ACCA P1 Governance, Risk and Ethics - 2011 - Study text - Emile Woolf Publishing
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Paper P1: Governance, risk and ethics
284 © Emile Woolf Publishing Limited
© Emile Woolf Publishing Limited
285
Paper P1
Governance,riskandethics
CHAPTER
13
Ethics and social
responsibility
Contents
1 Ethics, governance and social responsibility
2 Seven positions on social responsibility
3 The cultural context of ethics
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Ethics, governance and social responsibility
Introduction
Shareholder theory
Stakeholder theory
Social contract theory
Johnson and Scholes: four possible ethical stances for a business entity
Ethical stance: personal and corporate
1 Ethics, governance and social responsibility
1.1 Introduction
Business entities operate within society. They interact with their local communities.
Their employees, customers and suppliers are all members of the society in which
the entity operates.
The responsibilities of a business entity towards society were considered in earlier
chapters on corporate governance. There is a link between ethics, corporate
governance and social responsibility.
1.2 Shareholder theory
The shareholder theory of corporate governance is based on the view that the
objective of a company is to maximise value for its shareholders. It was suggested in
the previous chapter that a teleological approach to ethics can be used to justify the
profit motive in business, so that the objective of maximising shareholder wealth
(within constraints of ethical behaviour) is perfectly legitimate.
Shareholders, especially shareholders of large stock market companies, often trade
their shares. Some are investors in the company for the long term and others invest
only for the short term, hoping to make a quick profit from a favourable movement
in the share price.
Long-term shareholders are likely to support the view that the company should
invest for long-term growth. If necessary, short-term profits should be sacrificed
in order to invest more retained profits in the business.
Short-term shareholders are likely to support a policy of high dividend
payments and measures to boost short term profits (in the hope that this will
lead to a higher share price).
1.3 Stakeholder theory
The stakeholder theory of corporate governance is that a company’s directors owe a
duty to all major stakeholders in the company, including not just employees and
customers, but also communities and society as a whole. According to the
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normative view described in an earlier chapter), a company has a moral duty to
consider the concerns of various stakeholder groups.
This concept of governance can be linked to a deontological approach to business
ethics. This would argue that all individuals have a basic moral right to be treated
by business entities in a way that respects their interests and concerns. Employees
should not be treated simply as a means to achieving the end of higher company
profits.
The rights of stakeholders can be analysed in terms of stakeholder groups
(employees, customers, shareholders and so on) rather than considering each
stakeholder individually. The possession of intrinsic moral rights by stakeholders
creates corresponding ethical duties for a company to respect to those rights.
1.4 Social contract theory
There is also a social contract theory of corporate governance. This is based on the
view that members of society give legal recognition to a company. They allow the
company to exist and act as a legal person within society. They also allow a
company to use land and resources, and to hire members of society as employees.
The company therefore has an obligation to pursue the objective of making profits
only in ways that will also enhance the material well-being of society as a whole.
Profit-making must be ethical and a company must consider the interests of society
in the decisions and actions that it takes.
1.5 Johnson and Scholes: four possible ethical stances for a business
entity
Johnson and Scholes (2002) have suggested that companies can take any of four
possible ethical stances. These are consistent with the differing views of corporate
governance. The four ethical stances are to focus on:
Maximising short-term shareholder interests (the ‘least ethical’ of the four
stances)
Maximising long-term shareholder interests
Multiple stakeholder obligations: recognising obligations to different
stakeholder groups
Being a shaper of society.
Shaper of society
‘Shaping society’ means changing conditions in society and altering the way that
society operates and perceives itself. In the past (and probably also the present),
technology has been a significant shaper of society, affecting how and where we all
live. Media companies have also been cited as important shapers of society in the
past 100 years or so, because film has changed the way in which society viewed
itself.
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Companies control resources and make decisions about the future of technology.
They are instrumental in shaping society.
Johnson and Scholes argued that ethical companies recognise this role that they
have, and their decisions and actions are taken with a view to creating benefits for
society and improving the well-being of society.
1.5 Ethical stance: personal and corporate
An ethical stance or posture is a position that someone takes on an ethical issue.
Both individuals and organisations can develop a conscious ethical stance on certain
issues, their decisions and actions are affected by it. For example, a company might
take the view that it will not do business with certain types of customer or supplier.
Here are just two examples.
Some retailers in the UK refuse to buy goods from suppliers in other countries
that use slave labour or child labour. This ethical stance might be taken partly
out of self-interest (reputation risk), but it might also be guided by ethical
concerns.
In 2006, the British Jewellers Association took an ethical stance against the
sourcing of diamonds from countries (such as the Congo and Sierra Leone)
where fighting over diamonds has led to civil war and widespread killing. It
calls these diamonds ‘blood diamonds’ and is attempting to eliminate the trade
in these diamonds in the UK.
The ethical stance in a company comes from the moral values and ethical stance of
key individuals who work within the company, and from the corporate culture. The
ethical aspects of culture are discussed later.
The fictitious example below shows how personal ethics can influence the ethical
stance of a company, which in turn might have an effect on its overall business and
marketing strategies.
Example
Rick and Tina used to be executives in a large company that made soft drinks. They
have now set up their own company to make fruit drinks using a recipe devised by
Tina.
They wanted to set up their own company so that they could do something that
they enjoyed and believed in. During their time working for the large company,
each of them accumulated substantial personal wealth; so from their own company
all they wanted to do was avoid heavy losses after the initial set-up costs and earn a
reasonable living. They were more interested in building the business than in
making quick profits and returns.
Each of them had strong moral views about showing respect to other people and
protecting the environment.
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As owner-founders of the company, they had a vital role in establishing the general
culture of the company, and its ethical stance on various issues.
They devised a mission statement for the company. This was to produce a
healthy drink product that would contain only natural ingredients, and to
operate as an ethical company with concern for its employees and the
environment.
The business strategies of the company were based on the production of a
healthy food drink in a way that is ‘friendly’ to the environment.
- The company invested in technology that enabled them to produce their
own cartons and bottles from recycled plastic and glass. About 60% of the
raw materials in the bottles and cartons for the drinks came from recycled
materials.
- The company uses a van for deliveries that can run on bio-fuel.
- The company sources its energy from a renewable energy supplier.
Employment policies were also driven by ethical concerns. Rick and Tina
wanted their company to be a ‘good employer to work for’. They have a small
work force, but they promote teamwork, and provide generous pay, working
conditions and holiday entitlements.
The company also contributes in small ways to charity groups. For example, it
provides drinks free of charge to local sports events run by different groups for
handicapped people and young prison offenders.
A consequence of the strategies and policies of the company is that production costs
are fairly high – higher than for the fruit drinks of competitors. However, the
company is able to promote itself as a provider of healthy drinks with an ethical
environmental policy. It was therefore able to position itself in a niche in the market
as a ‘high quality, high-price’ brand.
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Seven positions on social responsibility
Responsibilities to society and to the environment
7-level classification by Gray, Owen and Adams
2 Seven positions on social responsibility
2.1 Responsibilities to society and to the environment
Traditional moral philosophy has been divided between the deontological and
teleological approaches. A more recent philosophy is the environmental philosophy.
This looks at the different ways in which different individuals and groups view
society (and their responsibilities) and accept moral responsibility towards society.
Some individuals focus on ethical responsibilities towards other people. Others
argue that individuals and entities have responsibilities not only towards other
people in society, but also towards the earth and its environment.
2.2 7-level classification by Gray, Owen and Adams
Gray, Owen and Adams (1996) provided a framework for classifying different
groups of people and their views of the relationship between business organisations
and society. These can be used to analyse the ethical stance of business entities and
their members (managers, employees, shareholders) towards society and social
responsibility.
They identified seven levels or positions on social responsibility.
Level Comment
1 Pristine capitalists
This position is dominant in the world of
accounting and finance. The only responsibility of
a company is to make money for its shareholders
and to maximise shareholder wealth.
Shareholders have invested the risk capital and are
the legal owners of their company. It therefore
follows that only the shareholders should have any
right to decide the strategies and policies of the
company.
This pristine capitalist view is based on rational
self-interest, and putting individual self-interest
before the collective benefits of society as a whole.
The market economy is a good thing. There are no
environmental problems because human beings are
inventive and adaptable: the market economy will
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find solutions to the world’s environmental
problems.
2 Expedients
Individuals who have an ‘expedient’ view also
believe that the main aim of a company is to
maximise the wealth of its shareholders. However
some concessions have to be made at times to other
stakeholders in order to put the company in a
stronger position strategically. By doing so it is
more likely to maximise shareholder wealth.
A simple example may be that a company may
pursue a policy to protect the environment, or may
support a charity, in order too improveits
reputation and customer loyalty.
This ‘expedient’ position is taken by people with a
longer-term view than pristine capitalists, who
recognise that economic success can only be
achieved by companies by accepting certain social
responsibilities.
3 Proponents of the social
contract
These individuals believe that companies and other
organisations exist at the will of society, and there
is a ‘social contract’ between the company and the
society in which it operates. Companies therefore
have a responsibility and an obligation to respond
to the needs of society.
A company must therefore act in accordance with
standards of behaviour that society finds
acceptable. If it does not, society will not allow the
company to continue.
This is a right-based perspective in which the rights
of all human beings are considered significant.
Holders of this view would argue that government
regulation might be necessary for the market
economy, because free market prices do not
properly reflect all the effects that companies have
on society and its environment (for example,
pollution and other environmental damage).
4 Social ecologists
Individuals taking this position are concerned for
the social environment. They believe that
companies and other large organisations have been
responsible for creating social and environmental
problems. They should therefore be held
responsible for dealing with those problems and
finding solutions to them.
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5 Socialists
These individuals believe that there should be a
significant re-adjustment in the ownership of assets
and in the structure of society. They criticise all
forms of domination, including the governments of
a nation state, concentrated economic power (large
companies) and authoritarianism.
6 Radical feminists
These individuals believe that society and social
systems are dominated by an aggressive masculine
view of the world. This is harmful and wrong.
There is an urgent need for more feminine values
to guide attitudes, such as care, compassion and co-
operation.
7 Deep ecologists/ deep
greens
These individuals are at the opposite extreme to
pristine capitalists. They believe that human beings
have no greater right to existence than any other
form of life. Ethical decisions should be based on
concerns for all forms of life.
To a greater or lesser extent, there is an acceptance of the views in positions 1 to 3
within business. Positions 4 to 7 are all based on a view that the world should be
made into a better place, but to do this there must be a radical re-assessment of basic
assumptions in society.
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The cultural context of ethics
Culture and ethics
Johnson and Scholes: the cultural web
Edgar Schein: three levels of culture
Culture, ethics and global companies
3 The cultural context of ethics
3.1 Culture and ethics
Culture has been defined as the ‘shared beliefs, attitudes, norms, values and
behaviour found among speakers of one language in one time period and in one
geographical region.’ This definition suggests that in order to share a common
culture, people must speak a common language and live in the same geographical
area. Culture might also change over time.
Companies (and other entities) also develop their own culture. The individuals who
work in a company often develop cultural attitudes and habits that are unique to
that company. Even global companies, in which employees do not share the same
language or live in the same geographical area, can develop a culture of shared
beliefs and attitudes.
There is a link between culture and ethics, because the culture in which people live
shapes their ethical beliefs, attitudes and values.
Culture, ethics and corporate social responsibility
Corporate social responsibility (CSR) was described in an earlier chapter within the
context of corporate governance, and the responsibilities of the board of directors
(and a company) towards society. CSR is concerned with issues such as the interests
and welfare of:
employees
customers
communities in which the company operates
the general public, and society as a whole.
Well-governed companies take a stand against crime and do not sanction criminal
activities by their employees, in any country in which they operate.
In recent years there has been much greater awareness of environmental issues, and
the role of companies in both damaging the environment and acting to protect the
environment and create sustainable businesses.