Centrally Planned Economies And Free Enterprise Commerce Essay

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Since well-published business scandals, of which Enron and WorldCom are the most famous, the importance of ethics and corporate governance has grown massively and has become fundamental to making business decisions. This is not just a matter of being righteous: if an organization has a reputation for making unethical decisions it will be perceived as being a high-risk organization that it might be better not to be dealt with, whether as an employee, lender, investor, supplier or partner.

Usually, the ethical issues concerning business exists at three levels:

Macro Level:

The role of business at national and international level and concerned with assessing the relative virtues of different political/social systems, e.g. centrally planned economies and free enterprise.

Corporate Level:

It focuses on the ethical issues facing individual companies when formulating and implementing strategies.

Individual Level:

It concerns the behavior and actions of individuals within the organization.

ETHICAL DILEMMA

An Ethical Dilemma involves a situation that is morally problematic and makes a person question what is the 'right' or 'wrong' thing to do. The following example shows the range of problems facing some managers in organization.

Should a manger break the law if he/she thinks it is morally right to do so? For example, the partheid law that used to be in place in South Africa caused a dilemma for some people. They can take the view that all laws should be obeyed and that effort should be made to change a law rather than disobey it. The dilemma is between obeying a 'legal' law or 'moral' law.

Trading with unsavoury governments can be seen as either contributing to the continuation of the regime or supporting economic growth that benefits all concerned.

If a foreign subsidiary of a company is operating in a country which it is legally permissible to employ slave labour , should your company take advantage of this facility?

In order to protect the environment, should an organization simply comply with the law or do more than is required to take due regard of the well-being of future generations?

What do people do when offered a bribe? The dilemma revolves around size of the bribe and the influence that is being sought. In Europe, many managers receive a bottle of whisky from suppliers at Christmas. This may be the done thing but I bigger gifts are involved there might well be a conflict between personal and organizational interests. In countries where bribery is commonplace, e.g. baksheesh, you cannot do business there unless you pay. Should you necessarily judge by others by your own standards? Is one set of ethics better than other?

When there is a need to downsize and some people are to be made redundant, the dilemma is often between fairness and efficiency. Does a manager operate the 'last in, first out' rule or retain a mix of employees that would be most cost-effective?

If asked to falsify some data regarding the safety of a product or to be economical with the truth, there is a dilemma between going along with it and helping the organization (and the boss) and refusing, although it may adversely affect the prospects of promotion.

ETHICAL STANCES:

According to Johnson, Scholes and Whittington an Ethical stance is:

"The extent to which and organization will exceed its minimum obligation to stakeholders"

There are four possible ethical stances:

Short-term Stakeholder Interest:

This ethical stance has a short term focus in that it aims to maximize profits in the financial year. Organisations with this ethical stance believe that it is the role of governments to set the legal minimum standard, and anything delivered above this would be to the detriment of their shareholders.

Longer-term Stakeholder Interest:

This ethical stance broadly the same approach as the short-term shareholder interest except that it takes a monger-term view. Hence, it may be appropriate to incur additional cost now so as to achieve higher returns in the future. An example could be a public service donating some funds to a charity in the belief that it will save the taxpayer the cost associated with providing the entire service should the charity cease to work. Hence this ethical stance is aware of other stakeholders and their impact on long-term profit or cost.

Multiple Stakeholder Obligation:

This ethical stance accepts that the organization exists for more than simply making a profit, or providing services at a minimal cost to taxpayers. It takes the view that all organisations have a role to play in society and so they must take account of all the stakeholder's interests. Hence they explicitly involve other stakeholders, and believe that they have a purpose beyond the financial.

Shaper of the Society:

This ethical stance is ideologically driven and sees its vision as being the focus for all its actions. Financial and other stakeholder's interests are secondary to the overriding purpose of the organisation.

THE REIDENBACH AND ROBIN MODEL

This model proposes five developmental stages that a company may grow through, tempered against a concern for profits and ethical standards.

Stage 1:

At the base are the moral or ethically challenged companies. Amoral organisations are around strictly for the short term. They are prepared to condone any actions that contribute to the organisation's aims and pursue winning at any cost. Obedience is valued and rewarded and there is little concern for employees other than their value as an economic unit of production.

At the heart of this organization is the philosophical conviction that business is not subject to the same rules as individuals and that there is no set of values other than greed.

Stage 2:

Legalistic organizations obey the law, though ethical concerns are judged on the basis of adherence to the letter if not the spirit of it, if that conflicts with economic performance. They adopt codes of conduct that read like products of legal department (which they are).

The argument goes that 'if it's legal, it's OK', and 'if we are not sure, have the lawyers check it out' typifies the legalistic approach. Economic performance dominates evaluations and rewards. A legalistic company's code of ethics - if it exists - would be dominated by don't do anything to harm the organization statements.

Some legalistic companies have no ethics code, and do not accept the necessity. Often they see little purpose in expressing explicit ethical standards, and indeed some feel any such statements could lead to difficulties and complications.

Stage 3:

Responsive organisations are those that take a view - perhaps cynically - that there is something to be gained from ethical behavior. They are interested in being responsible corporate citizens, mainly because it is expedient, and have codes of conduct that begin to look more like codes of ethics. Managers understand the value of not acting solely on a legal basis, even though they believe they could perform better without such codes.

Although a reactive mentality may remain, it is occupied with a growing sense of balance between profits and ethics. Management begins to test and learn from more expensive actions. A responsive company's ethics code would reflect a concern for other stakeholders, but additional ethics support vehicles, such as hotlines, are less likely to be found.

Most stage three companies would leave ethical concerns aside until they become a problem - only then would they consider remedial action.

Stage 4:

Emerging ethical (or ethically engaged) organisations take an active (rather than reactive) interest in ethical issues. They recognize the existence of a social contract between business and society, and seek to instill that attitude throughout the corporation. Managers have an active concern for ethical outcomes and want to do the right thing. Values are shared across the organization. Ethical perception has focus but may still lack organization and long-term planning. Ethical values in such companies are part of the culture. Codes of ethics are action documents, and contain statements reflecting core values.

These organisations accept that their code of ethics is a starting point - any code not monitored and enforced rapidly becomes a dead letter. One leading UK bank has put in place a range of instruments for enlisting staff commitment to its code, including ethics hotlines and regular assessment of code effectiveness.

Stage 5:

Ethical organisations have a 'total ethical profile' with carefully selected core values (and an approach to hiring, training, firing and rewarding) reflect it. They have a philosophy that informs everything that the company does and a commitment on the part of everyone to carefully select core values. They balance profits and and ethics throughout their culture.

Although the concept of social responsibility may change from time to time, the pyramid model gives us a framework for understanding the evolving nature of firm's economic, legal, ethical and philanthropic performance.

Reindbach and Robin classify a growing number of organisations in the 'emergent' stage four, but say they cannot find any examples of the 'ideal' final stage, which starts off with a founding moral stance permeating the whole culture.

ILLUTRATION 1:

On 30 September 2004, the share price of US drug company Merck fell to an eight -year low after it was forced to withdraw a painkiller Vioxx, used by many arthritis sufferers, due to side effect fears.

Merck's share price fell 26.% after it removed the Vioxx product from all markets due to an increased risk of heart attack and stroke.

The announcement was immediately followed by a US lawsuit claiming the firm misled users. One of the legal firms that has filed the suit, said Merck had failed to warn that the drug was defective.

However, other analytics said Merck had acted as promptly as possible.

In 2005, a Texas jury found Merck & Co. responsible for the death of a 59-year old triathlete who was taking the company's once-popular painkiller, Vioxx.

The jury hearing the first Vioxx case to go to trial awarded the man's widow $253.4 million in punitive and compensatory damages - a harsh reprimand to an industry leader that enjoyed a generally favourable public image before Vioxx problem began.

Investors in pharmaceutical companies know that there is always the risk of long-term side effects coming to light and this is factored into their risk and reward perspective. The huge fall in the share price was caused by the suspicion at the time that Merck had evidence about the side effects but suppressed that information.

There was damage, justified or not, to both the company's share price and to ti's reputation. Real costs of suspected unethical behavior.

ILLUSTRATION 2:

Share options are generally regarded as a good way of giving directors and managers incentives that encourage behavior that will enhance shareholder wealth. Typically, options are granted giving the right to buy shares at or just above the current share price. If the share price rises in the future, managers can exercise their options to buy and immediately sell at a profit at the current price. Managers are therefore encouraged to work for share price increases - which increase shareholder wealth also.

However, some companies have been found to be issuing backdated options, i.e. options to buy at a price lower than the current price. Therefore, managers can make a profit without generating future share price increases.

Apple Inc. has discovered 15 occasions o which backdated options were granted for their shares. The chief executive, Steve Jobs, knew of the practice, but did not personally benefit from these options. A former financial officer has resigned from the board. An analyst has commented 'if this were to escalate to the point where Steve Jobs were forced to resign, it would be a disaster for Apple'. However, resignation seems unlikely as Apple has said that Jobs had not benefited personally from the practice. The affair has somewhat tarnished unique reputations of both Apple an Steve Jobs.

Apple was only one of many companies to grant backdated options. Around 120 US public companies, most in IT, have either come under government investigation, or have been forced to launch internal investigations into the options. So far, more than 30 executives, including CEO, presidents, CFOs and head of Human Resources (HR), have left companies that are under investigation. Executive from two have been indicted.

CORPORATE SOCIAL RESPONSIBILTY

Corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance.

Although there might be differences of opinion about what is and what is not ethical, few people would argue that business ethics, for example honesty, are voluntary. However, the case for corporate social responsibility is not so clear cut, and there are a number of different views relating to social responsibility.

The Shareholder View:

Friedman argues that, 'the social responsibility of business is to make a profit'. The justifications for this are:

Pursuing profit will result in increased employment, generate economic growth, stimulate innovation, increase the tax take and generally raise living standards. Making profits is therefore, itself a public good and is a sufficient purpose of business.

Directors should be acting on behalf of the shareholders, CSR too often means that directors are being charitable with other people's money.

Shareholders are free to use dividends to contribute towards CSR if they wish.

Business is not competent to decide moral and ethical matters. Where is the democratic connection between what a business decides to spend money and effort on and where that money and effort are actually needed or wanted by society? Are CSR projects chosen simply because they are areas where directors, or their spouses, are personally interested.

The longer-term self-interest view:

Drucker argues that it is in the long-term economic self-interest of business to act in a reasonable manner:

Failure to do so will prompt legislation

Failure to do so will damage the business and even the industry.

The public relations and enhancement of reputation arising from CSR will increase profits in the long term. CSR is therefore seen and justified as expenditure that helps to generate long term profits.

The stakeholder view:

This view assumes that shareholders are simply one stakeholder among many, and that their interests are not necessarily paramount. There may be circumstances where shareholder interest has to be sacrificed for the greater good of other stakeholders.

Quite how it is decided which stakeholders deserve generosity at any particular time is not clear. There is a danger that the stakeholders that benefit are those with most power - which is not necessarily the same as the shareholders who might deserve attention.

IILUSTRATION

BP, primarily known as an oil company, launched its, "Beyond Petroleum" initiative in the early 2000s to address climate change. In 2005, it announced plans to invest $8 billion over the next 10 years in renewable energy. It is already the second largest solar-power producer in the world.

However, two recent incidents have damaged BP's image for promoting CSR. Firstly, there was an explosion at its Texas City refinery in which 15 people were killed and over 150 injured. Secondly, there was a serious oil leak from the pipeline at Prudhose Bay in Alaska. There are accusations that lack if investment in safety, training, and inspection were responsible for both incidents. Critics of BP have accused it of "Greenwash", i.e. using environmentally friendly programmed to divert attention from less benign activities.

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