BUSINESS ETHICS & GOVERNANCE Building Trust with Righteous Governance Nasuha Nordin UKM-Graduate School of Business MODULE 1: MATTERS OF THE HEART Trust, Relationships, and Ethics Nasuha Nordin UKM-Graduate School of Business Module 1 Credo Relationship theories Ethical Philosophies Moral Philosophies Ethical Dilemma / Decision Making Ethical Culture Nasuha Nordin UKM-Graduate School of Business “LOOKING back on my career at GE, one of the things I wish I could do over is to talk more about what kind of company I envisioned us to be … what our values were and what we really stood for.” — Jack Welch, legendary CEO of GE Nasuha Nordin UKM-Graduate School of Business TRUST Nasuha Nordin UKM-Graduate School of Business Trust Trust is like the air we breathe – when it’s present, nobody really notices; when it’s absent, everybody notices1 Warren Buffet 1 Smart Trust. 2012. Covey,S.M., Link,G. & Merill,R. Nasuha Nordin UKM-Graduate School of Business Trust Index ■ Edelman Trust Barometer ■ Transparency International Corruption Nasuha Nordin UKM-Graduate School of Business Nasuha Nordin UKM-Graduate School of Business Nasuha Nordin UKM-Graduate School of Business Edelmen Trust Baromeeter Country Malaysia Japan Indonesia 2016 51 N 38 D 62 T 2017 48 D 35 D 69 T Nasuha Nordin UKM-Graduate School of Business 2018 53 N 37 D 71 T 2019 59 N 39 D 73 T Trust vs Distrust Trust Willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party (Mayer et al 1995, Notre Dame University) Nasuha Nordin UKM-Graduate School of Business Distrust The exact opposite? Trust RELATIONSHIP VULNERABLE CONTROL Nasuha Nordin UKM-Graduate School of Business MONITOR Trust elements In your own perception and/or beliefs, what would be the precedent to trusting a new party (person)? Personal Activities – One to one relationship MBA Group Assignments Business Transactions Nasuha Nordin UKM-Graduate School of Business CASE STUDY Personal Trust vs Business Trust Nasuha Nordin UKM-Graduate School of Business Story of Trust Personal Trust Group Trust ■ The railway story my daughter or the 8 other kids – Kill 8 and retain trust – Kill 1 to save 8 lives ■ Mayor and fellow citizen – Be silent to attract tourist and gain township confidence (trust) – Disclose and risk losing confidence (trust) Nasuha Nordin UKM-Graduate School of Business Principles and Values Nasuha Nordin UKM-Graduate School of Business RELATIONSHIP THEORIES Nasuha Nordin UKM-Graduate School of Business Principal – Agent Theory AGENT PRINCIPAL Hire & Monitor GOVERNANCE Perform & Control Nasuha Nordin UKM-Graduate School of Business Stewardship Theory STEWARD PRINCIPAL Empowerment & Trust Ability GOVERNANCE Benevolence Integrity Protect & Maximize wealth & Trust Nasuha Nordin UKM-Graduate School of Business ETHICS Stakeholder Theory Empowerment & Trust Institutional Shareholders Delegate & Hire Block Shareholders Principal Agent/ Steward Other Stakeholders Performance Governing Bodies Individual Shareholders Protect & Maximize shareholders’ Wealth Supplier Customer Government Nasuha Nordin UKM-Graduate School of Business Society Employees Financier BOD Management Associations Minority Shareholders Stakeholders’ Interest STAKEHOLDER INTEREST SHAREHOLDERS • • • • • EMPLOYEES Dividend Growth in stock price Stable employment Safe working environment High compensation Nasuha Nordin UKM-Graduate School of Business Stakeholders’ Interest STAKEHOLDER INTEREST CUSTOMERS • • • • • SUPPLIERS CREDITORS Fair exchange Sale, quality and reliable product Prompt payment Regular orders Prompt, on time and complete payment Nasuha Nordin UKM-Graduate School of Business Stakeholders’ Interest STAKEHOLDER INTEREST FEDERAL GOVERNMENT • • • • • • • • • • FINANCIAL INSTITUTIONS COMMUNITY Tax Compliance Assisting government Valuable stocks Creditworthy High transactions Employment Economic growth SDG Protect social and environment wellbeing Nasuha Nordin UKM-Graduate School of Business Activity - Who’s who? Sime Darby UKM Principal – Agent ? Principal – Agent ? Agent – Steward ? Agent – Steward ? Stakeholders ? Stakeholders ? Nasuha Nordin UKM-Graduate School of Business ETHICAL THEORIES Nasuha Nordin UKM-Graduate School of Business 8 Ethics Philosophies Ethical Theories Ethical Organization's Challenges Nasuha Nordin UKM-Graduate School of Business 5 Ethical Dilemma Processing BEHAVIOR How does individual behaves or decides to react to a situation may vary when that individual is put in situation when it has to interact with another individual (i.e. collective behavior) Nasuha Nordin UKM-Graduate School of Business MORAL : Person’s personal philosophies about what is right / wrong VALUE : are set on a group's beliefs. People evaluate situations to decide their beliefs and then separate what is important and acceptable ETHICS Ethics consists of those unwritten rules we have developed for our interactions with each other Nasuha Nordin UKM-Graduate School of Business Personal Ethics : behavior or decisions made within a group’s values BUSINESS ETHICS : comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or from the legal system that primarily guide individual and group behaviour in business Social Environment and Ethical Concerns ■ 1960s: Environmental issues; Civil rights issues; Work place; Drug use. Modern consumer movement ■ 1970s: Employee militancy; Human rights issues; Cover-ups; Transparency. CSR ■ 1980s: Bribes etc; Influence peddling; Deceptive advertising; Financial fraud. Stakeholders theory ■ 1990s: Sweatshops; Corporate liabilities; Financial mismanagement. Self regulation and Globalization ■ 2000s: Cybercrime; Financial misconduct/ Accounting fraud; Intellectual property; Sustainability – WTO; NAFTA; ASEAN.Nasuha Nordin UKM-Graduate School of Business 8 ETHICAL PHILOSOPHY Divine Command Theory Ethical Egoism Theory Utilitarian Theory Categorical Imperative and Immanuel Kant Contractarian and Justice Moral Relativists Virtue Ethics (back to Plato & Aristotle) Golden Rule Nasuha Nordin UKM-Graduate School of Business Ethical Philosophy… Divine Command Theory •resolution of dilemmas is based upon religious beliefs. Ethical Egoism Theory (Teleology) •everything is determined by self-interest •act in our own self-interest and that all of us should limit our judgment to our own ethical egos and not interfere with the exercise of ethical egoism by others Utilitarian Theory (Teleology) •Resolve ethical dilemmas by bringing the greatest good to the greatest number of people Nasuha Nordin UKM-Graduate School of Business …Ethical Philosophy… Categorical Imperative and Immanuel Kant • you not only have to be fair but also have to want to do it for all the right reasons. • Kant wants you to adopt and accept these ethical standards because you don’t want to use other people as a means to your enrichment at their expense. Contractarian and Justice • theory of justice and sometimes referred to as the social contract • to have us step back from the emotion of the moment and make universal principles that will survive the test of time • putting the rules into place via a social contract that is created under circumstances in which we reflect and imagine what it would be like if we had no rules or law at all • started with a blank slate Nasuha Nordin UKM-Graduate School of Business …Ethical Philosophy… Rights Theory (Deontology) •also known as an Entitlement Theory •two big elements •(1) everyone has a set of rights, and •(2) it’s up to the governments to protect those rights •because governments protecting those rights are put into place by Egoists, Kantians, and Divine Commandment Theory followers Nasuha Nordin UKM-Graduate School of Business …Ethical Philosophy… Moral Relativists •believe in time-and-place ethics •Moral Relativists do not believe in absolute rules, virtue ethics, or even the social contract. •Their beliefs center on the pressure of the moment and whether the pressure justifies the action taken. Nasuha Nordin UKM-Graduate School of Business …Ethical Philosophy… Virtue Ethics (back to Plato & Aristotle) •Aristotle taught the importance of cultivating virtue in his students and then having them solve ethical dilemmas using those virtues integrated into their thoughts through their virtue training. •learn those virtues by studying the history of business through individual case studies, historical perspective readings, and insights into economic cycles. •contrast the different outcomes and impacts, you will be able to develop your list of virtues. Nasuha Nordin UKM-Graduate School of Business …Ethical Philosophy… Virtue Ethics (back to Plato & Aristotle) •Acceptance - Making the best of a bad situation •Charisma - Inspiring others •Integrity - Being a model of trustworthiness •Trustworthiness - Fulfilling one’s responsibilities Nasuha Nordin UKM-Graduate School of Business …Ethical Philosophy Golden Rule •Trusting •Do unto others as you want others to do unto you Nasuha Nordin UKM-Graduate School of Business ETHICAL THEORIES Nasuha Nordin UKM-Graduate School of Business “One ought only to act such that the principle of one’s act could become a universal law of human action in a world in which one would hope to live.” - Immanuel Kant (philosopher) Nasuha Nordin UKM-Graduate School of Business 5 ETHICAL DILEMMA PROCESSING Acid Test Sleep Test Dobre 6 steps Nasuha Nordin UKM-Graduate School of Business Dobre 3 steps Kohlberg 6 stages Ethical Reason Ethical Dilemma Processing… Acid Test •Personal Value •Governance •Newspaper Headline Sleep Test •Research shown individual that made right decision is able to sleep better than those that didn’t Nasuha Nordin UKM-Graduate School of Business …Ethical Dilemma Processing… Dobre 3 steps • Analyse consequences • Analyse actions (options available) • Make decision Dobre 6 steps • What are the facts? • What can you guess about the facts that you don’t know? • What do facts mean? • What will happen if you choose one thing rather than another? • What do your feelings tell you? • What will you think of yourself if you decide one thing or another? • Can you explain and justify your decision to others? Nasuha Nordin UKM-Graduate School of Business …Ethical Dilemma Processing Kohlberg 6 ethical reasoning •Obedience and punishment •Individualism, instrumentalism and exchange •Good boy / nice girl •Law and order •Social contract •Principal conscience Nasuha Nordin UKM-Graduate School of Business Ethical Challenges by Organizational Function R&D Manufacturing Marketing HR Finance Nasuha Nordin UKM-Graduate School of Business CASE STUDY Personal Ethics vs Business Ethics Nasuha Nordin UKM-Graduate School of Business Scenario – Personal Ethics THE CASE FOR CANNIBALISM Adapted from Harvard Ethics Class: Justice Series • a famous nineteenth century legal case involving a shipwrecked crew of four • After nineteen days lost at sea, the captain decides to kill the weakest amongst them, the young cabin boy, so that the rest can feed on his blood and body to survive. Nasuha Nordin UKM-Graduate School of Business Scenario – Personal Ethics THE CASE FOR CANNIBALISM Captain Dudley Brookes Sailor Nasuha Nordin UKM-Graduate School of Business Stevens First Mate Parker Cabin Boy Divine Command Ethical Egoism Virtue Ethics Moral Relativist Ethical Dilemma Utilitarian Theory Categorical Imperative (Immanuel Kant) Rights Theory Contractarian and Justice Nasuha Nordin UKM-Graduate School of Business Scenario – Business Ethics PUTTING A PRICE TAG Adapted from Harvard Ethics Class: Justice Series Czech Republic government wanted to increase the excise on smoking. What happens if the citizens smokes more due to lower excise? Nasuha Nordin UKM-Graduate School of Business GOVERNMENT COST BENEFIT ANALYSIS COST Increase in Healthcare Cost BENEFIT Tax Revenue from Cigarettes Sales Healthcare savings (from early death) Pension savings (from early death) Savings on Housing Cost (from early death) Net Gain if citizens smokes $ 147million Savings from pre-mature deaths $ 1,227.00 per person Divine Command Ethical Egoism Virtue Ethics Moral Relativist Ethical Dilemma Utilitarian Theory Categorical Imperative (Immanuel Kant) Rights Theory Contractarian and Justice Nasuha Nordin UKM-Graduate School of Business FORUM 1 What is the Value, Trust, and Ethical Dilemmas? Nasuha Nordin UKM-Graduate School of Business Scenario I – Thank you for the training ■ You work in IT, you would like to be Certified Software Development Professional (CSDP). You current employer is sponsoring for your certification training and on field work for the next year. However, your pay increment for the next 2 years will be minimal. There will be no bond, and there is no guarantee for any position promotion. ■ You went on searching for the new jobs, and the one particular employer is willing to payment much higher than your current employer and will pay even higher if you have CSDP. The new employer will not bear the cost of CSDP. The vacancy will be there waiting for you at anytime you wish to join. ■ OPTION 1 : Quit and bear the cost yourself ■ OPTION 2 : Stay and join the new company later ■ What would you do and why? Nasuha Nordin UKM-Graduate School of Business Scenario II – KPI ■ Company A is a chain of well known café and restaurants operating more than 10 years successfully. Offering tasty delicacies with premium price. ■ Recenly, the BOD decided that there should be a change of menu in line with SDG 3 Good health and wellbeing. Hence, there will be change of menu from limited number of items with high price to more options on the menu with lower price. On top of that, the BOD expects the management to meet the usual KPI to meet shareholders’ interest. ■ Value chain of the company consists of Supply Chain Management, Operations, Sales & Marketing, Services and other supporting activities. Sales Director has assigned budgeted sales to respective outlet. ■ OPTION 1 : Offer current menu alongside new menu ■ OPTION 2 : Offer only new menu ■ As the branch manager, what would you do and why? Nasuha Nordin UKM-Graduate School of Business FORUM What is the Value, Trust, and Ethical Dilemmas? Nasuha Nordin UKM-Graduate School of Business Scenario III PepsiCo Group 1 – Personal Ethics ■ As a potential employee, would you work with a company such as PepsiCo? ■ As a CONSUMER, would you purchase products from a company such as PepsiCo? Group 2 – Business Ethics ■ Does PepsiCo corporate social responsibilities performed, justifies the business model the company is in? Why? ■ As a junior member, how would you convince your superordinate to change unethical business model By using the theories discussed today, you are required both individually (and collectively) present the format of a forum to discuss these two scenarios. This is part of 5% individual marks + 5% group marks under “Class Participation” assessment. Nasuha Nordin UKM-Graduate School of Business Scenario – Business Ethics Does giving back justify your negative action? PepsiCo Sugar drink and other “junk food” producer PepsiCo is also an advocate of environment protection. Does doing good is acceptable even though the means could potentially harm health of some people in the world? Nasuha Nordin UKM-Graduate School of Business Nasuha Nordin UKM-Graduate School of Business Nasuha Nordin UKM-Graduate School of Business Nasuha Nordin UKM-Graduate School of Business Criticisms ■ India ■ Health ■ Aquafina Tap Water Nasuha Nordin UKM-Graduate School of Business Criticism – – – – Unhealthy product – sugar, calories, tooth decay Packaging – a large amount of waste India – water quality (36x the level of toxins!) India – heavy use of groundwater Nasuha Nordin UKM-Graduate School of Business Criticism – – – – Snack items – high calorie and fatty Investors – decreasing ROC Aquafina – use of tap water? Naked Juices – untruthful advertising? Nasuha Nordin UKM-Graduate School of Business Social Responsibility and Sustainability Sustainability Employee Commitment PepsiCo Foundation Dream Machine Nasuha Nordin UKM-Graduate School of Business Sustainability ■ Going green: – Reduce energy usage – water conservation: reduce usage and recycle. – Restore watershed – “Think outside the bottle” – PackTrackPlus Nasuha Nordin UKM-Graduate School of Business Employee Commitment ■ Diversity and the Collaborative Culture ■ Talent sustainability – Pepsi University ■ Code of Conduct – Compliance Officer ■ Internal Audit Hotline – 24 hrs anonymous ethics hotline Nasuha Nordin UKM-Graduate School of Business Pepsi Foundation ■ 1962: philanthropic contributions to a variety of nonprofits ■ Gives back to community via grants, employee programs and disaster relief.works with: – United Way – post secondary educaation – ExCEL awards – prizes for excellent children of employees – Save the Children – assisting children in India and Bangladesh Nasuha Nordin UKM-Graduate School of Business Dream Machine ■ Kiosks that give redeemable consumers points when they recycle their bottles. ■ Will also assist army veterans via money generated. Nasuha Nordin UKM-Graduate School of Business CASE STUDY Core Value of Leaders Nasuha Nordin UKM-Graduate School of Business Steps of Social Responsibility PHILANTHROPIC Giving back to society ECONOMIC (maximizing shareholder value) LEGAL (abiding by laws and regulations) Nasuha Nordin UKM-Graduate School of Business ETHICAL (following standards of ethical behavior) Activity Group 1 – Individual Leaders Core Value Group 2 – Corporate Core Value Each group will analyze the core values of renown leaders whom is: Each group will analyze the core values of renown corporation which is: a) Successful but practice unethical behavior a) Successful but practice unethical behavior OR a) Successful and believes in ethical behavior Nasuha Nordin UKM-Graduate School of Business OR a) Successful and believes in ethical behavior