Managerial Ethics

Contents of module 2
• Managerial & Ethical Dilemmas at work
• Managing Ethical Problems
• Managerial Ethics and Individual Decisions
• Creative Accounting- Its role in Business
Scandal
• Corporate Ethical leadership
• Corporate Social Responsibility
• Social Reporting
• Ethics of Whistle blowing
 Managerial Ethics
• Ethics is difficult to define in a precise way.
• Ethics is the code of moral principles and values that
governs the behaviours of a person or group with
respect to what is right or wrong.
• Ethics sets standards as to what is good or bad in
conduct and decision making.
• Ethics deals with internal values that are a part of
corporate culture.
• It shapes decisions concerning social responsibility
with respect to the external environment.
• Principles that guide the actions and decisions
of managers, and determine if they are good or
bad, or right or wrong.
 A Firm’s Ethical
Responsibilities to Its Stakeholders
Owners/shareholders – Rightfully expect some form of
return on their investment

Employees - Rightfully expect to be treated with dignity

and respect for devoting their energies to the enterprise

Customers - Rightfully expect a seller to provide them

with a reliable, safe product or service

Suppliers - Rightfully expect to have an fair relationship

with firms they supply and be treated fairly

Community - Rightfully expect businesses to be good

citizens in their community
 Three Categories of Management Morality

Moral manager

Managerial
ethical and
Immoral manager
moral
principles

Amoral manager
 Characteristics of a Moral Manager
• Dedicated to high standards of ethical behavior in
– Own actions
– How the company’s business is to be conducted
• Considers it important to
– Be a steward of ethical behavior
– Demonstrate ethical leadership
• Pursues business success
– Within limitations of spirit of laws
– With a habit of operating well above what laws require
Characteristics of an Immoral Manager

• Actively opposes ethical behavior in business

• Deliberately ignores ethical principles in
making decisions
• Views legal standards as barriers to overcome
• Pursues own self-interests
• Ignores interests of others
• Will walk on others to avoid being crushed
 Characteristics of an Intentionally
Amoral Manager

• Believes business and ethics should not

be mixed.
• Does not factor ethical considerations into
own actions since business activity lies
outside area of moral judgment
• Views ethics as inappropriate for competitive
business world
• Concept of right and wrong is lawyer-driven
only.
 Characteristics of an Unintentionally
Amoral Manager
• Is blind to or casual about ethics of
decision-making and business actions
• Displays lack of concern regarding
whether ethics applies to company actions
• Sees self as personally ethical
• Typical beliefs
– Do what is necessary to comply with laws and
regulations
– If it is not illegal, it is allowed
The Business Costs of Ethical Failures
 Maintaining High Ethical Standards

• ETHICAL TRAINING
– It is not about teaching people right from
wrong...we assume they know that, and,
– It is not about giving people the moral courage
to do what is right...they should be able to do
that anyhow.

• Ethical Training is about dealing

with dilemmas

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• Ethics can be more clearly understood when
compared with behaviors governed by laws
and by free choice.
 Ethical Dilemma
• A marketing executive is approached by a
wholesale consumer to provide ‘cut-back’
money on the purchases, he will make for
continuation of an order of supplies.
• The executive is under pressure to complete
his annual sales target and checks up that
this order is vital for his meeting the sales
target.
• This has put the marketing man into an
ethical dilemmas of: ‘Should he sacrifice his
personal interest to protect his professional
integrity of not striking any understand
dealing?’
 Ethical Dilemma
• A project manager was faced with challenge of ‘time over run’
and consequent cost escalation for failing to get the
‘environment clearance certificate’ from the concerned agency.
• He had the option of bribing his way through to get the
certificate without following any mandatory conditions or to
develop a new water body and planting ten thousand trees on
its banks.
• The former choice would be against his values and principles,
whereas the latter choice would require more time and money
for completion of the project. This had put him into an ethical
dilemmas arising from the conflict between his moral
conscience and the sense of responsibility as project manager.
 Ethical Dilemma
• A newly established private educational institution for
vocational courses proposed to air a 10 second advertisement
at the peak time on a popular TV channel in a metro claiming:
‘Enrolment in the institution automatically guarantees 100%
jobs in government offices’.
• The proposal had put the accounts manager of the TV channel
into a dilemma whether to accept the advertisement-accepting
the advertisement would mean supporting and promoting
‘wrong’ information, and refusing the same would mean loss of
revenues to the channel.
• The TV channel was more concerned with the consequences of
their action that might mislead many poor students to pay hefty
fees to enroll in the course with job false guarantee.
 Ethical Dilemma
• A Dilemma is a situation that requires a choice
between equally balanced arguments or a
predicament that seemingly defies a satisfactory
solution.
• A situation that arises when all alternative choices or
behaviors have been deemed undesirable.
• Potentially negative ethical consequences, making it
difficult to distinguish right from wrong.
• According to Rushworth Kidder, “In ethical dilemma
the toughest choices are right versus right.
 Structure of Ethical Dilemmas

(1) Either Doing what is Results in A Bad Outcome

Morally right

(2) Or Doing what is Results in A Good Outcome

Morally wrong

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 Characteristics of Ethical Dilemma
• Uncertain outcome- No assurance about
outcome of ethical choices.
• Multiple choices & alternatives- different
decision makers find different alternatives rather
than simple yes/no.
• Mixed consequences- Outcome of solved ethical
dilemma are opposed to each other.
• Direct/Indirect involvement
• Very complex in nature.
Approaches for Resolving Ethical Dilemma

• Utilitarian
• Universalism
• Care-based
• Virtue Ethics
 Cont..
• Utilitarian- (end based)
- Greatest degree of benefits for the largest
number of people.
• Universalism- (rule based)
- It is based on duties & obligations of an
individual. The moral worth of an individual
should be judged based on the intention of a
person rather than outcome of the action.
 Cont..
• Care-Based approach-
- Obligation to care for those with whom one
is having close relationship.
• Virtue Ethics-
- Mental construction with good sense.
 Methods of Resolving Dilemmas
• Nine steps for dealing with ethical dilemma
are;
1. Define the problem and clearly recognize the
moral issues in it.
2. Determine who will be affected by the
decision? What would be your role?
3. Find out how the problem has occurred?
4. Isolate illegal issues involved in the problem
by testing right vs. wrong.
 Cont..
5. Make the choice- right vs. right, e.g.-
truth/loyalty, justice/mercy
6. Select any one approach to resolve the
dilemma.
7. Find out if any other alternative is available.
8. Decide and act- finally select an approach and
take action accordingly.
9. Review the decision
Guidelines for Dealing with Ethical
Dilemmas
Is it legal?
Is it right?
Is it beneficial? To whom? How much?
Is it harmful? To whom? How much?
 Guidelines for Dealing with Ethical
Dilemmas (cont.)
• Would you be willing to allow everyone
to do what you are considering?
• Would you like your family to know?
• Would you like your decision printed in
the newspaper?
• Have you consulted others who are
objective and knowledgeable?
 Types of Ethical Issues

• Bribery
• Coercion
• Deception
• Theft
• Unfair Discrimination
 Cont..
• Bribery-
- It is defined as ‘the offering, giving, receiving,
or soliciting something of value for the
purpose of influencing the action of an
official in the discharge of his/ her public or
legal duties.’
- It is used to manipulate people by buying
influence.
- It creates a conflict between a person and his
organization.
• Coercion-
- It controls people by threat or force.
- It may be forcing a person to act in a
manner that is against person’s beliefs.
• Deception-
- It manipulates people and firms by
misleading them.
- It involves intentional misleading by
knowingly and willingly making false
statements or representation.
• Theft-
- Theft is the taking of something that
does not belong to you.
- It is defined as, ‘ the act of stealing. The
taking of property without owner’s
consent.’
- The property may be physical or
conceptual.
• Unfair Discrimination-
- It is defined as unfair treatment or
denial of normal privileges to persons
because of their region, age, gender,
nationality or religion.
- It occurs when one individual or class is
favored over another on the basis of
non relevant criteria.
Organization and The Individuals
 Organization & The Individuals
• Ethical Behavior ------------ Organization

Rational
Organization Political Caring
Organization Organization
 Cont..
• Rational Organization:
- Where the activities of a number of
people are coordinated for the
accomplishment of some common goal.
- Division of labor is made and
responsibility and authority is allocated
accordingly.
 Cont..
• Political Organization:
- Do not behave in purely rational way
and seldom look at the formal lines of
authority and communication within an
organization.
- These organization view business as a
system of competing power and formal
and informal lines of communication for
partnerships.
• Caring Organizations:
- They are not engaged in the pursuit of
profits and personal gains, but are
involved in caring for those for whom
the organization has been designed.
- Example- NGOs, Trust
Rights and Obligations of Individuals
• The rights of individual are also intricately
joined with the duties. Rights and duties are
reciprocal.
- To obey and follow the line of command
- Contractual obligation and moral obligation
- To prohibit the employees to act in conflicts
of interest with those of the employers.
• To get fair wages
• To get healthy and safe working condition
• To get job as per skills and capability
• Scope to grow i.e. promotion and
incentives
 Creative Accounting
&
Its role in Business Scandals
 Creative Accounting
• Accounting practices that follow required laws
and regulations, but deviate from what those
standards intend to accomplish.
• Creative accounting capitalizes on loopholes in
the accounting standards to falsely portray a
better image of the company.
• Initially we will offer this definition: 'a process
whereby accountants use their knowledge of
accounting rules to manipulate the figures
reported in the accounts of a business'.
• The use of accounting methods to hide aspects of
a company's financial dealings in order to make
the company appear more or less successful
than it is in reality.
• Accounting methods used to conceal firm's true
state.

• “Creative accounting is the transformation of

financial accounting figures from what they
actually are to what preparers desire by taking
advantage of the existing rules and/or ignoring
some or all of them.”
Objectives of Creative Accounting

• Income smoothing
• Takeover and Acquisition
• Management Buy-out
• Others
 Cont..
• Income Smoothing:
- To show the better position of a company.
- Companies generally prefer to report a steady
trend of growth in profit rather than to show
volatile profits with a series of dramatic rises and
falls.
- This is achieved by making unnecessarily high
provisions for liabilities and against asset values in
good years so that these provisions can be reduced,
thereby improving reported profits, in bad years.
• Takeover and Acquisition:
- In the year of the takeover, the new management
and accountant have a bias to show a miserable
picture — low profits, deflated asset values, inflated
provisions.
- Then in the years proceeding the takeover, the
assets can be re-inflated, provisions released, all
contributing to increased profits and a perception
that the new management is doing a great job.
• Management buy-out:
- A form of acquisition where a company’s
existing managers acquire a large part of
the company.
- This helps the new buyers negotiate a
lower purchase price, and increases
their return after the buy-out.
• Others:
- To keep the company’s financial results
within agreed limits set by creditors,
-To fulfill public listing requirements,
-To help negotiations with regulators,
-To pay less tax,
-To push the company towards insolvency.
Importance of Ethics in Accounting

• The nature of the work carried out by

accountants and auditors requires a high level
of ethics.
• Shareholders, potential shareholders, and
other users of the financial statements rely
heavily on the yearly financial statements of
a company as they can use this information to
make an informed decision about
investment.
 Accounting/Business Scandal
• Any act or attempt to falsify an accounting
statement for financial gain.

• Set of questionable, unethical, and/or

illegal actions that a person or persons
within a corporation engaged in.
• Losses due to Unethical Behavior:
– Costs of legal action taken against
executors.
– Costs of reduced productivity.
– Increased unemployment as companies are
forced to downsize or go out of business.
– Economic loss to organization, hence to
society.

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Solution??? (How to Resolve?)

Administer
Investigate
Effective
Motives for
Ethical and
Unethical
Internal
Practice
Controls

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 Motives for Unethical Behavior

High Situational Pressures Low

High Opportunities Low

Personal Characteristics (Integrity) High

Low

Unethical 62 Ethical
 Effective Internal Control System
Control Environment:
Risk Assessment: Monitoring:
Influence Control
Identify, Analyze, and Entities’ Activities.
Awareness of
Manage Risks Relevant to
Management and
Financial Reporting.
Employees.

Control Activities:
Information and Transaction Authorization –
Communication: Segregation of Duties – Supervision
Quality of Info Impacts – Accounting Records – Access
Reliability of Financial Control – Independent Verification
Statements.

Promote Efficiency in the Firm’s

Operations
Safeguard Assets of the Firm
Ensure Accuracy
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& Reliability of Account
Records & Info
 Ethical Leadership
and
Social Responsibility
 Corporate Ethical Leadership

• Ethical leadership is leadership that is

involved in leading in a manner that
respects the rights and dignity of others.
• “As leaders are by nature in a position of
social power, ethical leadership focuses
on how leaders use their social power in
the decisions they make, actions they
engage in and ways they influence
others”.
 Guidelines for Corporate Ethical
Leadership
• Treat corporate values and formal standards of
conduct as absolutes.
• Design and implement conditions of engagement
for suppliers and customers.
• Allow foreign business units to help formulate
ethical standards and interpret local ethical
issues.
• Exercise moral imagination, which means
revolving ethical tensions responsibly and
creatively.
 Ethical Leadership
• Senior managers/Top management must be
strongly committed to ethical conduct.

• Role Modeling
• Uphold ethical values in an organization
• Communicate about Ethics & Values
• Reward Ethical Behavior
• Action against unethical behavior
Three pillars of Ethical Organization
 Corporate Social Responsibility
• “Corporate Social Responsibility is the
continuing commitment by business to behave
ethically and contribute to economic
development while improving the quality of life
of the workforce and their families as well as of
the local community and society at large”
• Organization’s obligation to make choices and
take actions that will contribute to the welfare
and interests of society and organization.
• Being a good corporate citizen.
Contrasting Views on Social Responsibility

• Classical View
Holds that management’s only
responsibility is running a business to
maximize profits.
• Socio-Economic View
Holds that any organization must be
concerned about the broader social
welfare.
The Classical View “Against” Social
Responsibility

• Reduced business profits

• Higher business costs
• Dilution of business purpose
• Too much social power for businesses
• Lack of business accountability to the
public

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The Socio-Economic View “For” Social
Responsibility
• Long-run profits for businesses.
• Public expectations support business social
responsibility.
• Better public image for businesses.
• Businesses may avoid more regulation.
• Businesses have the resources.
• Businesses have the ethical obligation.
• The public wants it.

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Total Corporate Social Responsibility
 1- Economic 2- Legal
Responsibilities: Responsibilities:

The only Social Social Responsibility =

Responsibility = Obeying the Law
Profit Maximizing. (as well as making a
profit)
• 3-EthicalResponsibilities:

-To be ethical, an organization should seek a

higher standard than merely obeying the
law:
e.g., Act with equity, fairness, and impartiality
e.g., Respect the rights of individuals
e.g., Act for the common good
• 4 - Discretionary Responsibilities:

- Purely voluntary, not mandated by economics,

law, or ethics
- Goes beyond what society expects
- This is true Social Responsibility
 Corporate Responses to
Social Demands
High
Proactive
Take social initiatives.
Discretionary

Accommodation
Accept ethical responsibility.
Ethical

Degree of Social Defense

Responsibility Legal
Do only what is legally required.

Obstruction
Economic
Anything for Profit

Low
 Reasons for CSR Activities
• CSR activities are important to and even
expected by the public
– And they are easily monitored worldwide
• CSR activities help organizations hire and
retain the people they want
• CSR activities contribute to business
performance.
Social Reporting
 What is Social Reporting
• Social reporting is the use of social media to report
collectively and live from events, like workshops,
and conferences. It allows to share in real time
photos, videos, power point presentations, and
summaries / comments.
• Reporting of issues such as employee reporting,
ethical reporting, green reporting and other
matters, bring to the notice of management.
• The objectives for social reporting can be derived
from the rationale for Corporate social
responsibility.
 Objective for Social Reporting
• Positive image motive

• To meet information needs of consumer &

society

• Improve the quality of life

• To measure the performance

• Positive image motive
- Several firms report on social information so
that they can create a positive image for the
firm.
- The management would not like to be perceived
as a destroyer of the social environments, non-
contributor to social causes, primarily a user of
social services, etc.
- Instead , the management would like the
consumers and society to perceive the firm as a
‘responsible citizen’ for the preservation of
environments.
• To meet information needs of
consumer & society
- With the Social awareness, several public
interests groups are closely watching the
activities of corporations.
- Consumers are connected about the
safety of the product.
• Improve the quality of life
- The better quality of life can be
maintained due to the care taken by the
organization.

• To measure the performance

- The performance of an organization can be
measured out by analysis of how much
careful a firm----towards the welfare of
the society.
 Whistle-blowing
Our lives begin to end the day
we become silent about things
that matter
-Martin Luther King Jr.
• Whistle blowing is a term used to describe
the disclosure of information that one
reasonably believes to be evidence of
contravention of any laws or regulation or
information that involves mismanagement,
corruption or abuse of authority.
• ‘Raising a concern about wrongdoing
within an organization or through an
independent structure associated with it.’
 Types of Whistle-Blowing
Internal Whistle-Blowing External Whistle Blowing

 When an individual  When an individual

advocates beliefs or advocates beliefs or
revelations within the revelations outside the
organization. organization.
 Whistle-Blower
One who reveals wrong-doing within an
organization to the public or to those in
positions of authority.
One who discloses information about
misconduct in their workplace that they feel
violates the law or endangers the welfare of
others.
One who speaks out, typically to expose
corruption or dangers to the public or
environment.
 Characteristics of a Whistleblower

Unselfishly Motivated
Utilitarian
Uninterested in Altering Their Behavior
Allows Own Attitudes and Beliefs to Guide
Them
Often are Well Educated and Holds
Professional Positions
 What to think about?

The “mom” test:

• “I’m going to be in this industry for long time.
Will this damage my reputation with my boss,
colleagues, future customers or employers?”
The personal responsibility test:
• Weigh personal obligations to family and etc.
that can only be met if you have an income.
• “Will harm avoided greater than harm
incurred?”
 How to blow the whistle
• Do it anonymously
- let the evidence speak for itself and protect yourself, if
possible.
• Do it in a group
- charges have more weight and won’t seem like a personal
dispute.
• Present just the evidence
-leave interpretation of facts to others.
• Work through internal channels
-start with your immediate supervisor or follow the standard
reporting procedure
• Work through external channels -go public (biggest risk)
 Effects of Whistle-Blowing
• Forced to leave organization/demotion
• Credibility ruined
• Family, health and/or life in danger
• Outrage and divisiveness of people
directly or indirectly involved
• Physical or psychological isolation
• Imprisonment
Guidelines:
• Be sure you are right (keep accurate
records)
• Try to resolve the situation in-house
first.
• Consult an legal representative before
contacting the media,
• Realize you could be fired
• Don’t expect to profit financially
 Whistleblower Protection
• Laws vary from state to state, and
federal laws protect mainly
government workers.

• Where legal protection exists

whistleblowers face a number of
barriers that can make it hard for
them to expose unethical behavior in
the workplace. 94
 Duty to Blow the Whistle
Whistle-blowing should not be considered the first
avenue, but the last, after all else has failed.
When to blow:
• Serious and considerable harm to the public is
involved
• Have reported to immediate supervisor already.
• Have exhausted all channels available for correcting
the issue within the organization.
• There is documented evidence with the ability to
convince an impartial party
• There is good reason to think going public will result in
changes
 Benefits of Whistle blowing
• It can lead to the end of unethical business
practices.
• The lives of individuals and whole
communities have been saved by
whistleblowers.
• Sever damages to the environment can be
saved.
 Demerits
• The consequences of whistle blowing are often
extreme and include possible firing, civil action,
or even imprisonment.
• The protection laws for whistle blowing in many
countries are just there on paper.
• It may need “chain of command” that a whistle
blower has to discuss with the supervisor before
taking any action.
 Statistics on Whistle-blowing
2002 in the America
• 90% of whistleblowers lost their jobs or
were demoted, regardless of the industry
• 27% faced lawsuits
• 26% had psychiatric or medical referrals
• 17% lost their homes
• 8% went bankrupt
ALL as a result of whistle-blowing!
• Negative Effects:
• 51% of government employees lost their job
• 82% harassed by superiors
• 69% watched closely after blowing the whistle
• 63% lost job responsibilities
• 60% fired
• 10% attempted suicide
Positive Effects:
• 20% felt their actions resulted in positive
changes
• More than 50% (of responders) would do it
again