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Ethical Business Conduct and Corporate Distrust

Introduction

Businesses claim to be concerned with ethical conduct, which is still mainly seen as an instrument of the favorable image formation. Students of business schools have courses in ethics to be prepared for the work in companies that have well-established codes of ethics as well as those businesses that are only yet to develop their ethical principles (DeGeorge 2010). Researchers have developed the necessary theoretical frameworks to address a variety of issues associated with ethics. People seem to have acknowledged the importance of this aspect and strive for ethical conduct in the business sphere. At the same time, there is still distrust in the society as individuals do not believe that companies, and especially big corporations, will focus on ethics rather than their profit (Crane & Matten 2010). It is essential to identify reasons for the lack of trust as well as issues that still exist in the business world to be able to make sure that ethical conduct will become a norm in the modern business environment. This paper includes the analysis of major factors that contribute to people’s mistrust and a brief account of possible measures to improve the situation.

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Historical Background

It is necessary to consider the background of ethical conduct to understand the peculiarities of the modern society. It may seem that ethics entered the business world in the 2000s. However, those involved in trade took into account ethical principles centuries ago. For instance, in medieval England, guilds developed particular rules that included various standards concerning the quality of products and services, cooperation and “not competition” (Tricker & Tricker 2014, p. 34). It is noteworthy that the codes were developed based on religious values, traditions, and texts. Importantly, business practices of that period were based on personal relationships between the trader and buyer, which contributed significantly to the development of mutual trust (Tricker & Tricker 2014). It is possible to note that the business ethics of those times were concerned with personal and religious values.

However, in the 19th century, significant changes took place, and old practices proved to be somewhat outdated. Thus, apart from individuals, large corporations started operating and gaining more and more significance (Tricker & Tricker 2014). The introduction of the notion of the limited liability company can be regarded as one of the pivotal changes in the world of business ethics. Corporations had rights that had been the terrain of personal rights and responsibilities. These entities could sue (or be sued), make agreements, employ people, own property and so on. At the same time, there was hardly a particular individual responsible for all those actions undertaken. Clearly, people started losing their trust in business relations with corporations as well as other individuals.

The modern ideas on business ethics were developed in the twentieth century. At that, researchers regard the 1970s as the inception of the contemporary ethics in business (Salehi, Saeidinia, Aghaei 2012). Such principles as transparency, fair competition, and collaboration entered the global business scene. Importantly, major crises of the 1980s and the 2000s that involved malpractice and fraudulent operations of large corporations showed that ethics is not a desirable but a crucial aspect of the business world (Parboteeah & Cullen 2013). These events facilitated the development of business ethics as a discipline, and the abundance of books on the matter reveals the attention paid to the issue.

What Is Being Done in the Field

Theoretical Approaches Used

It is necessary to note that researchers and practitioners have done a lot to develop theoretical frameworks as well as particular codes and principles of business ethics. Thus, theorists have developed specific paradigms to address ethical dilemmas employees may encounter. These theories are often the basis of codes of ethics as well as policies concerning employees and other stakeholders (Harrison 2005). For instance, Agency Theory is rooted in the analysis of the so-called agency problem that was in the lens of Smith, Mill, and Berle (Nordberg 2010). The theory holds that employees without a stake will not perform properly as “in pursuing their individual well-being, the interests of managers and shareholders may diverge” (Nordberg 2010, p. 178). Therefore, it is considered a beneficial strategy to provide a stake to managers to make them motivated.

Another theory is based on a more optimistic view of people’s nature. According to Stewardship theory, managers were not totally motivated by money, but they often try to satisfy their needs in achievement, earning certain status and so on. The theory is linked to psychological paradigms that focus on people’s behavior, especially Maslow’s hierarchy of needs (Henn 2009). At that, researchers stress that managers perform better (irrespective of the monetary reward) is they share the company’s values. Ethical codes are also instrumental in this process.

At present, another theory is central to the contemporary business world. The Stakeholder Theory is based on the notion that all stakeholders are moral individuals and that managers should consider ethical dilemmas through the analysis of all the stakeholder’s needs and interests (Levy & Mitschow 2009). The manager has to take into account the interests of as many stakeholders as possible. Importantly, the theory is based on the principles of consequentialism as the outcomes for individuals involved are central. However, this approach is also closely connected with the virtue theory that implies the focus on morality as all people are seen as moral beings.

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Letza, Sun and Kirkbride (2004, p. 251) note that supporters of the framework stress that the theory is not based on “left-wing” ideals, but is rooted in the principles of running a business. It is stressed that various stakeholders including employees, clients, partners, organizations and so on affect the development of the company. Likewise, the company has an impact on many stakeholders other than shareholders or even employees and clients. The case of Enron shows the value of this theoretical approach as the company’s managers focused on the limited group of stakeholders (shareholders) and ignored the interests of a larger community (Clarke 2005). This partial utilization of principles of the stakeholder theory led to catastrophic outcomes as thousands of people lost their jobs. The company’s unethical conduct also contributed greatly to the arising of the crisis of 2008. Importantly, the unethical conduct was systemic as the entire sector of the economy (banking) could be characterized by the lack of pragmatism as well as responsibility.

Practical Steps Undertaken

It is necessary to note that various measures aimed at addressing ethical issues exist in the business world. Researchers identify two types of ethical approaches: formal and informal (Belak & Milfelner 2011). When it comes to the informal method, it involves the development of social norms that are introduced and maintained through supervisors’ control and personal examples as well as peers’ evaluations and interactions. Formal methods include various courses concerning ethics, conferences. These measures are also associated with reinforcement implemented by ethics officers. Clearly, corporate codes of conduct are also a part of the formal approach.

As far as codes of ethics are concerned, it is possible to state that they are regarded as some of the most efficient ways to improve employees’ conduct associated with ethics. Interestingly, the need for particular sets of ethical standards emerged in the 1970s. Interestingly, more than 70% of American managers viewed the introduction of the code of ethics positively (Webley & Werner 2008). At present, in many countries (for example, the USA), all companies are obliged to have codes of conduct. It is believed that ethics policies and codes of ethics allow managers to display ethical conduct, which is beneficial for any organization.

There have been various external tools to monitor companies’ operations. As has been mentioned above, numerous codes were introduced many centuries ago. As far as the UK is concerned, the Cadbury Report (1992) unveiled major flaws in the system and revealed the urgent need for the change and introduction of more efficient ethical codes (Solomon 2011). Solomon (2011) states that the report can be regarded as a milestone that marks the transition from the agency theory to the shareholder approach. This led to the introduction of such measures of supervision as shareholder voting, meetings of employees and shareholders, shareholder resolutions as well as possible divestment.

Importantly, the Cadbury Report also became a widely accepted model for the implementation of the investigation on companies’ compliance with various regulations and standards. There have been a number of other reports that contributed to the development of effective standards in the ethical sphere. These valuable documents include the Hampel Report (1998), the Smith Report (2003), the Higgs Report (2003) and other. UK officials have developed some codes and guidance schemes that govern the ethical conduct of various companies. The compliance with these standards could ensure organizations’ effective operations and the development of trust in people towards the business world in general and corporations in particular.

Thus, auditing has been one of the major tools for addressing this goal. It is noteworthy that the auditing was mainly concerned with companies’ performance and compliance with laws and regulations. Rather little attention was paid to ethics. However, such major crises as Enron’s collapse show that auditing also became a part of the system that was contaminated with unethical and irresponsible activities (Ferrell, Fraedrich & Ferrell 2012). During the past decade, Western governments have come up with another tool of supervision. North American and European officials have introduced ethical indexes including the Dow Jones Sustainability World, the Domini 400 Social Index (DSI), ASPI Eurozone, the CSR Rank of Slovenian Enterprises and others (Belak & Milfelner 2011). Such organizations as the Financial Services Authority holds regular audits to make sure that companies comply with basic regulations.

Scandals similar to Enron’s situation happened in many countries of the world, which led to the creation of certain changes in the regulatory practices. For instance, in the USA, the Sarbanes-Oxley Act (SOX) was an attempt to provide a new corporate governance policy to avoid unethical conduct (Clarke & Dean 2013). Governments of many countries also developed various regulatory tools to control companies’ operations. Importantly, the primary attention is paid to public companies, but privately-owned companies’ conduct is also under the review.

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Why Are People Sceptical

It has been acknowledged that many factors contributed to the collapse of the banking system of 2007-2008. Some of the major causes were the irresponsible conduct of managers and the inability of the boards to control the processes that were taking place. Pirson and Turnbull (2011) stress that boards seemed to be unaware of (and sometimes disinterested in) the situation in the banking sphere and their major strategic decisions were based on inadequate information. More so, their actions were untimely as when they started addressing risks, but it was too late. The principles based on the Shareholder theory governed the corporate world, and a few people and organizations were concerned with ethics. Many people were also contaminated with this paradigm as many individuals got involved in unethical and irresponsible activities (getting loans from different banks).

This led to the development of a particular view on the business world. People saw it as a gathering of people who focus on making profits at the expense of others. It is noteworthy that, according to a survey held in the early 2000s, young professionals who had entered “the real world” within months after their graduation thought that “ethical compromises” were necessary (Seider, Davis & Gardner 2009, p. 210). In other words, people, as a rule, believe that ethics is rather complemental as the central goal of a company is to make profits. The modern world is mainly characterized by the so-called ethical egoism. This paradigm holds it that people do not have any duties to others and everybody “ought to pursue his or her own self-interest” (Rachels & Rachels 2011, p. 77). Clearly, such notions as social responsibility and ethical conduct seem to be unviable.

Most importantly, people do not trust corporations as the latter often violate their own as well as universally excepted codes of conduct. Thus, the notorious Enron had the code of ethics. Moreover, the company’s top managers stressed that they were proud of their corporate culture that contributed to the development of the organization’s reputation (Webley & Werner 2008, p. 406). Pass (2006) examined the compliance of 50 large UK companies with their codes of ethics as well as governmental provisions in this sphere. It was found that only 34% fully complied with the regulations, 44% of the organizations could not comply with some prescriptions but provided reasonable and ‘acceptable’ explanations, while 22% totally failed to follow the ethical codes (Pass 2006).

Some of the reasons why companies fail to comply with the regulations in the sphere of ethics are as follows. Webley and Werner (2008) claim that organizations tend to develop inadequate codes of ethics that are often too general and oriented on employees excluding the most important decision-makers (top management). These codes are rather narrow as they include the guidance on the development of relationships with a limited number of stakeholders.

Another serious downside associated with ethical codes is their inefficient embedment. Webley and Werner (2008) note that many organizations have quite effective ethical codes, but the employees do not follow the standards set. Clearly, training is crucial for the proper implementation of ethical guidelines. The lack of commitment among top managers is also a burning issue that leads to the lack of trust and poor implementation of ethical codes. Finally, the pressure to meet targets often forces managers to make ethical compromises and avoid articulating ethical concerns. Fisher and Lovell (2013) claim that whistleblowing is still rarely used especially when it comes to ethical issues that are often ignored.

What Should Be Done

It is possible to identify several ways to encourage managers to act ethically and make people believe in business ethics. First, it is essential to develop a comprehensive theoretical paradigm. Rachels and Rachels (2011) claim that ethical egoism cannot be a proper basis for the new approach. However, it should become the basis for the new worldview since it will be adopted easier. It is important to stress that although the ethical egoism theory is associated with self-interest, it can help people to believe in business ethics. Thus, people pursuing their own interests and focusing on the long-run benefits may also try to help others to satisfy their needs. It can be effective to make people understand that creating a better society is one of their priorities as it will satisfy their needs.

Clearly, the theory of ethical egoism should be strengthened by another theoretical framework. It is important to utilize the consequentialist approach to create the necessary background for the development of proper ethical practices and trust among stakeholders. Payne and Giacalone (1990) note that the stakeholder theory should be the governing theoretical paradigm used when developing ethical codes as well as various practices. It is essential to make employees understand the need to focus on the long-term goals that imply the attention to the needs of stakeholders involved.

Importantly, the circle of stakeholders should be as wide as possible. Virtue theory can be effectively employed. Bertland (2009, p. 25) states that this approach is beneficial for the development of organizations, and managers should give the employees “the environment and the encouragement to grow and to find fulfillment in their job.” Again, the theory of Maslow’s hierarchy of needs may help create a new paradigm.

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It is also essential to make people change their views on the corporate world through the change of their own ethical values. Clearly, this is especially important for those involved (or those who want to be linked to) the business environment (Johnson 2012). Managers and students of business schools should develop their ethical values that are consistent with major standards accepted in the world of business. Johnson (2012) stresses that it is achievable and can be beneficial for the success of organizations that will be able to employ effective managers who are ready to comply with the standards set.

Conclusion

On balance, it is possible to note that although ethical guidelines were an indispensable part of the business world throughout centuries, businesses still display unethical conduct. A variety of scandals and major financial crises show that ethical considerations are still seen as secondary. However, people start paying more attention to ethical issues, which is seen through the increasing number of guidelines and regulations as well as courses on ethics in business schools. These are quite positive signs as the necessary ways to improve the situation include the use of efficient standards (both external and internal) and effective training of managers and students of business schools.

Reference List

Belak, J & Milfelner, B 2011, ‘Informal and formal institutional measures of business ethics implementation at different stages of enterprise life cycle’, Acta Polytechnica Hungarica, vol. 8, no. 1, pp. 105-122.

Bertland, A 2009, ‘Virtue ethics in business and the capabilities approach’, Journal of Business Ethics, vol. 84, no. 1, pp. 25-32.

Clarke, T 2005, ‘Accounting for Enron: shareholder value and stakeholder interests’, Corporate Governance: An International Review, vol. 13, no. 5, pp. 598-612.

Clarke, F & Dean, G 2013, ‘Corporate collapse: regulatory, accounting and ethical failure’, in R Di Pietra, S McLeay & J Ronen (eds), Accounting and regulation: new insights on governance, markets and institutions, Peter Lang, New York, NY, pp. 9-31.

Crane, A & Matten, D 2010, Business ethics: managing corporate citizenship and sustainability in the age of globalization, OUP Oxford, Oxford, UK.

DeGeorge, RT 2010, Business ethics, Prentice Hall, Boston, MA.

Ferrell, OC, Fraedrich, J & Ferrell, L 2012, Business ethics: ethical decisions making & cases, Cengage Learning, Mason, MA.

Fisher, C & Lovell, A 2013, Business ethics and values, Prentice Hall, Essex, UK.

Harrison, M 2005, An introduction to business and management ethics, Palgrave MacMillan, Hampshire, UK.

Henn, SK 2009, Business ethics: a case study approach, John Wiley & Sons, Hoboken, NJ.

Letza, S, Sun, X & Kirkbride, J 2009, ‘Shareholding versus stakeholding: a critical review of corporate governance’, Corporate Governance, vol. 12, no. 3, pp. 242-262.

Levy, D & Mitschow, M 2009, ‘I paid for this microphone!: the importance of shareholders theory in (teaching) business ethics’, Libertarian Papers, vol. 1, no. 25, pp. 1-12.

Nordberg, D 2010, ‘Unfettered agents? The role of ethics in corporate governance’, in Baker, HK & Anderson, R (eds), Corporate governance: a synthesis of theory, research, and practice, John Wiley & Sons, Hoboken, NJ, pp. 175-193.

Parboteeah, KP & Cullen, JB 2013, Business ethics, Routledge, Oxon, UK.

Pass, C 2006, ‘The revised Combined Code and corporate governance: an empirical survey of 50 large UK companies’, Managerial Law, vol. 48, no. 5, pp. 467-478.

Payne, SL & Giacalone, RA 1990, ‘Social psychological approaches to the perception of ethical dilemmas’, Human Relations, vol. 43, no. 7, pp. 649-665.

Pirson, M & Turnbull, S 2011, ‘Corporate governance, risk management, and the financial crisis: an information processing view’, Corporate Governance: An International Review, vol. 19, no. 5, pp. 459-470.

Rachels, J & Rachels, S 2011, The elements of moral philosophy, McGraw-Hill Education, New York, NY.

Seider, S, Davis, K & Gardner, H 2009, ‘Morality, ethics and good work: young people’s respectful and ethical minds’, in D Ambrose & T Cross (eds), Morality, ethics, and gifted minds, Springer Science & Business Media, Muncie, IN, pp. 208-223.

Salehi, M, Saeidinia, M & Aghaei, M 2012, ‘Business ethics’, International Journal of Scientific and Research Publications, vol. 2, no. 1, pp. 1-5.

Solomon, J 2011, Corporate governance and accountability, Wiley, Chichester, UK.

Tricker, B & Tricker, G 2014, Business ethics: a stakeholder, governance and risk approach, Routledge, Oxon, UK.

Webley, S & Werner, A 2008, ‘Corporate codes of ethics: necessary but not sufficient’, Business Ethics: A European Review, vol. 17, no. 4, pp. 405-415.

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