Module 2
Business Sustainability, ethics
and corporate governance
BUSINESS SUSTAINABILITY
“Sustainable development is development
that meets the needs of the present without
compromising the ability of future
generations to meet their own needs.”
Brundtland (1987)
 Key Concepts in the above quote


Needs of the world’s poor
Limitations of the environment
Business sustainability
BUSINESS SUSTAINABILITY- key drivers

Competition for Resources


Climate Change


We have a fossil-fuel based economy
Economic Globalisation


The worlds population is continuously growing
The integration of national economies into the
global economy
Connectivity and Communication

Increases in connectivity has led to less time to
both build reputations and/or destroy
reputations
Business sustainability Principles
1.
2.
3.
4.
5.
6.
7.
8.
9.
Ethics
Governance
Transparency
Business relationships
Financial return
Community involvement/economic development
Value of products and services
Employment practices
Protection of the environment
Source: Epstein and Roy (2003) ‘Improving Sustainability
Performance’ as cited in Epstein (2008), p. 37.
Theories of sustainability
Corporate social responsibility
 Corporate
social responsibility (CSR) refers
to the responsibility an entity has to all
stakeholders, including society in general
and the physical environment in which it
operates.
Theories of business sustainability
Corporate social responsibility continued
 Reasons?



entities act in a socially responsible manner
because there is ultimately some benefit to
their profits.
entities want to limit interference from
governments or other groups
managers are motivated simply by the
desire to do the right thing, and that there is
no economic motive behind acting in a
socially responsible manner
Theories of business sustainability
Shareholder value
 An

corporation has many stakeholders
Individuals or groups who have an interest
in the corporations affairs- can affect or are
affected by the organisation
 Shareholder


Value
Shareholder (owner) returns are the primary
focus of an organisation
Agency Theory
 Managers
act on behalf of shareholders
Theories of business sustainability
Stakeholder theory
 Stakeholder
theory holds that the purpose
of the entity is to work for the good of all
stakeholder groups, not just to maximise
shareholder wealth.
 Estes (1990, p. C1) argues that:

“These forgotten investors are owed an
accounting because they, too, invest by
committing valuable resources, including
not only money but their work, their careers,
sometimes their lives to the corporation.”
Theories of business sustainability
Stewardship theory
Stewardship



theory
Directors act in the interest of a group(s) of
stakeholders and not shareholder value
Contributes to the rise of independent nonexecutive directors
Peter Weinberg (former Goldman Sachs
executive):

“Serving on a board is like taking on a position in
public service . . . It is not (and should not be) a
wealth creation opportunity but a chance to
play a role in the proper workings of our
marketplace. (Nordberg 2008, p. 43).”
Theories of business sustainability
Legitimacy theory
 Theory
that entities must conduct
operations in accordance with societal
expectations
 Society
allows the entity to operate
(pursue its objectives and rewards) so
long as the entity agrees to act in a
socially acceptable manner
Reporting and disclosure
 In
addition to required financial reporting,
organisations are voluntarily reporting on
their sustainability practices.
 One approach to sustainability reporting is
the GRI reporting framework which is
comprised of


Reporting Guidelines: Principles and
Standard Disclosures
Sector guidance & support resources
Reporting and disclosure
 The



GRI reporting principles relate to:
content (stakeholder inclusiveness,
sustainability context, materiality and
completeness) and
quality (balance, comparability, accuracy,
timeliness, clarity and reliability).
Follow a TBL approach
https://www.globalreporting.org/Pages/default.aspx
Triple bottom line reporting
 Triple
1.
2.
3.
Bottom Line (TBL or 3BL) refers to:
Social performance
Environmental performance
Economic performance


3 Pillars of Sustainability
3 Ps: People, Planet, Profit
Triple bottom line
reporting
Triple bottom line reporting
continued
continued
Prepared by Nicole Beatson
The role of accountants in
sustainability

Reporting


Cost Analysis


Report the entities sustainability performance,
includes environmental and social information
Include economic, environmental and social
information in decision making processes
Audit and Assurance

Internal controls to ensure the integrity of the
information
Ethics
 The
key to governance for sustainability
may be determined by the extent of
ethical consciousness.
 Morality vs Prudence

Prudence


Acting in one’s self-interest.
Morality
 Acting
as one ought to by taking into
account the interests of other people
Common Myths about
Behaviour














“I have to do what I’m told-to keep my job!”
“I can trust my boss to always be fair.”
“I really made a big mistake. I’m a bad person.”
“What others do is none of my concern.”
“I’m the only one who sees what’s going on-and who cares.”
“An action is either right or wrong.”
“It’s not my job to police my boss.”
“I can’t change this place.”
“A person cannot be talked into greater moral courage.”
“You are born with your morality.”
“Women have a more developed sense of ethics than men do.”
“People just naturally ‘do the right thing’ when presented with a
moral dilemma.”
“Good employees don’t do bad things. People act unethically
because they are selfish, stupid, or bad.”
“Ethical management means ethical organisations.”
Source: You want me to do what? When/where and how to draw the line at
work by Nan DeMars (Simon & Schuster)
ETHICS
 Ethics
is central to the study of business
 The decision-making control over the
direction and management of an entity is
known as corporate governance
 Modern corporate governance practices
need to be in line with ethical and
societal expectations
ETHICAL PHILOSOPHIES
 The
fundamental question of ethics is
What ought one to do?
 Major influences on ethical thinking:






Prudence
Religion
Law
Conscience
Relativism
Rights
ETHICAL PHILOSOPHIES
continued
3 major approaches to studying ethics
described by Beauchamp et al (2009)
1. Descriptive approach



Describes facts
Explains moral behaviour and beliefs
Business examples:
 Codes
of conduct
 Company policies on expected behaviours
ETHICAL PHILOSOPHIES
continued
2. Conceptual approach

Conceptual study of meanings and terms
used in ethics
e.g., justice, right, responsibility, duty

Business example
 Examination
entities
of stakeholders of business
ETHICAL PHILOSOPHIES
continued
3. Normative (prescriptive) approach


Concentrates on what ought to be done
Two theories typify this approach
 Teleological
theories
-Consequences of decisions and actions
 Examine the decision and/or action in terms
of morality- the right thing to do?
Teleological theories
 Teleological
theories are concerned with
consequences of decisions
 If actions result in good consequences,
behaviour is said to be ethical
 Two issues


What is a desirable consequence?
Upon whose judgement is the
consequence examined?
Teleological theories continued
 Hobbes
(1588-1679): if everyone acted
in their own self-interest, anarchy
would rein. Social contract theory –
cede rights to a central authority for
protection.
 But Smith (1723-1790) believed
competitive self-interests were
necessary in commercial world to
achieve overall public benefit
Teleological theories continued

Most notable theory is utilitarianism
 All individuals maximising their utility will lead
to society’s utility being maximised also
 Utility = happiness
Who gets the most utility? Individual or Society?
 Provides justification for profit maximisation:
"greatest happiness principle",

"It is the greatest happiness of the greatest number that
is the measure of right and wrong.“ Jeremy Bentham
(1748 – 1832)
Teleological theories continued




Bentham’s student John Stuart Mill (1806-1873)
examined what constituted happiness &
considered liberty – the extent to which
power can be exercised by government over
an individual
criticism of utilitarianism: doesn’t consider
issue of minority rights
Therefore must base actions on ‘do no harm’
And Friedman (1912-2006)mooted limited
government intervention and self-interest as
long as in accordance with ‘the rules of the
game’
Teleological theories continued
•
Ethical egoism


individual decision maker decides what is
best for himself or herself.
Agency Theory (Nordberg 2008)
Teleological theories
“There is one and only one social
responsibility of business — to use its
resources and engage in activities
designed to increase its profit so long as it
stays within the rules of the game, which is
to say, engages in open and free
competition without deception or fraud”
(Friedman 1970, p. 126).
Deontological theories
 Concerned
with duties & morality
 Kant (1724-1804) proposed that an action
is morally right if it is motivated by a good
will that stems from a sense of duty
 So, a business motivated by profits,
despite doing respectful things, is acting
in a prudential but not a moral way
 But when does partiality become
immoral?
Deontological theories
continued
 Accountants
or managers taking actions
based on their sense of duty would
subscribe to this approach. That duty may
be based on a set of rules or professional
guidelines.
 Impartiality and regulation are seen as
essential components of a moral system.
 Business issues to consider:


Insider trading
External audit
Ethics, regulation,
sustainability and politics
 There
are no hard and fast rules when it
comes to ethics in business.
 Four key responsibilities of business
1.
2.
3.
4.
Economic
Legal
Ethical
Discretionary
Ethics, regulation,
sustainability and politics
 Why


consider the role of ethics?
The free market vs the community
Nordberg’s Framework
Ethical behaviour and
professional code of ethics
 Development
psychology suggests that
how a person responds to an ethical
situation is linked to their moral
development
 3 developmental stages



Pre-conventional
Conventional stage
Principled stage
 Many
companies and professional bodies
have developed their own codes of
ethics
Professional codes of ethics


APES110 Code of ethics for professional
accountants, issued by the Accounting
Professional & Ethical Standards Board
(APESB) itself established by CPA Australia and
the Institute of Chartered Accountants
Australia
Members of these two professional bodies
and the Institute of Public Accountants (IPA)
MUST comply with the code of ethics
APESB link: http://www.apesb.org.au/issued-standards
APES110
 Five





fundamental principles
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
(Independence & responsibility to act
in the public interest)
Ethical decision-making
methods

2 approaches to assist in decision
making when there is an ethical issue at
stake

Methods with a sequential approach
e.g. Langenderfer and Rockness (1990)
model

Methods which aim at identifying issues
e.g. St James Ethics Centre model
Ethical decision making methods
Ethics, regulation and business
continued
 Key






ethical issues facing entities today include
Whistleblowing
Insider trading
Ethical investments
Bribery
Forensic accounting
Fraud
Corporate governance


Corporate governance refers to the
direction, control and management of an
entity. This includes the rules, procedures
and structure upon which the
organisation seeks to meet its objectives.
People who make decisions have power,
but they also have responsibilities and are
accountable for their actions
Legal duties
 Specifically,
directors owe the following
legal duties to their company:




to act in good faith, in the best interests of
the company
to act with care and diligence
to avoid improper use of information or
position
to avoid conflicts between their role as a
director and any of their personal interests.
Corporate governance
principles, guidelines and
practices
 Guidelines



ASX Corporate Governance Council
OECD
World Bank
 Guidelines



are issued by
cover items such as
Functions and structure of board of
directors
Conduct of directors
Role of shareholders
Structure of
corporate governance
Prepared by Nicole Beatson
Corporate governance principles, guidelines
and practices
Corporate Governance




CEO and CFO to attest to the truth and fairness of
financial reports
Audit committee
Compensation of senior officers and directors
Customer and supplier relationships
Corporate social responsibility
and stakeholder theory
A corporation usually has a large number of
stakeholders who are individuals or groups
who have an interest in the entity’s activities
and performance
 So stakeholders are not just shareholders
 Corporate governance needs to reflect the
wider duty of care that society is placing on
decision makers of entities

Corporate social responsibility
and stakeholder theory continued
 Stakeholder
theory holds that the purpose
of the entity is to work for the good of all
stakeholder groups, not just to maximise
shareholder wealth
 Stakeholders include shareholders
(owners), employees, creditors, suppliers,
governments, unions, environmental
groups
Corporate social responsibility
and stakeholder theory continued
 Corporate
social responsibility (CSR) refers to the
responsibility an entity has to all stakeholders
including society in general plus the physical
environment in which it operates
 The move towards CSR has occurred over a period
of years as societal expectations change
Corporate social responsibility
and stakeholder theory continued



To what extent is economic and technological
success the cause of environmental degradation?
How can accountants help entities in the quest for
social and environmental consideration?
Consideration of consequences of ‘business as
usual’ continuous economic growth (not a new
idea – see J.S. Mill’s ‘Of the Stationary State’)
http://www.efm.bris.ac.uk/het/mill/book4/bk4ch06
Corporate social responsibility
and stakeholder theory continued
 Gray
and Bebbington (2001) suggest that
accountants can help entities in this quest
for CSR because of



Their information systems
Their performance appraisal expertise
Their focus on qualities such as integrity,
objectivity and independence
Corporate social responsibility
and stakeholder theory continued

Ways in which accountants can help




Developing systems that not only capture the
environmental and social activities but also
evaluate the extent to which the activities meet
the objectives
Having a greater awareness of the future
Including environmental and social information
in external reporting
Attempting to measure both the cost of
environmental and social activities as well as
the benefits
Corporate social responsibility
and stakeholder theory continued
 Triple
bottom line reporting refers to the
economic, social and environmental
performance of an entity
 Elkington (1999) proposed that an entity’s
long-term viability is a function of how well
it can balance these three areas
Corporate social responsibility
and stakeholder theory continued
 Key



barriers to implementation of TBL are
Lack of environmental experience among
accountants and auditors
Difficulty of valuing contingent liabilities
Difficulties in determining environmental
costs
General Business Environment


Stakeholders






Investors
Creditors
Employees and trade unions
Customers
Government
Special interest groups community







Reserve Bank of Australia
Australian Securities and Investments Commission (ASIC)
Australian Competition and Consumer Commission (ACCC)
Australian Taxation Office (ATO)
Australian Prudential Regulation (APRA)
The Australian Stock Exchange (ASX)
Accounting Regulation
Regulation
(Note: You do not need to know these regulatory bodies for exam. You
need to be aware that such regulation exists. This is an illustration of the
types of bodies that exist. Most countries would have their own
regulatory bodies governing similar areas.)
How do we recognise if there is a morality issue in a business
decision?
How do we know what the best behaviour is (in terms of
morality)?
1. The problem of morality vs. market economy: The flood
disaster in Germany
Some years ago in the eastern part of Germany there was
a flood disaster similar to Queensland in 2011. In order to
protect themselves and particularly their houses the
people affected used sandbags. The disaster lasted
about seven days. In that period the price for a
sandbag quickly rose from initially $ 0.50 to $ 2 per bag.
Some of the suppliers claimed even up to $10. In the
media this behaviour was condemned as a rip-off to the
disadvantage of victims.
Is that argument acceptable?
How do we recognise if there is a morality issue in a business
decision?
How do we know what the best behaviour is (in terms of
morality)?
2. The high-salary-problem
Almost half of the world —
over 3 billion people — live
on less than $2.50 a day.
The GDP (Gross Domestic
Product) of the 41 Heavily
Indebted Poor Countries
(567
million people) is less than
the wealth of the world’s 7
richest people combined.
Nearly a billion people
entered the 21st century
unable to read a book or
sign their names.
On the other hand:
Is that immoral?
Wealth Inequality in America: http://www.youtube.com/watch?v=QPKKQnijnsM
How do we recognise if there is a morality issue in a business
decision?
How do we know what the best behaviour is (in terms of
morality)?
3. The produce
manager of a
supermarket
debates with himself
whether to get rid of
a lot of half-rotten
tomatoes by
including one, with its
good side exposed,
in every tomato sixpack.
How do we recognise if there is a morality issue in a business
decision?
How do we know what the best behaviour is (in terms of
morality)?
4. A company
president finds that
an aging
executive, within a
few years of
retirement and his
pension, is not as
productive as
formerly. Should he
be kept on?
References
Slides adapted from:
Beatson, N 2014, Chapter 2 Business Sustainability, Accounting:
Business reporting for Decision making 5th Edition Teacher Resources,
Wiley
Brundtland, G 1987, Our Common Future: Report of the World Commission on
Environment and Development, Oxford University Press, Oxford.
Epstein, MJ 2008, Making Sustainability Work: Best practices in managing and
measuring corporate social, environmental and economic impacts, BerrettKoehler Publishers, Inc., San Francisco.
Friedman, M, 1970, ‘The social responsibility of business is to increase its profits’,
New York Times Magazine, September 13, pp. 32–33, 122, 124, 126.
Kant, I, 1964, Groundwork of the metaphysic of morals, transl. Paton, KJ, Harper and
Row, London as cited in Chryssides, GD & Kaler, JH 1995, An Introduction to
business ethics, Chapman & Hall, London, pp 80-107
Nordberg, D 2008, The ethics of corporate governance, Journal of General
Management, vol 33, no. 4, pp 35-52.