics because they make sure that they do not violate any rules. Corporate Responsibility Public visibility is important for any business organization. Public visibility allows organizations to become more noticeable by the consumers thus leading for an increased traffic of people towards the company. Reputation is defined as the overall evaluation of the character or quality of a person usually held by the people who are acquainted with that person. For business organizations, these people are the stakeholders, especially the customers that bring in revenues for the business.

There are many benefits to keeping a good reputation. First, a company that keeps a good reputation is synonymous to a company that does good business. Second, a good reputation will keep a company ahead of a fierce competition because a business with a good reputation will rake in more customers that a business that do not have good reputation. Thirdly, aside from increased revenue from customers, having a good reputation allows business organizations to create good business relationships with suppliers, other businesses that the business organization may collaborate with in the future as well as the society where the organization is operating. Having a good reputation is the reason why many businesses employ good public relations because public relations are vital to maintaining a good reputation, which is something that business organizations aim for. Public relation is an important aspect of maintaining a good image for many business organizations. Public relations or PR is defined as the management function that assesses public attitudes and identifies the different policies and procedures within the organization or an individual with the public interest. It also entails planning and executing such plans and programs of action to gain public understanding and acceptance (Ebersole). Public relations can be executed in different ways. Most public relations efforts include public speaking activities such as public affairs through engaging in public speaking or making sponsors of activities that are important for the community. Public relations also involve appearing in media events where media networks are present. This will allow the company to become more visible to the public and gets the chance to advertise their activities for the economy (Lautenslager 2003). Public relations also entail working with different media companies to win a spot on television for a commercial ad to be seen by the public. These are all the important aspects of

public relations, and if a business organization is able to do this, the business is on the right track to developing good public relations that will give them a good reputation and a good image for the business organization Persuading the public or influencing them about what the organization want them to see is the primary objective of public relations. A business organization needs to have good PR. When a business organization has a good PR, it means that create a backdrop for what the public wants to perceive of them, which makes it very easy for the business organization to become easily accepted and perceived by the public domain. The acceptance rate of the public is higher than that of a company with good PR. Anything that they want to do is easily acceptable to the public because they have already created a good backdrop on how they want the public want to see them. Experts have argued that PR has been very instrumental in creating a brand for many business organizations. Many large business organizations use PR as a means of making their brands well-known. Business owners in their respective fields have used PR and the associated media to channel PR through as a means of becoming known and generating more public attention towards their products and services. PR is a form communication that targets a specific market. Although the process of communication is done publicly, the audience that the organization is targeting is specific, which are potential clients, customers or investors (Lautenslager 2003). Having a good reputation through excellent PR is important for any business organization who aims to enter into corporate social responsibility. It has been mentioned above that companies with good PR makes it easy for them to introduce other activities to the public since

they have already created a backdrop for what they want the public to perceive of them. This includes corporate social responsibility. Corporate Social Responsibility is about how companies manage the business processes to produce an overall positive impact on society (Baker 2011). In the overall operations of a business organization, they are required to answer to two aspects of their operations. First is in the quality of their management of people and the entire operations and second is the impact they create in the on society in various areas (Baker, 2011). This is where corporate social responsibility takes place. When an organization is backed up by good PR, they create this good image and reputation that the public sees of them. By taking advantage of this good reputation that has been created by good PR, the business organization is given a big chance of paving their own way towards a more highly regarded form of public relations, which comes in the form of corporate social responsibility. If business organizations have built a not-so-good reputation at some point in their history, they may find it difficult to bounce back and regain that much-needed boost for the business. In this case, engaging in corporate social responsibilities is quite difficult for them since bad reputation has scarred their image to the public. The reason for this is that the public wants a business organization that has a good record. If that image or good record is missing, clients and potential customers are not likely to engage in business with that organization. The business organization needs to exert more effort in the process; first to bounce back from the bad image and then to gather as many customers as they


can. This entails that in order for the business organization to venture into any activities that involve corporate social responsibility. Different organizations engage in corporate social responsibility because of various reasons. For most businesses it is no longer considered as an option because it is the way of the future for many business organizations. For many business organizations, engaging in CSR can mean a lot of things because CSR in fact has many different paths to go through to become accomplished. CSR can be supporting environmental activities to supporting a local charity event or group (Corporate Social Responsibility: It's No Longer an Option, 2008). Employee engagement is an important aspect of a business and according to studies; a good CSR contributes to the drive of employees engaging more in company activities. For most business organizations in the United States, its employees are driven more to perform better if the business they are working is engaged in CSR. The reason for this is that the companys reputation for social responsibility is also among the top 10 drivers of employee engagement (Corporate Social Responsibility: It's No Longer an Option, 2008). A company with a good reputation has been found to attract more skilled employers, which can be advantageous for the business organization because skilled employees would mean more manpower for the production team. Organizations with a reputation for CSR can take advantage of this benefit and fortify their appeal as an attractive potential employer for highlyskilled by making their commitment part of their value proposition for potential candidates (Corporate Social Responsibility: It's No Longer an Option, 2008). Major companies with global operations have become highly committed to their involvement to CSR. The perspective of employees when it comes to the CSR activities of their

employees translates to more positive attitude when it comes to better performance. Companies that have good CRS activities have good customer relations and good customer service skills. When employees are good at these facets of the business they are given extra credit for it by their employer. Coca-Cola for example has been a great contributor to the welfare of the society by different programs through its long existence in the industry. The most recent efforts of the company was the creation of the Haiti Hope Project, which brings together a coalition of business, government and civil society partners to create opportunity for 25,000 Haitian mango farmers and their families through the development of a sustainable mango juice industry in the country (Coca-Cola Company, 2010). The project is a five-year plan that is currently estimated at $7.5 million will seek to double the income of the Haitian farmers and to raise their standard of living. The project will also help the country recover from the recent natural disasters that hit the country (Coca-Cola Company, 2010). The Importance of Corporate Social Responsibility There are two arguments in CSR, according to experts. The first one is the normative case and the second one is the business case. In the normative case, businesses conduct CSR because they feel that it is the right thing to do. They conduct CSR because it is what the organizations heart is telling them what to do. The business case on the other hand is doing CSR because it is the only logical thing to do. When business organizations do CSR in this argument, they think using their mind (Cuen, 2009).


Some organizations are investing more on CSR based on the business case rather than the normative case. When organizations do this, one may think that business organizations are not really authentic or insincere in their act of engaging in corporate social responsibility. Experts are saying that in order to really take advantage of the benefits of CSR, organizations must infuse the normative case and business case of corporate social responsibility (The Business Case for Corporate Social Responsibility). In this case, people often times ask the question; what do business organizations who invest big in corporate social responsibility get from the act? Studies have shown that companies that focus more on social responsibilities such as climate change, environmental protection and looking after the welfare of its workforce and the society have outperformed those business organizations that do not focus on corporate social responsibilities (Engardio, 2008). For companies that engage in CSR activities, the benefits have been very fruitful. A majority of businesses today believe strongly that the benefits of CSR to their companies have drawn more customers, boosted shareholder value and increased profits (Engardio, 2008). For business organizations that practice CSR activities, the benefits are more than just the ones mentioned in the survey. The main objective of CSR is for business organizations to gain a better reputation and create a good brand image in the process. It has been mentioned that having a good reputation in business is translatable to better sales and more investors. A good reputation for businesses is like putting on that special perfume to attract possible suitors for the company. In addition to increased investors, business organizations also increase customer loyalty in the process (Engardio, 2008).


Surveys have proven that many American consumers have said that when making purchases, they take into consideration corporate citizenship practices in their decision to buy a product. This entails that what customers perceive of the business organization is a determining factor for customers choosing their products and services over competitors. Thirty six percent of the people surveyed by the poll said that corporate citizenship is a necessary factor in deciding to buy a product. The poll further added that 91% of those surveyed said they will change loyalty to another business if the company they currently do business with has negative image (Engardio, 2008). Conclusion Business ethics is an important aspect of running a business. For most companies in compliance with legislations such as the Sarbanes-Oxley Act of 2002 may cause business organizations to spend tons of money in compliance but in the long run, it has given corporations the opportunity to become more responsible with their finances and financial actions. Engaging in CSR is also a business ethics that businesses do. It does have its positive impact on many business organizations, however despite these benefits; many executives from business organizations are still not convinced that CSR activities would really benefit the entire organization. This is normal, because there are really business organizations that do not consider CSR as one of the things that their organizations should prioritize. When businesses comply with legislations aimed at creating an ethical practice in business, they utilize the common good approach to business ethics because they make it a point that their actions are in sync with the accepted good in the society. The same theory applies to corporate social responsibility. Creating a good reputation and a good image that serves the good

of the society is also an approach that uses the common good approach theory to business ethics. If business would continue to comply with legislations and incorporate CSR efforts in their activities, there is no doubt that Buller and McIvoys theory of ethical capabilities will be fulfilled.

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