Chapter 12:

Ethical Management
Systems

Group Members: Madiha Siddiqui, Faiza Jamall, Mehr Azeem, Anum

Tariq, Kinza Tanveer, Fahd Ali
 Corporate Governance and Ethical
Management
Corporate (self) governance is the responsibility of the
corporation’s board of directors
• the ultimate purpose –the end itself-of capitalist business is
to maximize long run profits and business strategy seeks to
calculate the means to achieve the this ultimate objective
given a company’s history, resources, market situation and
other relevant circumstances.
• the McKinsey Investor Survey reflects the importance
attached to self- governance as an instrument of profit
maximization by the market.
To summarize the corporate
governance…

Improved self governance is a way to

respond to pressure raised by interest
groups specially vocal in various strands
of the anti globalization movement
Must serve the following purposes…

• ensuring that managers effectively execute the strategy laid

down by the board of directors
• avoiding fraud, deception and malpractices within corporation
which frustrate or increase the cost of execution of this strategy
•providing opportunities for shareholders to scrutinize functioning
and performance of the corporation
•responding to pressure from special interest groups and from
general public
• reducing pressure for increased state regulation and intervention
in corporate affairs
Must be committed to the
following principles:

• Fairness
• Accountability
• Responsibilities
• Transparency
 Triple Bottom Line Reporting
 The triple bottom line reporting implies that a
company’s directors should report not only to the
shareholders but also to all the stakeholders
who are likely to be affected by the company’s
policies

 Ethical Reporting should be done

 The directors are expected to outline the

financial, environmental and social risks
associated with the implementation of certain
policies that are to be implemented
 Ethical Risks

 larger the ethical risk involved in the

implementation of a certain policy, the
greater chance that the Board of the
company will take ethical management
and reporting seriously
 Reputation
 Reputation helps a company to build
strong brand image and brand equity. In
other words, reputation builds up the
goodwill of an organization

 ensures the credibility of that organization

and attracts high investments and higher
quality employees as well
 Identifying Ethical Risks
The organization’s internal risk of unethical
behavior can be determined by:

• Culture
• Policies
• Organizational systems
• Operational procedures
 Identifying Ethical Risks
The external factors that determine the risk
of unethical behavior are:

• National legal environment

• The organization and its social salience of
crime
• Level of corruption in the society
 Stakeholders Involvement
 The stakeholders’ perceptions should be
considered while evaluating the strategy
options and the organization should seek
to coordinate its ethical perspective with
that of its stakeholders
Ways of Involving the Stakeholders

 Identify the stakeholders whose ethical

perspective matter

 Prioritization of stakeholders interests in terms of

legal, technological, social, financial and political
power of different stakeholders

 Planning stakeholder interaction and setting the

objectives of what the company wants to
achieve
 Prioritization of these objectives and then
deciding on timelines of when to achieve
them

 Formulation of a stakeholder engagement

strategy (How is the information exchange
between stakeholder and organization is
to be structured? How much information is
to be revealed? etc)
Ways of Involving the Stakeholders
 Identify
• Measures of assessing the quality of
information provided by stakeholders
• Mechanisms to evaluate the risks pointed out
by the stakeholders
• Actions required to control the ethical risks
pointed out
• Mechanisms to evaluate the outcomes of the
stakeholder involvement process in terms of
costs and benefits to the organization
 The Board should develop a strategy that
will:

• To control the significant ethical risks

• Enable the organization to take advantage of
the opportunities that maybe generated
through Ethical risk management.
 Codes of Ethics

• A code of ethics is a statement which

explicates morally acceptable behaviour
within a corporation
Objectives

• Raising ethical awareness and expectations (by establishing

explicit ethical standards and official ‘values’)
• Provide guidance for ethical decision making
• Promote organizational integration by strengthening a ‘value’
based organizational culture
• The code of ethics are designed to promote the
corporation’s reputation, pacify objectors and preempt legal
action and state intervention
• self discipline, accountability and loyalty are expected to be
strengthened by the formulation and the implementation of
the corporate code of ethics
• codes can have a negative tone if their main purpose is the
stamping out of malpractices
• an aspirational code is relatively short statement of
expected ethical norms
• Directional codes-sometimes called ‘ codes of
conduct’ provide guidelines about ethical
expectations as far as employee behaviour is
concerned in specific circumstances

It typically includes:
 a statement of the rationale for the code
 expected ethical standards of behaviour
 guidelines for conduct in specified situations
 sanctions for violation of guidelines
 Ethical Management Systems
 Ethical management systems have to be
constructed to operationalise ethical
practice in the working life of the
corporation
 an ethical management strategy seeks to
change the behavior of corporate insiders,
both managers and employees
Modes of Ethical
Management
 The ‘ Immoral’ Corporation

Risks involved:
 the long run financial costs of ethical ‘
misbehavior’ may be seriously underestimated
 stakeholders may become alienated and
consumer loyalty may be undermined
 The Hypocritical Corporation

Risks involved:
 Avowed ethical stance lacks credibility specially
among major stakeholders.
 Distance between claims and action increase
vulnerability to scandals
 Employees are tempted to mimic the hypocrisy
the corporation displays in the larger social
environment by prioritizing self interest while
pretending to promote corporate goals
 The ‘ Internalizing’ corporation

Risks involved:
 definition and focus on corporate identity may
suffer as personal autonomy is encouraged
 ethical dissidence may emerge as a
consequence of the encouraging of personal
autonomy and “ethics talk” leaders may dispute
managerial authority
 Discretion granted to employees may be
abused
 The ‘Ethically ideal’ Corporation

Risks involved:
 development of a sense of superiority and
ethical complacency
 unrealistic ethical expectations of employees
and specially of new recruits
 Absence of a formal structure for ethical
management
 The ‘Law Abiding' Corporation

Risks involved:

2) Emphasis on the letter of the law obscures the need for

compliance with the spirit of the legislation and conceals
the risks involved in a too literal interpretation of legal
and regulatory requirements.

3) Personal autonomy and judgment of employees is

undermined as all that is required is strict compliance
with the letter of the law

4) The ethical code is elaborate and detailed and there is a

need to continuously revise it as new unforeseen
circumstances develop
Dimensions of Ethical Management
Systems

 Ethical management systems need to be

designed and implemented for articulating
the ethical orientation of the corporation
which “takes ethics seriously”
 The EM system should provide ethical
considerations in the following areas:

• Communication
• Recruitment
• Orientation
• Performance Evaluation
• Training
• Monitoring and Disciplining
 Communication

 Awareness Programs
 Ethics Talk
 Ethical Help Line
 Ethical Newsletters
 Recruitment

 Recruitment processes structured to select

employees with appropriate ethical orientation
 Integrity is a measurable variable in the process
 However, checking integrity of employees in
Pakistan through reference checking does not
prove useful due to exaggeration of references
 Orientation

 Orientation programs for new entrants

influence ethical orientation
 New entrants have an open mind and are
receptive to cultural adaptation
 Performance Evaluation

 Since decision making involves ethical

dimensions, measuring ethical conduct
can be the best performance evaluator in
jobs
 Training
 Enables employees to interpret and apply
the code of ethics
 Generic case studies are used for training
 Training helps identify means for
stimulating ethical motivation and to
develop an ethical organizational culture
 Involves cognitive, behavioral and
managerial competence
 Monitoring and Disciplining
 Disciplinary systems usually impose
punishment for major violations of the
corporation’s ethical code
 Monitoring and evaluation of the
corporation’s ethical performance can
focus on regular interaction with key
stakeholder groups to respond to
changing expectations
 Role Players
 Improving inter personal relations within the
corporation is a key stimulant of ethical development

 The major role players according to Business Ethics

literature are

e) The CEO
f) The ethics sponsor
g) The ethics champion
h) Members of the Ethics Committee of the Board
i) The ethics manager
j) Line managers
 Reporting Systems
 Sustainaibility/ triple bottom line reporting:
 Where ‘ethical reporting systems’are integrated with
‘environmental’ and ‘social resposibility’ reporting systems.
 Found in mature capitalist orders.
 Used to counter public criticism
 Improves relationship with stakeholders
 Popularity of ‘ ethical investment funds’
 Its quality is dependent the quality of its measurement
system.
(AA 100) provided be ISEA
 Accountancy Process
 Identify indicators to be reported.
 Identify sources of information.
 Identify methods of information
collection and analysis.
 Set targets with respect to key
indicators.
 Formulate an ‘improvement’ plan.
 Costs and benefits of ‘ethical
reporting’ being integrated with ‘MIS’
 American System’s format vs GRI
system.
 Internal reporting vs External
reporting.
 Pakistani perspective.