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Ensuring Corporate Ethical Behavior

Introduction: New Expectations of Corporations and Converging Concepts

We live in an era of rapid and massive change; turmoil is one of the main features of our times. For centuries the population on planet Earth has been increasing, corruption has been endemic in many societies, and financial crises have succeeded one another like tsunamis that suddenly hit the shore following an earthquake whose tremors have gone unheeded. During this time, companies have been operating to achieve one goal—to maximize profit. With the exception of a few business philanthropists, businesspeople have not concerned themselves with the impact of their business’s operations on society or about the ethics of capitalism. As Mayer (2011) noted, “corporations come to the intersection of law and ethics with a predominantly economic approach” (p. 713). However, many economists have moved from classical economics to behavioral economics. Furthermore, the US Supreme Court in 2010 explicitly recognized the corporation as a person entitled to free speech and political participation,1 a decision that provides ample opportunity for corporate influence to be used constructively and ethically. The challenge is to suggest how (Mayer 2011, 759).

Furthermore, the huge corporate fraud scandals in recent years, combined with sovereign debt crisis followed by a worldwide economic downturn, have resulted in a deep alienation between the world ofcorporations and the wider public (Meynhardt et al. 2014, 4). Business takes place in many societies that no longer trust their economic leadership. Quoting the ex-director at Goldman Sachs London office, Werhane et al. (2013, 1) stressed that it was a “decline in the firm’s moral fiber” and its culture as well as an excessive emphasis on profit instead of client services that brought about the loss of trust and destroyed the corporation. The same authors argued that failures such as Goldman Sachs tragedies, like the Columbia shuttle disintegration and the 1986 Challenger explosion, are unnecessary and can be remedied or even completely avoided because they arise from moral failures caused by narrow or blinded mental models and “willful blindness”2 that hinder effective and ethical decision making (pp. 1—5). The basic thesis ofWerhane et al. (2013) was that a person’s narrow or compromised mindsets, bounded awareness, blind spots, and unquestioned obedience to a perceived authority make it less likely that he/she will consider the moral ramifications of decisions or actions, thus leading to moral failures in decision making (p. 6). In the words ofWerhane et al. “discourse plays an important role in shaping mindsets and subsequent decision-making” (p. 4). As we saw in Chapter 1, an individual fraudster of the Leeson or Madoff kind can have catastrophic effects on corporations. Nevertheless, corporate scandals should not be seen as random incidents brought about by the misconduct of individuals but as integrity failures in the corporate conduct. Thus, Werhane et al. were optimistic about the possibility of unbinding blinded or bounded thinking and awareness as well as moral failures in individuals and organizations by utilizing moral imagination to change the distorting mental models that underpin ineffective ethical decision-making (pp. 7—8). This is not to say, of course, that the correction of bounded mental models in the business world is an easy task but that it is necessary to ensure trust—a crucial ingredient for the free enterprise system to function or to function well (p. 11).

Meanwhile, companies have invested in corporate social responsibility (CSR) in the wake of public reaction to large corporate fraud scandals (Filatotchev and Nakajima 2014). In fact, Frankel (2006) maintained that (a) abuse of trust and deception is widespread globally because individual morality is increasingly declining and (b) corporations must invest in creating corporate morality as a bulwark against the declining individual morality. The comforting thought is that organizations do not corrupt people or commit frauds; it is people within them that do (Simpson and Taylor 2013, 73). Thus, if a manager is a good model of ethical behavior and the company has a strong corporate governance (CG) structure, it is reasonable to expect that the company employees will be less likely to rationalize stealing from their employer along the lines “the boss steals, why shouldn’t I?” Simpson and Taylor suggest that management can prevent unethical behavior by using performance evaluations and fostering an ethical environment in the company. This includes facilitating whistle-blowing, recruiting personnel that are likely to comply with ethical principles, and reinforcing ethical principles through training (pp. 92-94).

It was only recently that CEOs, researchers, academics, and policy makers alike have come to realize that new, radical thinking is called for where society and business intersect. The lack of ethics and social responsibility (SR) from the business arena for too long has had devastating effects globally in an interconnected world, however far apart people live. The concern about a real risk to the very existence of human life in the future if the same unethical and irresponsible ways of corporations persist has made obsolete Milton Friedman’s (1970) argument, published in the New York Times, that businesses’ social responsibility is to increase profit for shareholders within the rules of the game and by so doing they benefit society. As will be discussed further in this chapter, the generally accepted view today is that in order to ensure its long-term profits, a corporation needs to do a lot more for its own employees and the broader community and to do so in an integrated way. It would not be an exaggeration to say that we live an epoch of sustainability that presents new financial, social, legal, and political challenges to those who choose “to meet the passion and action of our age” (Mayer 2011, 763). In the words of Hristoche, Paicu, and Ismail (2013), “the proper implementation of CSR, not only regionally but also globally, is the engine of sustainable economic development” (p. 114). An indication of the era of sustainability that is already here is the United Nations Global Compact (2009) which is widely accepted as the world’s largest corporate responsibility initiative and comprises 10 principles.3 The Global Compact has over 12,000 participating corporations and other stakeholders from more than 144 countries. It is the largest voluntary corporate responsibility initiative in the world. The 10 principles of the Global Compact are reproduced below.

Global Compact Principles4 :

Human Rights

  • 1. Businesses should support and respect the protection of internationally proclaimed human rights; and
  • 2. Make sure that they are not complicit in human rights abuses.

Labour

  • 3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
  • 4. The elimination of all forms of forced and compulsory labour;
  • 5. The effective abolition of child labour; and
  • 6. The elimination of discrimination in respect of employment and occupation.

Environment

  • 7. Businesses should support a precautionary approach to environmental challenges;
  • 8. Undertake initiatives to promote greater environmental responsibility; and
  • 9. Encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption

10. Businesses should work against corruption in all its forms, including extortion and bribery.

The UN Guide for Corporate Sustainability (United Nations Global Compact 2014, 7) sets out five defining characteristics considered “essential to long-term corporate success and for ensuring that markets deliver value across society” that the Global Compact asks business to strive toward. The five corporate sustainability features are principled business, strengthening society, leadership commitment, reporting progress, and local action.

On the basis of the discussion that follows, the present author believes that in the same way as Galileo Galilei dethroned the earth-centered view of the universe in favor of a sun-centered one, corporate centrism is reluctantly ceding its place to the global citizen. Its displacement has come about gradually as the notions of CSR and corporate citizenship5 alongside “connected capitalism”6 and “conscious capitalism” have been embraced by so many researchers, managers, and organizations.

Unethical decisions that may have disastrous consequences for a corporation or even for national economies do not happen in a vacuum. They are made by individuals, whether acting alone or in collusion. Of course, a plethora of factors exist that affect how an employee resolves an ethical dilemma. Such factors include, for example, one’s social background, personality, and treatment by superiors. Stead, Worrell, and Stead (1990) advised managers to commit themselves to ethics, behave ethically themselves, provide ethical training for their employees, establish ethics units, and reward ethical behavior. Before considering reported correlates of individual ethical behavior, let us note in this context three key ethical theories outlined by Simpson and Taylor (2013, 68):

  • 1. Consequentialism derives from John Stuart Mill’s (1806—1873) utilitarianism; that is, the end justifies the means if the end is moral or ethical.
  • 2. Deontology derives largely from Emanuel Kant’s (1724—1804) view that there are moral absolutes, or universal principles of morality and ethics.
  • 3. Contractualism is based on the belief that people can agree in a social contract on what is and is not moral.

Of course, human beings are imperfect and sometimes breach their own moral standards. In such cases our “self-conscious” emotions—namely, shame, guilt, and embarrassment—moderate the link between our moral standards and our moral behavior (Tangney, Stuewig, and Mashek 2007).

 
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