Ethics Print Out

7/29/2019 Ethics Print Out

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ETHICAL RESPONSIBIL IT IES IN COOPERATIVE CAPITALISMAs recently as 25 years ago, companies were viewed as islands of managerial initiatives andresponses in a sea of market relationships. This world view of a firm was founded on the notionof clear boundaries within which it operated. There were four boundaries which demarcated thelimit of managerial activity and responsibility:

Financial boundaries. Firms sought to own all of their assets including plant, equipment andintellectual property rights. They also endeavoured to fund their operations mainly throughinternal accruals. This naturally increased their autonomy and ability to take independentdecisions.

Administrative boundaries: Administration derived its validity and stability through theorganization chart which clearly laid down the hierarchy and the authority/responsibilityrelationships within the firm. Managers excercised internal control through the hierarchy whileon the outside response to market forces determined the allocation of resources.

Social boundaries: Firms constituted social communities where employees were bound together

by shared values, norms and a sense of shared purpose. The sense of community varied fromcompany to company depending sometime on size( the smaller and younger a company the morethe likelihood of strong community feeling), and sometime on strong inspirational leadershipcementing the bond between employees. (G.E. under Jack Welch is a good example)

Contractual boundaries: Most large firms and several small ones particularly in the U.S. enteredinto precise, formal, and legal contracts with their stake holders including employees, suppliers,dealers, franchisees and other associates. These demarcated the rights and obligations of each ofthe transacting parties. While these contracts were susceptible to violation on either side,managers preferred the arms length relationships that they created and commensurately increasedthe scope for independent decision making and control over the firms destiny.

The blurring of boundaries: During the last two decades several forces have been reshapingcompany boundaries creating expansion on the one hand and overlap on the other. America hasbeen in the vanguard of this transformation. Firstly the civil rights movement originating in the1960s has heralded change in the recruiting and retention practices reducing the earlierarbitaryness and prejudices. The environmental movement has also brought about change for thebetter as far as the larger societal interest goes. Several new regulatory agencies came into beingand they used persuasion as well as coercion to address concerns on fair employee practices andenvironmental issues. There are numerous agencies but the major impacters in ethical terms arethe Environmental protection agency(E.P.A.), The Occupational Safety and HealthAdminstration(O.S.H.A.), The Equal Employment Opportunity Commission(E.E.O.C.), and theThe Consumer Safety Product Commission(C.S.P.C.). Firms who initially adopted an adversarialposition vis a vis these agencies gradually moved to a more cooperative response on contentiousand disputed issues.

New Stake holders: After the first oil shock in the early 1970s, American companies faced stiffcompetition from Asian countries with the Janpanese in the forefront followed by the Asiantigers( Singapore, Taiwan, South Korea, and Hong Kong). As a result U.S. companies startedpaying more attention to important stakeholder groups primarily workers, trade unions, and local


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governments. GMs Saturn small car project is a fine model of cooperation betweenmanagement, local government and trade unions who were all involved from inception inimportant decisions including plant location, recruitment, training and welfare activities. In ourcountry with liberalization and the gradual emergence of competitive markets, there is increasingevidence of cooperation between industry, trade unions and local governments who are wooing

investments into their states like never before. Of course there are still many problems and trustessentially has to be built between the various constituents(witness the imbroglio on the BALCOdisinvestment). The heartening feature is that there is a clear realization on the part of all partiesthat it is better to adopt a collaborative posture than an adversarial one.

The Japanese industrial paradigm. Perhaps the most striking example of cooperative capitalismcan be found in the Japanese economy in the post war period. In a massive effort to first resurrectand then strengthen their economy, the Ministry of International Trade and Industry(MITI) wasformed. Banks were orientated towards giving virtually unlimited credit on easy terms tocompanies irrespective of their size. Tariff barriers were installed to protect domestic industryand a sustained export drive was launched and sustained. There are many other initiatives that

one can think of including the huge national effort in improving quality, but overall it was theconcerted cooperative drive between industry and its major stake holders, not least companyemployees, that ensured Japans attaining a position of industrial primacy ahead of Europeannations and second only to the mighty Unites States. Sadly, too much of a good thing can be badin the long run and the Japanese economy is languishing today almost buried under a mountainof bad debts that its banks failed to foresee during the good times. But the tremendous gains ofthe collaborative approach adopted in that country serves as a wonderful example that countrieslike India and China would do well to emulate. In our country we are seeing over the past fewyears an increasing willingness on the part of industry and its major stake holders to reason andwork together. The inputs taken from industry bodies and concessions to their reasonabledemands in the development of the annual finance budget is one example. The divestmentprocess moving forward albeit with significant stutters and hiccups is another example. Thewillingness of trade unions to accept reductions in employment levels (unthinkable a few yearsearlier) points to a progressive improvement in cooperation . Another factor that is responsiblefor blurring of organizational boundaries is the knowledge explosion and the easy access byalmost anybody to the latest developments in science and technology. The Internet is largelyresponsible for this and progress in Telecom/I.T convergence technologies will accelerate thistrend.

New responsibilities for managers. The new forms of cooperation extend the scope of managerialresponsibilities. The accountability framework in the old, boundary paradigm was simple andstraight forward. The increase of cooperation between companies, their stakeholders andbetween industry groups raises fears of large scale concentration of both economic and politicalpower. This includes the possibility of industry groups acting in concert to subvert action ofmarket forces that would be effective in regulating a normal competitive scenario where firmscompete freely and fiercely against each other. Managers now increasingly will have to face upto the dilemma of loyalty to the home country interests on the one hand and maximizing globalperformance at the expense of domestic market performance on the other. Growing pressure torespect the cultures and preferences of overseas customers as well as to conform to localregulations and ethical norms are increasing the complexity of the decision making environments


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for executives. Serious attention has to be given to these issues and induction of managers intothese new responsibility roles has to be smoothly and speedily effected.

PERSONAL ETHICS

Ethical behavior in business situations has to flow from Managers personal ethics. In turnpersonal ethics are founded on personal morality which is based on aspirations, values andcommitments and is considered by many to constitute the essence of ethics. A persons moralvalues are shaped by the rich and complex background of social influences that she comes under,starting from childhood. To better understand the sphere of Personal ethics, it helps if we adopt asuitable framework.

Framework for Individual Ethics. The following framework is significant firstly because itdefines the sphere of personal ethics and it provides basic analytical perspectives that help in theassessment of ethical dilemmas that constitute the working arena of ethical decision making. Theframework also provides alternatives for resolving ethical dilemmas. Finally the framework is

important because it crystallizes the long tradition through human history of serious thoughtabout right and wrong and moral behavior that characterizes ethics. The basic elements in theframework can be identified through four questions;1)What course of action will do the most good and the least harm?2) Which alternative best serves others rights including shareholders rights?3) What plans can a person live with? Which is consistent with the basic values andcommitments of his company?4) Which course of action is feasible in the world as it is?

The ethics of consequences. What course of action will do the most good and the least harm toeveryone affected by it? The British philosopher John Stuart Mills invented the termUtilitarianism to describe this approach. As the name suggests it is aimed at maximizing theutility for all those involved in a situation be they participants, contributors or merely thoseaffected by the actions of the participants. This approach appeals to most people because of theprevailing view that actions must be judged as good if they benefit others and proceeding alongthis path of reasoning, the more people that are benefited by an action or actions, the more moralit has to be. In business too, utilitarianism squares with the role perceptions of those in authoritywho interact with large numbers of people and several agencies and therefore see merit in theconcept of the greatest good of the greatest number.

As a managerial guideline it is necessary to break up the four basic questions asked above intothe following sub questions

1) Which groups and individuals will benefit from different ways of resolving a dilemma?2) How greatly?3) How severe will the suffering if any be?4) In what ways can the risk and harm be minimized?

Philosophers distinguish between two types of utilitarianism. Act utilitarianism is based on theidea that every act must be analyzed on the basis of its consequences by using the guidelinesactivated by the four questions and the four sub questions described above. Rule utilitarianism


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on the other hand stipulates that a general set of guidelines such as speak the truth repay yourdebts, dont harm the reputation of your fellows through loose talk and speculation etc. iffollowed consistently, will ensure the greatest good of the greatest number.

The Ethics of Rights and Duties: Actions are wrong if they violate a moral duty and conversely

they are right if they conform to a moral duty. We are familiar with duties such as avoiding harmto innocent people, keeping promises, behaving justly and respecting the rights of others. Thisview of ethics rejects the idea of ethics as an ultimate means and ends calculation. For instanceexecuting a psychopathic killer to prevent him from taking more lives could be justified by theutilitarian approach. In a business context retrenching employees to show better bottom lineperformance acceptable to share holders and some other stake holders would be seen asadmissible using the utilitarian approach, But most of us would agree that taking awayemployment from people through no fault of theirs and particularly where they have performedwell , constitutes an unethical act. Immanuel Kant the great German philosopher laid down thatadherence to principles and duties was the core of ethics.

The Ethics of Virtue and character: This high minded and therefore important approach to rightconduct is encapsulated in the following questions:1)What decisions and course of action are consonant with my personal values2) Which decisions and actions best serve my commitments and life aspirations3)For business managers, which decisions and actions are most consistent with

the kind of organization that we are trying to create or preserve?

This approach differs from the morality of consequences and duties in two principal ways. Thecharacter of the person who acts is as important here as therightness or the wrongness of the action. Karna the great epic hero of the Mahabharat is a primeexample of a person who followed the ethics of virtue and character. Apart from being a braveand courageous warrior, he also had the courage of his convictions and displayed exemplaryconsistency in his conduct at all times. Lal Bahadur Shastri as Railway minister also showedlaudable character in resigning in the wake of the Ariyalur train disaster accepting moralresponsibility for the catastrophe- something which has been considered unthinkable by thepresent breed of political leaders. In Indian business J.R.D. Tata, G.D. Birla and KamalnayanBajaj were all men of great character developed over a lifetime of acting and living virtuously.Some believe (with considerable justification in my opinion), that this approach to moral conductis the most commendable one and organizations, as well as, individuals within organizations,should view it as the finest achievement to practise this approach. However it must be acceptedthat this approach has to give due regard to and amalgamate with the earlier describedapproaches of consequences and rights and duties.

The Ethics of Pragmatism: This approach to the understanding and practice of ethics owes muchof its appeal to the 15th century Florentine statesman Niccolo Machiavelli. A single questionsummarises this world view of appropriate conduct-What will work in the world as it is? Inany situation, there may be several options that could meet some or all of the competingdemands of consequences, rights and duties, and personal integrity. Following Machiavellisrecommendations, the decisive question to be asked and answered is which of the options areactually feasible . In an organizational situation, the companys competitive, financial and


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political positions, the likely costs and risks of various plans of action, as well as the timeavailable for action must be considered. The ethics of pragmatism postulates that people arehuman, not angels and to suggest ideal standards of conduct is not only unrealistic butirresponsible. It is a fact that most business decisions are taken in the context of the here andnow and are imbued largely with the considerations that derive from a practical approach.

However it is suggested here that pragmatism is essentially a short term approach withunpleasant long term consequences. If for instance a firm maintains good relations withgovernment officials by placating them with gifts and largesse, in the long term it will be foundwanting in compliance with regulatory requirements, will be vulnerable to audit, and likely tofail in its fiduciary responsibilities. It may be better to bite the bullet in the short term but ensurelong term compliance with legal and regulatory requirements. It is the considered view of thewriter that the higher approaches of rights and duties and virtue and character will in the long runfulfill the objectives aimed at in following the approaches of consequences and pragmatism.However it is to be noted that the converse of this is not true. If consequences and pragmatismare followed exclusively, they will not yield long term stability and success for an organization.

This can only be brought about by practicing the higher approaches.

BALANCING RESPONSIBILITIES

Ethical issues are coming more and more to the fore of managerial attention with thedevelopments that have been described earlier and specially in the context of the expandingboundaries of business organizations. There are few if any accepted guidelines for suchdilemmas. A sound way for managers to cope with these situations is to rely on the fundamentalprinciples of personal ethics and to act out the roles prescribed for responsible economic agentsand as managers in the increasingly boundaryless organization.

1)The ethics of consequences asks managers to carefully assess the benefits, harm andrisks for all parties who will be affected by a decision. The utilitarian perspectiveencourages them to find ways to maximise benefits and minimize harm.

2)The ethics of rights and duties reminds managers that they have a duty to respect therights of various stakeholder groups. No stakeholders rights can be overlooked merelyby evoking the greatest good of the greatest number axiom.

3)The ethics of character and virtue requires managers to assess their obligations to variousstakeholders in terms of their personal values and those of their organization. In particularit asks them to evaluate each alternative in terms of the consequences for differentstakeholders.They should choose that alternative that harmonises best with the values andcommitments that distinguishes their company.

4)The pragmatic Machiavellian approach dictates courses of action that will work in theworld as it is. Taken in concert with the other three perspectives, this view can helpmanagers in selecting an alternative that is most likely to succeed.

The final suggestions are to examine the understandings that a company has with its variousstakeholders (both explicit and implicit) and to respect them while applying the generalguidelines that have been recommended above.


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CORPORATE GOVERNANCE:

Definition: Corporate Governance deals with laws, procedures, practices and implicit rules thatdetermine a companys ability to take managerial decisions viz. a viz. its claimants- in particularits shareholders, its creditors, its customers, the State and employees. There is a global consensus

about the objective of good Corporate Governance: maximizing long term shareholdervalue(return on shareholder investment). Since shareholders are residual claimants(they get theirreturn after every shareholder group gets their respective claims), this objective follows from apremise, that in well performing capital and financial markets, whatever maximizes shareholdervalue must necessarily maximize corporate prosperity and best satisfy the claims of creditors,employees, customers, vendors, associates, regulatory agencies including the government, andthe larger societal environment in which the firm operates. However the major priority is stillgiven to shareholders and creditors by most institutions in most countries that are responsible fordeveloping guidelines on this relatively recent area of business focus. In India the prevailingguidelines have emerged from the recommendations of Confederation of Indian Industries(C.I.I .code 1998), and the Securities and Exchange Bureau of India(SEBI code 1999) which have been

formally incorporated in clause 49 of the official SEBI rules which deals with compliancerequirements of both listed companies and companies applying for listing.

Coverage of Corporate Governance Board of Directors: Single tier board(unlike two tierboard in which the second tier has worker and union representation which is mandatory inGermany). A minimum of 6 board meetings to be held in a year for a at least day per meeting.Outside professionals as independent directors. A minimum number of outside directors isspecified for companies with a turnover equal to or exceeding Rs.100 Crores. There arerestrictions as to the maximum no of directorships an individual can hold ( this figure is currently16). Non executive directors are expected to become active participants on matters such as boardformation, audit committees, required to be financially literate in the case of non executivedirectors. Issues that have to be addressed and settled include remuneration of directors includingIndependent non executive directors specifically sitting fees, commission fees and stock optionsfor executive directors. Minimum attendance requirements at board meetings are also specified.Key information to be public ally disclosed include annual operating plans and budgets,manpower and Overhead budgets. A further set of requirements concern disclosures bothfinancial and non financial. Interests of Directors register has to be maintained which recordsdetails of individual directors interest in any contracts or arrangements of the company. Otherrequirements include details of share price movements or the company, consolidation of groupaccounts and standards of disclosures(e.g. disclosure regarding planned capital instruments suchas equity issue of G.D.R. issue)

The larger view of corporate governance: It is now commonly accepted that every firm has and isanswerable to its various stakeholder groups. We start with a definition of who a stakeholder is.Any person or group who has both a long term interest in and a long term commitment to acompany can be termed a stakeholder. While a shareholder who owns at any point of time someshares in a company can be considered a stakeholder, it is only that or those shareholders whoinvest in a company for the longer term who are prepared to share the risk and the returns withother similar minded and similar acting shareholders who can be considered true shareholderstakeholders of the company. Similarly employees who while entertaining reasonable


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expectations of competitive remuneration, congenial working conditions, prospects fordevelopment and growth in the organization, with a commitment to consider the longer termgood and success of the company and put in their best efforts to ensure both can be consideredtrue employee stakeholders. On the other hand individuals who buy and hold a companys sharesfor short term speculative gains and employees who only stay till the next attractive offer of

employment can not be viewed as true employee stakeholders. This combination of long terminterest and long term commitment applies to every stakeholder category including vendors,associates, creditors, regulatory agencies and the larger societal group. There is only oneexception to this requirement which is the customer. This constituent starts off with no interest orcommitment to the business prospects of the company even in the short term. It is a measure ofthe competitive capability of the company, as to how well it can capture the short term interest ofthe prospective customer and persuade her to buy into the marketing promises made by thecompany. It is even more a measure of the sustained competitive ability of the company as tohow long and how well the customer persists in buying the companys products/services. It isonly the truly satisfied customer who can be retained and expected to be loyal to the companyand its offerings.

It is interesting how simple and yet how true the above is. It applies not only to the successfulplanning and implementation of Strategy but also the application of Ethical principles of whichCorporate Governance is a significant element. If a company sets out to determine the rightfulexpectations of each of its stakeholder groups and makes it its obligation to meet theseexpectations it is bound to succeed in its business purpose which is the maximization of profits inthe long term.

To illustrate let us take the instance of the employee stakeholder group. Employees have therightful expectation to be rewarded financially and non financially in a competitive manner.They expect congenial working conditions both of a physical and socio psychological nature. Atrue employee stakeholder would also look forward to development and growth prospects in thecompany which would take her to higher levels of achievement and self actualization. If thecompany accepted the fulfillment of these expectations as its duty, it would not only benefit theemployees but would ensure highly motivated, high performing and extremely loyal partnerswho would do their best to meet all the organizational goals in the short, medium and long term.Similarly if vendor stakeholders are paid in a timely and accurate manner, given reasonablesupply lead times and are made aware of the companys plans for new products, capacityexpansions and acquisition of new technologies they will identify strongly with the company andensure timely and adequate supplies as also adhere to the companys quality specifications.

Why is it that so few companies in our country accept the simple larger message of CorporateGovernance while trumpeting their claims of good Corporate Governance which is nothing butsound strategy. The Answer lies in the unreal expectations that are prevalent which emphasizeshort term performance. The tyranny of the quarterly results report which expects and rewardsimproved performance on a quarterly basis puts pressure on firms to not only misreport results,but encourages extremely short term initiatives and responses. Examples can be found in everyfunctional area of management. Take the case of the marketing and sales function. Managers areconstantly expected to improve sales and market share over the previous year and the previousquarter. Firms do not bother to determine actual sales as represented by consumer offtake but


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restrict their efforts to pushing ever increasing quantities of their products/ services on to theirdistributors and dealers. This gives short term results in terms of increased sales and bookedprofits but puts increasing inventory pressure on the trade associates and results in knee jerksales promotion schemes which dilute the firms carefully built brand images and values. Themuch acclaimed Voluntary Retirement Schemes launched and executed by domestic and foreign

firms on our country and abroad is another short sighted measure to reduce employee numbersand thereby reduce costs. The intention is to get rid of non performing employees in a painlessway. What actually happens is that performing employees leave, take the VRS benefits and joinother companies. On the other hand the non performers stay on in the company and vitiate themix between performers and non performers. The only conceivable benefit is that the companycan claim a short term reduction in its employee costs. Examples can be taken from everyfunctional area of management including the finance and accounting function where delayedpayments to vendors are viewed as a smart way of activating zero cost working capital. We allknow that delayed payments will result in vendors increasing their prices and diluting quality aswell as developing unsatisfactory loyalty all of which hurt the company in the long run.

In conclusion we can state that Corporate Governance concerns meeting the rightful expectationsof the true stakeholders belonging to the various stakeholder groups and considering this as aduty and not as a favour or option. If this is done keeping the long term as the right time frame itwill not only ensure the continuing commitment of stakeholders but will result in maximizing thelong term profits which are the ultimate purpose of business and business firms. It is importantthat firms realize the spirit of Corporate Governance as more important than the letter which isreflected in the various codes and subsequent regulations covering business policy and practice.

NOTE ON SOCIAL RESPONSIBIL ITY

The meaning of Social Responsibility: The objective of business is to maximize long term profitsin a competitive environment in the community of people which is Society. For the firm itsstakeholders comprise the Society. Therefore the larger view of Social responsibility wouldconstitute the view of Corporate Governance which has been dealt with in the preceding note.However conventionally, Social responsibility is held to pertain to the larger community notdirectly interfacing with the company in its business pursuits but impacted in less direct ways.

The main features of Corporate Social Responsibility are:

Behaviour by Businesses over and above the legal or statutory requirements voluntary adoptedbecause businesses deem it their duty and also in their long term interests. As an example wemay take the example of Timex Watches Ltd in their manufacturing plant. The heat treatmentprocess featured the use of Potassium Cyanide a deadly poison. While the handling of thischemical within the plant was meticulously carried out with no danger to employees the handlingof the effluent required specified chemical treatment and release of the residue to drains andsewer systems outside the plant. However a decision was taken by the management to bury thewaste within deep concrete pits specially constructed within the factory premises to contain thetreated waste within the four walls of the company. This is only one instance of many sociallyresponsible initiatives taken by the company in the overall interests of the larger Societal group.


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Corporate Social Responsibility is intrinsically linked to the concept of Sustainable Developmentwhich emphasizes that acts by a responsible individual or group in the interest of social oreconomic development should consider the well being of both current and future generations.This is particularly true in the area of use of natural resources like forests, water sources and

agricultural land. It considers all aspects of environmental conservation and specificallyconcerned about contamination of large water bodies and resource(dumping of effluents in riversfor instance), unacceptable levels of polluting liquids and gases and degradation of prime forestland and vegetation in the public domain. Erosion of mountain sides in the interest of cultivationor setting up industrial units would also be featuring as areas of concern. Here the importantthing to note is that firms in particular and industry and business in general are expected tobehave in a conscientious way rather than controlled through impositions through statutes orregulations.

It is to be noted and accepted that Corporate Social Responsibility is not to seen as a fashionablenew area of interest or concern to responded to by firms as an opportunity to gain publicity and

goodwill by a few visible gestures as setting up a garden at a traffic roundabout or planting a fewtrees in the vicinity of their factories and offices. It should be seen as a mature andcomprehensive approach to meeting the long term expectations of stakeholder groups who do nothave direct involvement in the business activities and outcomes of the firm but whose welfareand well being will have long term impact on the firms business success.

What is Ethics: By definition Ethics is a Normative science dealing with Morals(right andwrong). Simply put it deals with what one ought to do with respect to ones obligations to others.Thus parental and teachers injunctions to be punctual, tell the truth, treat others as one would liketo be treated are familiar ethical sign posts that are used to first educate and then expectcompliance to. It is to be understood that the practice of ethics and a high level of compliancehave to be underpinned by a strong and consistent evaluative and incentivising /disincentivisingsystem. Thus school children are punished or rewarded in various direct or indirect ways for theircompliance/ non compliance to the codes they are taught. If a child comes late to school, she issent home or asked to bring one of her parents to explain/apologise for the infringement.Similarly a student who is caught lying will be castigated in front of his fellow students and mayeven be asked to stand outside the class for its duration.

Need for Incentives/Disincentives: In adult life, we are expected to follow these principles inour occupations and professions without the explicit evaluatory and incentivising control thatwas exercised in childhood. What is more we are subject to a far greater variety of situations inwhich the ethical standards apply. For instance breaking a commitment given for completion ofa task or meeting a deadline. It may have to do with how we treat our subordinates at work orour vendors. This may happen in work situations or outside them but the basic principles stillapply. Lets take an example: we pass on a secret that was passed on to us by a friend to anotherperson who could use the information to the detriment of the friend. If the friend discovers thisbetrayal, it might result in some form or reproach, a retaliatory response by not sharing moresecrets or even in the loss of the friendship. Note the progressive severity of the response. Thefirst two would be short term responses without the prospect of a more severe outcome. The thirdis a long term response which not only applies for a long period(even indefinitely) but whose


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consequences are more serious. While there is no formal punishment, the outcomes have to beconsidered as such. On the other hand, if the friends secret is preserved, it would lead to bothshort term and long term positive consequences. In the short term, there will be a continuingaffability, punctuated by affection and reciprocity and in the long term confidence and trust willbe built to the mutual benefit of both parties.

A Viable Consistent Framework: Once we accept that Long term profit maximization is thepurpose and therefore the ultimate objective of a business -in fact every single business,whatever plans, policies and actions that can contribute to this objective must be seen aselements of sound strategy and good business. If we now make the submission that theseelements will also be part of good ethical planning and implementation, this will resolve theexisting but clearly unnecessary conceptual stance that ethics and profit making are mutuallyexclusive and in fact hostile to each other. We will set out to establish the unassailable veracityof this proposition. For this we need to establish a framework and that is the StakeholderFramework.

Defining the Stakeholder: We first should define who a stakeholder is. Quite simply astakeholder in any organized body or institution is one who has both a long term interest andcommitment to that body. This flows from the primary meaning of the word stake whichcombines both of these attributes. We also set down the various stakeholders in theorganizational framework. These are Customers, employees, Vendors, Creditors, Regulatorsincluding government, Business associates including distributors and dealers/retailers, the largersocietal environment in which the organization functions and finally last but not least theshareholders. These constitute the complete set of stakeholders. There is a need to distinguish anominal stakeholder from a true stakeholder. A person might buy and hold thousands of sharesof a company. But if he is interested in holding these shares for only as long as they take toappreciate by say 5 0r 10 or maybe even 50% and then would exit his holdings he cannot beconsidered a true shareholder stakeholder. Again if an employee who is extremely capable andproductive and contributes significantly to the companys good, is interested in staying with thecompany only until he gets a better offer from another company, such a person cannot beconsidered a true employee stakeholder. This of course assumes that the organization on its partis fulfilling its legitimate responsibility for respecting and meeting its employee stakeholdersrightful expectations.

We next should establish the long term rightful expectations of each of the stakeholder groups.Lets do this first with the Customer. This is the simplest to identify and the hardest to fulfill.Every customer expects Satisfaction. To understand this we must understand that Customer buysa companys offering be it product of service on the basis of claims made by the company and atthe price offered and accepted. But on purchase while he has paid for and received the product,the claims and promises made which persuaded him to part with his money are yet to be fulfilled.If after receipt of the offering the customer finds that the claim/promise made has been fulfilledhe would become a satisfied customer. If he is dissatisfied he will complain. If the complaint isattended to in a timely and adequate manner, then too will the customer be satisfied. When thishappens we have a satisfied customer who is likely to repeat his purchases of the companysoffering and who too could pass on his satisfactory experience which could result in newcustomers. It is unfortunate that so many companies keep mouthing slogans of customer delight


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and Customer relations management without fulfilling their basic duty to satisfy customers inthis primary and fundamental way. This in no way suggests that firms should not be working onnew offerings ahead of their competitors or working in ways to develop strong enduring bondswith their customers. But in the absence of this total and unyielding focus on satisfyingcustomers by fulfilling the initial claims and promises made, no amount of additionals can do

the job of meeting the customer stakeholder expectations.

Employee Stakeholders: We now come to the next in order of precedence stakeholder, theEmployee. It is this stakeholder who contributes most to the companys pursuit of its ultimateobjective of maximizing long term profits. What are this stakeholder groups rightfulexpectations? We identify them as:

1. Competitive remuneration developed on an Industry standard. A company should try tobe among the best in its industry and it should be on the basis of what the employees getin hand and not on a Cost to the Company basis

2. Congenial working environment both physically in terms of basic work place facilitiesand utilities including adequately spacious well ventilated and temperature/humidity

controlled environment. It should also be an emotionally congenial environment withreasonable working hours, transparent policies on recruitment, training and developmentand retention(the three basic processes/functions in the larger H.R. Process)

3. Opportunities for growth and development within the organization. In this context itwould not be out of place to lament the tendency to fill vacancies arising out of attritionallosses through direct outside recruitment. In Timex Watches where I worked for 10 years,it was our policy to fill all vacancies through internal transfers and promotions. It workedmassively to the organizations advantage. Not only were we able to fill our vacanciesquickly but the overall motivation and performance were of a uniformly high order.Though much thought and planning as well as meticulous implementation were required,it was a huge success. There is no reason why most if not all organizations should followsimilar policies. There are arguments against this approach notably that outsiderecruitment would constitute a source of fresh blood and therefore fresh thinking. Onthe other hand there are more disadvantages than advantages including outsiders bringingbad practices that they had acquired, to a good organization and thereby polluting insteadof invigorating their new environment.

4. It should be the endless endeavour of an organization to provide opportunities for SelfActualization to each and every one of its employees. Apart from providing opportunitiesto learn and to contribute in various functions, the employees should be given scope tofurther their individual interests in knowledge and activity related pursuits includingsporting and cultural activities. It goes without saying that these should be promoted afterensuring that employees do full justice to their jobs and responsibilities towards the basicbusiness interests of the organization.

It would be entirely feasible to list the rightful expectations of each stakeholder group in theabove manner. After listing the first seven stakeholder group expectations, we come to theshareholder. It is very simple as in the case of the customer to establish the rightful expectationhere and that is Maximization of long term return on Investment. Here too, there is a plethoraof indicators including Maximizing share holder wealth and optimizing share holder value.The first is an inadmissible objective. A share holder might have a massive investment in a


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company and for the same return would have more wealth from his investment in the companythan another investor who puts in a smaller sum in a more profitable company and gets a higherreturn on his investment. Its obvious which shareholder is getting a better deal. The secondindicator viz. shareholder value is too vague to merit serious consideration. We must accept thatas far as possible performance of a firm and the meeting of stakeholder expectations should be

measurable in simple and quantifiable metrics. Since business performance has to be ultimatelyassessed and rewarded in financial terms, we should avoid qualitative and subjectiveperformance indicators. And to cap the argument, which shareholder would give up a tangiblemaximum return on her investment, for a nice sounding but vague Shareholder valuebouquet? None in my view!

Counter Expectations from Stakeholders: If then a firm is able to meet its stakeholdersexpectation as fully as it can and certainly to a greater extent than its competitors is it not to beexpected that it would fulfill its ultimate purpose ?True there would be a lot of details to bedeveloped, planned for, and followed up meticulously for the firm to be the perfect fulfiller of itsstakeholder expectations. But it cant be disputed that this framework is a complete and

exemplary one for any firm in any industry. Now we come to the clinching argument. If a firm isable to meet its stakeholder expectations fully and thereby maximize its long term profits, wouldit not meet its ethical objectives as well. In order to make this happen there should be acorresponding set of expectations from each stakeholder group. As an instance lets take the caseof the vendor stakeholder. The rightful expectations of any company from its vendors would be:

1. Consistent adherence to supply schedules and as per quality specifications2. Reasonable and competitive prices3. Timely intimation to the company in case of expected supply problems4. Continuous working on improving cost thereby providing progressively lower prices with

scaling improvements5. Sharing vital technical and commercial information which could impact the companys

interest6. Developing a partnering relationship as opposed to an arms length relationship.

Through faithful and rigorous adherence to the above set of mutual expectations, not only can theethical objectives be achieved, which meet conventional notions of transparency, fair play,reciprocity enshrined in the arena of Ethics, but best long term performance on profitmaximizations will also be assured.

Integrating B.E, C.G and C.S.R: It has become fashionable to talk about CorporateGovernance and more recently about Corporate Social Responsibility. All of these concerns canbe addressed conceptually and practically with the framework proposed above. But one caveat:Each of the primary stakeholder group expectations should be addressed simultaneously and tothe extent at any point of time, omissions and commissions can be identified vis a vis any of thegroups, pain should be taken to address these as soon as possible and in full measure. Firmsshould avoid masking or hiding non fulfillment of major obligations to their primarystakeholders and playing to the gallery by announcing activities and spending on minorobligations to the larger community. So if a firm is failing in controlling its factory emissionsand thereby contributing to the ill health of its employees and people in the vicinity of its plants,it is of little use and vastly hypocritical to announce that a small percentage of its profits wouldbe allotted to community service like digging wells and providing educational facilities for the


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poor in distant villages. Unfortunately, there is a continuing tendency for corporates to pay lipservice to Business Ethics and to overlook their primary ethical responsibilities while gainingpublicity with stunts like those described above. It can be nobodys argument that everybodyincluding business entities should enlarge their concern horizons to include as many groups andpersons as possible, but there has to be a clear and sensible system of priorities.

Conclusion: there is a need to sort out the present confusion on Business Ethics specially theimplicit dilemma about the divergence between profit and ethical objectives. Understanding thatthe profit motive is the only acceptable motive for any business (with the qualifier that profitshave to be maximized in the long term) is the starting point. We then use the comprehensiveStakeholder framework, identify and work to the rightful expectations of each stakeholder group.We need to augment these with a list of counter expectations that a business firm would have ofeach of its stakeholder groups. These then would constitute the framework in which Strategy,tactics and operational plans of the firm would be developed, executed, monitored, andcontrolled so that the goals, and targets are achieved in the right time frames. We would thentruly be able to accomplish what is currently seen by most Business Managers as Utopian, in full

measure. We would also achieve Long term profit maximization and more importantly be seenas completely Ethical Corporate Entities engaged in an ongoing partnership with each and everyone of our Stakeholders

Virtuous circle: Meeting the Employee Stakeholder Expectation

An investment in your employees ability to provide superior service to customers can be seen asa virtuous circle. Effort spent in selecting and training employees and creating a corporateculture in which they are empowered can lead to increased employee satisfaction and employeecompetence. This will probably result in superior service delivery and customer satisfaction. Thisin turn will create customer loyalty, improved sales levels, and higher profit margins. Some of

these profits can be reinvested in employee development thereby initiating another iteration of avirtuous cycle.


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THE ETHICAL RESPONSIBIL ITIES OF MANAGERS AS ECONOMIC AGENTS:

While many philosophers have argued- not without considerable justification- that ethicalthinking and practice has to flow solely from the framework of personal ethics, there is anotherview which holds that by taking on responsibilities in group situations such as business

organizations certain roles have to be played and with those roles also go responsibilities. Thereis often conflict between the role obligations of managers and their obligations as human beings.For instance a managers role responsibility might dictate that he reduces manpower to managecosts and fulfill his obligations to the shareholders of protecting their investment in the business.However in doing so he would be depriving some employees particularly good performers oftheir livelihood (at least temporarily) causing hardship to them and their families. Thisunderstanding of the dual nature of a managers obligations helps to bring perspective to theethical dilemmas faced by managers and the possibility of equitable dealing between variousstakeholder categories.A second assumption that has to be considered is that managers obligation to maximiseshareholder value is not only a professional obligation but a moral one. Many in our country and

some other countries as well could contest this assumption. On the other hand in countries likethe U.S. it has not only been upheld, but is one of the cornerstones on which that countrysextremely successful business model and economic edifice has been built and sustained. In thisframework, owners are considered principals while managers are viewed as agents who areobligated to serve the interests of their principals. In fairness it must also be said that principalsare typically long term institutional investors like Mutual funds, trust departments of Banks, andInsurance companies. These could also include individuals who are long term investors but notthose who are short term speculative holders of company shares. In meeting shareholderexpectations for high financial returns on their investment within appropriate risk levels,managers faced with ethical situations, be they related to employees or other stakeholders, haveto follow one or more of the ethical approaches described in the earlier chapter on personalethics. The approach that most readily suggests itself is the ethics of rights and responsibilities. Itis the shareholders right to expect high financial returns commensurate with acceptable risk. It istherefore the duty of managers to fulfill this expectation. It is also the shareholders right toexpect managers to obey the laws of the land in the conduct of the business and so too would itbe the duty of managers to do so. In the several takeover battles that have been witnessed both inour country and outside(primarily in the U.S.), a strong argument used to justify attempts totakeover has been that incompetent or self serving managers had failed to meet their obligationsto their shareholders. Attempts to take over the D.C.M. and the Escorts groups of companies inthe early 1980s by Swaraj Paul, and the takeover of the American tobacco giant R.J. Reynoldsare examples of the use of this logic. An interesting development recently has been thepreference of the shareholders of some companies for controlling pollution and improvingproduct safety over the maximization of financial returns.The ethics of consequences is also an important driver of managerial motivation and action. Itmust be accepted that in the pursuit of business success measured by the bottom line, companiesand the people who manage them are able to improve prosperity levels and alleviate humansuffering to a significant degree. Joseph Schumpeter one of the leading economists of the 20thcentury argued that modern capitalism by its very mechanism improves the standard of life of themasses. The relatively more rapid growth rate of the Indian economy post the liberalization


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started in 1991 by the Narsimha Rao government validates the contention of this greateconomist.A third cornerstone of the framework in which managers are to fulfill their obligations aseconomic agents is the relationship between markets and individual freedom. In an open marketwhere firms compete vigourously, the customer is provided with an increasing number of options

thus enhancing his freedom to choose that which best suits her personal needs. Vigourouscompetition expands the range of choices for labour goods and capital or in laymans terms forcustomers, employees and investors. The decision of the Indian Government to divest itsholdings in public sector undertakings will definitely increase the choices for all these groupsnotwithstanding the current opposition of some stakeholders notably the state governments andthe trade unions.

Ethics makes sense in Business: We stop and ponder for a while here whether all this talk aboutethics makes any sort of sense, as it relates to business, and business success. The answer to thishas to be a big yes though very few people realize it let alone accept it. Let us illustrate with anexample. In Timex Watches there was an early temptation to get the Excise inspectors off the

companys back by paying them off. Had this happened it would have led to more demands forpayments and several raids. The company decided on the other hand to maintain cordial relationswith the officials,make available records, accept their feedback on non updation and any otherlapses noted on scrutiny, and ensure strict compliance at all times with excise procedures. Theresult was that the company was never harassed and was in fact upheld as a model ofcompliance to other companies and most of all got better than average cooperation by this oftenfeared arm of governmental control.Most managers who have to deal with union officials seek a compromising relationship whereindiscipline and misdeeds are overlooked and tolerated, sometimes even condoned in return foran uneasy industrial relations peace which can be marred at anytime by a stoppage of work, or anact of misconduct. On the other hand the manager who spends time with the workers or staff,communicates effectively with the union officials, is willing to seek solutions to workerproblems, and do this all without surrendering his right to demand and get performance, willsucceed not only in winning cooperation from the work force and the union but will also getsuperior performance from his work team. While pragmatic behaviour might seem to get resultsand to some extent it does in the short term, an ethical approach while apparently frustrating inthe short term will yield lasting results in the long term.Another example can be in the recognizing of the rights of vendors and looking on them aspartners that the Japanese Keiretsu has shown. The companies who have followed this approachinclude Toyota and Honda and they have obtained wonderful results by way of timely and highquality performance from their vendors at extremely low cost. Had these companies pursued themore conventional approach of treating their vendors as subordinate entities to be dominated,condescended to and perhaps bullied into performance, they would have had to be content withpatchy performance, higher purchasing costs, and a sullen set of unwilling and under motivatedbusiness partners.

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