ACCA P1 Governance, Risk and Ethics - 2010 - Study text

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Paper P1

ProfessionalAccountant

CHAPTER

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

Chapter 13: Ethics and social responsibility

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.

Chapter 13: Ethics and social responsibility

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

Chapter 13: Ethics and social responsibility

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.

Chapter 13: Ethics and social responsibility

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.

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Attitudes to CSR are evident in the ethical stance that many companies now take on

these issues, and ethical stance in turn is affected by the corporate culture.

3.2 Johnson and Scholes: the cultural web

Johnson and Scholes suggested that there is a cultural web within any organisation,

which affects the way in which individuals understand the organisation in which

they work. This understanding of their organisation called their ‘paradigm’ of the

organisation. Employees find it difficult to think and act outside this paradigm.

The cultural web consists of six inter-related elements of culture within an

organisation.

 Routines and rituals. Routines and rituals are ‘the ways things are done around

here’. Individuals get used to established ways of doing things.

 Stories and myths. Stories and myths are used to describe the history of an

organisation, and to suggest the importance of certain individuals or events.

They are passed by word of mouth. They help to create an impression of how

the organisation got to where it is, and it can be difficult to challenge established

myths and consider a need for a change of direction in the future.

 Symbols. Symbols can become a representation of the nature of the organisation.

Examples of symbols might be a company car or helicopter, an office or

building, a logo or a style of language.

 Power structure. Organisations are influenced by the individuals who are in a

position of power. In many business organisations, power is obtained from

management position. However, power can also come from personal influence,

or experience and expertise.

 Organisation structure. The culture of an organisation is affected by its

organisation and management structure. Hierarchical and bureaucratic

organisations might find it particularly difficult to adapt to change and are often

conservative in their outlook.

 Control systems. Performance measurement and reward systems within an

organisation establish the views about what is important and what is not so

important. Individuals will focus on performance that earns rewards. For

example, it has been suggested that cash bonus systems help to create the profit-

driven culture in investment banks.

The cultural web within a company shapes its corporate ethics.

3.3 Edgar Schein: three levels of culture

Schein had similar views about corporate culture. He suggested that employees

working within a company have shared values, beliefs and ways of thinking: these

interact with the policies, organisation structure and politics of the company’s

management system to create a corporate culture.

Schein also argued that organisation culture is strong because it is regarded as

something that helps the company to succeed. An organisation culture is a set of

assumptions that a group of people working together have invented or discovered

ACCA P1 Governance, Risk and Ethics - 2010 - Study text - Emile Woolf Publishing

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