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Corporate Governance and Ethics

Corporate governance is defined as the development of of formal systems of accountability, oversight and control in order to remove the opportunities of employees to make unethical decisions. Accountability refers to the synchronizing of workplace decisions to the firm’s strategic direction in alignment to the ethical and legal considerations. Oversight refers to effective checks and balance policies that are in place to limit opportunities for managers and employees to engage in unethical practices.

Control is the processes and procedures put in place to audit and improve on the organizational decisions and actions. Business ethics refers to the principles, values and standards that guide individual and organizational behavior in the business world. this refers to upholding of noble ideals such as transparency, honesty, trustworthiness among others. From the 1920’s Progressive Movement in the U. S. A to today, the concept of business ethics has been of great concern to the business world due to the impact that economics or business has on every sphere of our lives.

The twenty first century has been witness to turmoil and near disintegration of global civilization as a result of the world economic crisis that was caused by the irresponsibility and outright gluttony of those charged with

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the privilege of managing multi-national corporations and overseeing world markets. In recent years, well publicized scandals have resulted in public outrage about deception and fraud in business. The cooking of accounts by major corporations such as Tyco is a fine example of how corporation executives hypnotized their shareholders with false financial reports indicating growth and huge profits.

A facade of success, was created with the executives awarding themselves million dollar bonuses, with the CEO, Dennis Kozlowski indulging in excessive luxuries such a $15 million vintage yatch and a $2 million birthday party for his wife, when in reality, the company was a sinking ship plagued by insider trading and misappropriation of funds. This paper attempts to provide understanding as to how ethical decision making ought to be conjoined Siamese twins, where one cannot survive without the other.

The ability to recognize and deal with complex business ethics issues is a skill that cannot be taken for granted by corporation managers. Corporate institutions both public and private must be founded on the principles of accountability and transparency. This is the only way to guarantee the going concern of businesses as well as growth and development of the society as a whole. CHAPTER 1 FRAMEWORK FOR UNDERSTANDING ETHICAL DECISION MAKING The management of corporations is generally complex in nature.

From the top management to the subordinate staff, different structures of command are usually in place to provide guidance on how to execute responsibilities as well as how to relate with every player, both internal and external, that contributes to the daily running of the business. The usually wide hierarchy and chain of command that defines most corporations poses a great challenge to the strict adherence of aligning corporate decision making to a code of ethics.

This is because the staff is not represented by robots who are simply programmed and automatically follow laid down instructions and commands. The running of all institutions falls in the hands of humans who come from different backgrounds and prescribe to very diverse beliefs and value systems hence leaving the matter of ethics at the mercy of individual interpretation. Let us look at some of these factors that influence the evaluation of and intentions behind decisions taken by different people. 1. Ethical issue intensity

This refers to the deemed relevance or importance of ethical issues in the opinion of the individual employee of an organization. It is personal and temporal in nature due to its attempts to tolerate divergent perceptions and beliefs within certain situations or due to mounting personal pressures prevailing at a particular time. Ethical intensity reflects the ethical seneitivity of the individual or work group that faces the decision making process. Research suggests that individuals are subjected to six spheres of influence when confronted with ethical choices i.

e. The workplace. The family. Religion. Legal system. Community and profession. The level of importance of each of the above influences is said to depend on how important the decision maker perceives the issue to be. Unless individuals in an organization share some common concerns about ethical issues, the stage is set for ethical conflict. It is important to nte that ethical intensity is usually influenced by the management, which can use punishments, corporate policies and values ti influence the actions of employees.

For example many of former energy giant Enron’s officials and staff were well aware of the firm’s unorthodox accounting practices such as use of off-balance sheet partnerships while using Enron stock as collateral for their dealings, leading to the eventual collapse of the company (http://www. tsbpa. state. tx. us/). Though not illegal at that time, the investment model operated like a pyramid or ponzi scheme whose intentions could be seen as open gambling and deceit veiled in sophistication and innovation.

The fact that the Enron management gave a stamp of approval for their transactions; this was accepted as a way of conducting business by the organization thus impacting on the employee’s ethical judgment and behavioral intentions. Organizations must identify and critically assess areas of ethical and legal risks and communicate these risks to employees. In addition, organizations with employees from diverse backgrounds ough to train them identify specific ethical issues and guide them on how to deal with them in accordance with the organizational framework. 2. Individual factors

As mentioned earlier, employees in an organization all come from very different culture and have therefore been inculcated or conditioned to very divergent systems of beliefs and values. While some value honesty, for others “a little white lie” can cause no harm. In addition, some may view their work as an opportunity for service and growth thus they protect company property and work with diligence, while others may consider their employment as a mere means to an end thus to them taking a few office stationery home or spending office time and phones on personal calls to them is a deserved right.

In the workplace, personal ethical issues involves personal values such as honesty, time keeping, faithfulness, promise keeping, fairness among others. There must be a clear understanding among employees between what is acceptable and unacceptable in the business environment. This gives rise to the point of conflict of interest which can best be elaborated with the Scenario of the public service and Goldenberg scandal of Kenya.

Rather than utilizing public funds for development projects and uplifting the standards of the citizens, billions of tax payer shillings were diverted into the private accounts of retired president Daniel Arap Moi and his cronies. This was through a fake mineral export compensation scheme that was the brainchild of the criminal genius, Kamlesh Pattni. Though this was outright thievery and flagrant disregard of the law, Moi and his cronies considered their being in power as “their time to eat” hence taking the cue from their predecessor, Jomo Kenyatta.

Other factors that may influence individual ethical resolution may include debts of an employee, alcohol or even gambling habits. Managers should put in place effective ethics programs that will not leave organizational ethical standards to the whims and interpretation of employees. It is therefore critical to institute definite and explicit ethical policies in order to enable employees align their personal principles and philosophies with organizational goals and objectives. 3. Organizational factors

In an organization, organizational values have greater influence on decision making processes than personal values. In the workplace, business choices are often done jointly through: Work groups. Committees. Conversations and discussions with co-workers. New employees in an organization are guided by what they learned in their backgrounds as well as the prevailing norm in the institutions. This therefore brings to light the importance of having a unifying system of decision making through laid down processes and procedures.

This can be set in motion through the following ways: a) Establishing a corporate culture This refers to putting in place specific sets of values, beliefs, goals, norms and problem solving techniques for all employees to share. This may be done through seminars to indoctrinate employees on the value systems of the company and taking new employees through a thorough orientation program that will acquaint them with the history and current ethical standing of the company. In addition, establishing a friendly ethical climate is vital. This can be achieved through open and frank discussions between the management

and staff. This creates an atmosphere of trust and positive attitudes towards ethics. Culture acts as the sorce of orderin the face of turbulence. Structured perceptions provide operational definitions of reality and are used by employees to interpret their situations and act within that definition of the situation. When the objectives, rules, procedures, and roles become internalized, the organization can rely on its culture as a control mechanism. A company’s myths and traditions simplify an unintelligible complexity into an understandable complexity.

They therefore provide the illusion of understandability as well as a self-regulatory function for the group. Similarly, a company’s history and traditions, its organizational culture and ethos, its operating and competitive environment, and the preferences of its key decision makers will determine which norms are promoted. These norms will also be incorporated intot he decision of employees, aligned with the standard business practices and , and in the case of responsible corporations, consistent with community standards.

Despite being one of the most reputable auditing firms in the world, Arthur Andersen LLP engaged in cooking of Enron’s books of accounts. Though not necessarily illegal, their speculative investment portfolio and spreading of Enron’s billion dollar debts through setting up of dummy institutions became a norm that was adopted by the over one hundred Arthur Andersen LLP employees dedicated to Enron’s accounts. Rather than adopting prudent management, high risk speculation became the organizations way of life that eventually led to the collapse of Enron.

Corporate executives can use the following ways to design and implement a good and solid corporate culture: Leading by example. Don’t ask someone to do something that you are not willing to do yourself or have not done before at some point in your career. Set clear goals and expectations. Promoting a relaxed and inviting environment that allows for a free flow of ideas, creativity and communication. Communicating effectively on all levels. Make sure that communications lines are open and comments and questions can always be heard.

Sometimes a face-to-face conversation will be more productive and appreciated than an email chain. Sharing struggles, accomplishments, goals and success stories. Creating a sense of transparency. Everyone in the company should be aware of what’s going on in the other departments of a company, if clients are happy or displeased and what is expected of everyone on an individual and team level. A once-a-week meeting that is short and productive might be beneficial.

Getting to know your team out of the office and collectively attend events such as community service projects, team building exercises and networking events Recognizing and real-time feedback is key. Publicly recognize employee performance, milestones, and accomplishments. More so than financial incentives, people like to know they are doing a good job and are appreciated in the organization. Say thank you often, give days off and consider implementing an incentive program. Modifying day-to-day work procedures. Change meeting locations; go out to lunch together or implement casual and/or spirit days.

Listening and giving employees the opportunity to influence company decisions. Though every idea you listen to may not be great, all you need is one good idea to impress a client or save the company time and money – all of which will build company morale. b) Coordination with significant others The work place does not operate in a vacuum. The influence of superiors, co-workers and subordinates must always be taken into account. The kind of advice one receives from co-workers will largely depend on the ‘ethical conscience’ of the organization.

A well entrenched ethical orientation will provide employees with an assortment of avenues to seek guidance when faced with potentially unethical or illegal situations. This will empower the individual employee to weigh between personal conflicts and organizational standards thus making the right decision through self analyzing of the situation rather than merely coiling back due to fear of retribution. Anticipatory socialization refers to how people adjust their beliefs, dress and personal appearance to accommodate o new settings before they enter them.

When a new employee starts work, the other employees determine whether or not the new employee will ‘fit in. ’ some employees may give a helping hand whereas others will simply let the newcomer find his/her own way, failure of which will have them christened as ‘misfits. ’ Establishing a system of norms and informal rules that define how employees are to behave will enable personnel generalize to new situations and act quickly. Also, enhancing communication and coordination amongst employees will foster oneness that will ultimately give the organization a unified purpose.

A lack of coordination in an organization can decrease productivity, complicate processes and delay the completion of tasks. In order to coordinate the efforts of an entire organization, the organization requires a systematic integration of a process that creates accountability within the organization. Implementing this type of process allows interdepartmental coordination throughout the organization between employees. Recognizing early signs and symptoms of not having coordination in an organization can help it prevent further damage. These include; Delay

One of the signs that an organization lacks coordination is delay. When there is a lack of coordination between management, labor, production and sales, delays will result causing the organization to become ineffective. When delays become part of the operations of the organization, customer relations will suffer for the organization. Delays create unreliability and will alienate customers from the organization. By controlling and properly managing work in progress, the organization can work to prevent delays and resulting coordination problems.

Duplication Another sign of a lack of coordination within an organization is redundancy. With redundancy, an organization will spend double the effort, material and time to produce the same item twice. Redundancy typically results from a lack of coordination between various departments within the organization. By implementing control measures to reduce redundancies, an organization can work toward improving overall coordination within the organization. Lost Data Organizations must effectively utilize information to function at an optimal level.

When this information is not readily available as needed within the organization, the lack of information can create a cascading effect that will damage the organization. Lack of coordination creates gaps in the acquisition and distribution of information. This in turn makes the organization’s available resources ineffective and causes it to miss opportunities. By implementing an accountability system for the information, the organization can improve coordination and minimize lost information. Inflexibility When an organization does not support coordinated efforts, innovation and progress can become stagnant within it.

This can make the organization obsolete and unable to compete against other organizations in the same industry that have adopted a coordinated effort to adapting new methods of producing and managing the organization. Inflexibility also freezes many protocols that could have potentially become productive. This happens because there is not enough coordination to gauge the effectiveness of the new protocol. In order for organizations to have efficient and ethical work processes, the following steps ought to be taken by organizations to ensure seamless operations and enhance oversight and control.

To undertake action plans during a specific time period that is defined by employees, so as to facilitate their commitment and interest in planning To manage and share with new employees the organization’s values and principles so that they all know how to participate To design, develop, and implement training on how to participate and collaborate on activities To collectively determine monitoring and evaluation methodologies To include employees in taking on monitoring tasks, maintaining an open and participatory point of view To encourage business units to promote their visibility through external communications, on topics such as news, projects, event announcements, calls for publications and so on, so that people outside the units stay informed. 4. Opportunity This refers to the conditions in an organization that limit or permit ethical or unethical behavior in an organization. Opportunity is a product of conditions, both internal and external that provide rewards or failure to erect protective barriers against unethical practices. Internal rewards may include self worth and enhanced ego whereas external rewards include social approval and status.

Protective barriers involve setting up of stringent organizational policies to guard against vices such as bribery and company policies to punish the non-compliant staff. The absence of punishment for the unethical within organizations essentially motivates employees to engage in unethical behavior, whose potential reward creates opportunities for questionable decisions. Politics has a direct influence into the affirs of business corporations. Cause (2002) asserts that organizations from labor unions to multinational companies have always contributed to politicians and political campaign teams in order to have influence over their legislative duties to favor their business interests.

In the USA, Halliburton, an oil exploration and extracting firm closely linked to the former president George Bush’s and former vice president Dick Cheney’s families, was one of the first oil companies to set up shop with exclusive drilling rights in Iraq immediately after the success of the American invasion to depose president Sadaam Hussein. Under the guise of ‘war on terror’ and seeking to destroy Sadaam’s stockpile of ‘weapons of mass destruction’ the leader of the ‘free world’ and his cronies were only out to gain control of Iraq’s oil reserves and make a few billion dollars for pocket change! Due to the high level powers that were involved in this scam, prosecution of Bush, Cheney and their accomplice then British Prime Minister Tony Blair is a mere wish and they are enjoying their plush retirements. Opportunity relates to individuals immediate job context i. e. Where they work. Whom they work with. Nature of the work. The immediate job context includes:

Motivational carrots and sticks that superiors use to influence employee behavior. Motivational carrots include pat raises, bonuses and public recognition. Motivational sticks include demotions, firings, reprimands and pay penalties. The opportunities employees have for unethical behavior in organizations can be eliminated through formal codes, policies and rules that are adequately enforced by the management. Banks for example, have adopted a policy of compulsory yearly vacations for employees in order to keep them away from their work stations so that they cannot be present to cover up any possible embezzlement or diversion of funds. 5. Business ethics evaluation and intentions

Ethical dilemmas arise from situations where crucial decisions are to be made yet rules that may offer guidance are quite often vague or in conflict. The results of an ethical decision are often uncertain; no one can always tell us whether we have made the right decision. An individual’s intentions and will ultimately determine final decisions taken. Guilt may occur where individual intentions and behavior are inconsistent with ethical judgment. In June 2002, Andersen, an auditing firm was convicted in a US federal court of the crime of obstructing justice by shredding working papers related to Enron audits because Andersen staff knew that the papers were potential evidence in the Enron investigations (Nelson KK, Price RA, Rountree BR, 2008).

Such a dilemma was a classic example of whether to adhere to the code of ethics by submitting the documents to the authorities and risk prosecution or destroy the documents and save themselves form being held liable for the auditing cover-ups. An individual’s intention and the final decision regarding what action he/she will take determine the outcome of the decision making process. Guilt may arise from inconsistency between one’s intentions and ethical judgment. Kenya Airways, Kenya’s flagship airline has for the past few years been faced with great turbulence. Not only have the share prices tumbled down significantly, there have also been administrative troubles pitting the chairman Titus Naikuni and a majority of the staff. For years mismanagement and conflicts of interest in issuing of tenders have left the company almost to its knees financially.

In order to cut costs, the management initiated a forced retirement package for hundreds of employees who did not take it kindly and went to the streets of Nairobi to hold demonstrations. The employees argued that the retirement package was a cover up scheme to hide the gross inefficiencies and corruption that become synonymous with the senior executives. It is indeed financially prudent for companies to cut down their sizes when faced with harsh economic times, however, the Kenya Airways scenario gives a glimpse into the grey areas managers may find themselves when evaluating complex situations that require decisive and sometimes drastic actions to be taken.

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