Etika Bisnis di Departemen Pemerintahan

Business & Professional Ethics

Sessions 5 & 6 Ethical Governance – Developing a Culture of Integrity

MMPA Program, 2011

Prof. L.J. BrooksRotman School of Management, University of Toronto

Business & Professional Ethics 2011 2

CORPORATE GOVERNANCE FRAMEWORK

Key Board Control Functions:

• Set Guidance and Boundaries - Policies, Codes, Culture• Set Direction - Strategies, Goals, Remuneration, Incentives• Appoints CEO, who appoints other executives, and CFO• Arrange for Resources• Monitor Feedback - Operations, Policy Compliance, Financial Reports• Reports to Shareholders, Govern.• Nominates/decides on Auditor

Board of Directors& Subcommittees:Audit, Governance,

Compensation

Shareholders Stakeholders

Auditor

Elect

Legend: Info Flow Actions

Board Responsibility for Corporate Actions:Legally to shareholders - Strategically to other stakeholders

Business & Professional Ethics 2011

Board of Directors Responsibility

BOARD

SHAREHOLDERSSHAREHOLDERS

OTHER STAKEHOLDERS

Legally

Strategically

How should the Board discharge its responsibility?What are the red flags that should be watched for?

3

Global Business Ethics Value Chain

GO

CAUTION

STOP

CORPORATION

ACTIONS

BEHAVIOUR

STAKEHOLDERSCREEN

INFLUENCES

Primary

Other

ACHEIVEMENT OFSTRATEGIC OBJECTIVES

GovernanceMechanism

Formulation of StrategicObjectives

CustomersEmployeesCapital MarketsCurrent: Shareholders LendersEnvironmentalistsHost CommunitiesGovernmentsNGOsMedia

DETERMINANTS OF VALUE…DETERMINANTS OF VALUE…Success = f(Trust + Respect)Success = f(Trust + Respect)

CORPORATE CULTURE ETHICS PROGRAM &CODE TOP MANAGEMENT SUPPORT STAKEHOLDER SYNERGIESCHARACTERGLOBAL MEDIA

PERCEPTION OF: TRUST RESPECTRELATIVE IMPACTRELATIVE SALIENCELOCAL CULTURE


Key Lessons from Recent Disasters• Mindset problems

– Rationalization – Did nothing wrong, no victim– Values deficiency – fairness, integrity, virtues expected– Priorities – self, profit, legality, … others?

• Governance flaws– No whistleblower encouragement program– No checks on opportunism – just too much trust/neglect

• Self-interest & regulation are not enough– Need ethical corporate culture/culture of integrity

• Reputation lost



Curriculums are ChangingAACSB Ethics Curriculum Themes

Per AACSB Ethics Education Task Force Report, June 2004

Corporate Governance

Ethical Decision Making

Responsibility of Business In Society

Ethical Leadership

Reinforcementby

Business SchoolPolicies

GuidanceApplication

Enforcement

© L.J. Brooks 2005

A Culture of Integritycan help remedy deficiencies

• Corporate Culture – those shared beliefs, values, and other means that guide the actions of a corporation’s employees and agents.

• A Culture of Integrity depends upon the set of beliefs and values that drive norms and actions.


Action

Identification &Communication

Code, Guidelines, Reinforcement

Monitor, Reward, Punishment

Values

Beliefs

© 2007 L.J. Brooks, Business & Professional Ethics for Directors, Executives & Accountants, Thomson South-Western

MindsetNorms

Mustmanage better

Must add expectations for

motivation & rationalization

8

Motivation

Organizational Culture – the values, beliefs, norms, & practices shared by an organization’s members



ORGANIZATIONAL CULTURE, INDIVIDUAL/TEAM OUTCOMES, & ORGANIZATIONAL EFFECTIVENESS

Elements of Organizational Culture Assumptions Values Narratives Symbols Heroes Rites, Ceremonies,Rituals

Reinforcers of Organizational Culture Mission/Vision Leadership skills Growth/Development Opportunities Team Development Communication Performance Management Systems Incentives and Rewards Human Resource Systems

Individual/Team Outcomes

Job/Career Satisfaction Organizational Identification Job Involvement Commitment Discretionary Effort Job Performance

OrganizationalEffectivenessFirst Level Attendance Turnover Productivity Work Quality Recruiting SuccessSecond Level Creativity/ Innovation Problem Solving Team Cohesiveness & CommunicationThird Level Market Share Profitability Achievement of Formal Org. Goals

A Model of the Impact of Organizational Culture on Individual/Team Outcomes and Organizational Effectiveness, The Business Case for Culture Change, W. Reschke & R. Aldag, Center for Organizational Effectiveness, August 2000.


A Culture of Integrity/Ethical Culture is essential for:

• The enthusiastic support of some employees, customers, and other stakeholders.

• Guidance about values or integrity expectations: – When to adhere to the corporate code. – How to make decisions that protect the company’s

reputation and further its strategic objectives.

• Sound risk management.• Meeting governance expectations/requirements.

Good ethics, good reputation, good business, … competitive advantage


Evidence a culture of integrity can really helpKPMG’s Ethics Survey, 2005-2006 – an ethics program

improves perceptions or behavior, as follows:

• 6-12% reduction in observed misconduct or violation of values and principles in the prior 12 months

• 9-16% improvement in prevention of misconduct• 39-48% improvement in comfort in reporting misconduct

to a supervisor• 27-46% improvement in belief that appropriate action

will follow reporting of misconduct• 43-54% improvement in perception that CEO and other

top executives set the right “tone at the top”• 37-49% improvement in motivation to “do the right

thing”



Rationalization Opportunity

Motive

Source: D.L. Crumbley et al, 2005, p. 3-131

THE FRAUD TRIANGLE


Physiological

Safety

Love, Affinity

Esteem,Respect

Self-actualization, Fulfillment Ego

Social

Physical

MASLOW’S HIERARCHY OF NEEDS


• Denial of responsibility.• Denial of injury.• Denial of the victim.• Condemnation of the condemners.• Appeal to higher loyalties.• Everyone else is doing it.• Entitlement.

Source: “7 Neutralization/Rationalization Techniques”, a speech by Joseph Heath at the Centre for Ethics at the University of Toronto, April 9, 2007

HEATH’S SEVEN RATIONALIZATIONS OF UNETHICAL ACTIONS


New Governance Expectations

Greater after Enron, AA, WorldCom • Need for Proactive Prevention of Problems – better

comprehensive risk management• Accountability/Transparency to stakeholders• Concern for Reputation Risk• Need for strong ethical corporate culture• Better understanding & management of corporate

culture• Better decision making


New Board Responsibilities

• Comprehensive Risk Management– Broad understanding of business model– Financial literacy– Guidance & Control framework– Focus on corp. culture, ethics & reputation– Business ethics…whistleblower protection plan– Ethics Risk Management

• Trust, but challenge, don’t turn away – Caremark National Case, trend


Comprehensive Risk Management depends upon the Corporate Ethical Culture

• Comprehensive Risk Management utilizes both:A. Key risk factor identification & measurementB. Review of key business processes including the ethical culture

that underpins process integrity• Ethical culture provides guidance for employees about

when to adhere to the Code, when actions are not covered in Code, in a grey area, or in a crisis - tools to measure ethical culture do exist

Enron’s Board failed to consider any of this!Few corporations do A, fewer do B!

© L. Brooks


Audit Committee’s Role is Key• Understand key business operations• Understand comprehensive risk management model and

reports• Examine key/large transactions• Ensure compliance with good policies• Ensure fair presentation

Who wants this risk?How much should the members be paid?

Nortel Networks Audit Committee Case

© L. Brooks


How can good ethics and good governance be instituted?

1. Create an Ethics Program– Identify important values– Build values into culture & decision making– Train/Reinforce – leaders must reinforce– Monitor Performance– Reward/Punish– Re-evaluate values & ethics program

2. Create an Ethical Corporate Culture


Ethics Program/Code Orientation Types

Orientation Primary Focus

Compliance-based Preventing, detecting, and punishing violations of the law

Integrity or Values-based Defines organizational values and encourages employee commitment

Satisfaction of external stakeholders Improvement of image with and relationships with external stakeholders (customers, the community, suppliers)Protect top management from blame “CYA” or cover your ___

Combinations of the above Values and compliance-based, for example

__________________________________________________________________

Sources: Trevino, Weaver, Gibson and Toffler, Cal. Mgt. Rev., 1999, and Paine, HBR, 1994, 111; Badaracco & Webb, 1995, 15.


Creating & Implementing an Ethical Corporate Culture

Create a Governance &

Leadership Framework

Create the GuidanceCommunications

& Framework

Develop the Core Values & Issues

Foundation

Develop Commitment & Understanding

Clarify Roles of Chair, CEOChief Ethics Officer, Board Ethics Subcommittee

Ethics Committee

Identify Core Values & Important Issuesthat should drive decisions & actions & ensure

harmonization with strategy & operations

Develop Mission Statement, Code of Conduct& other Decision Aids & Processes

Ensure Commitment by Board, CEO &Other Managers, Launch Ethics Program

& Encourage Employees


Corporate Culture – Mechanisms• Cultural

– Values, tone at the top, reinforcement...• Structural

– Code, Ethics Officer, Program...• Procedural

– Ethical decision making - ordinary + crisis mgt.– Ethics inquiry...– Internal Controls … 20/60/20 Rule

• Failsafe– Whistle blower protection...to Board…Enron, GE– Ethics/values audit

To create an awareness of how we do things around here.


Whistleblowers are essential

GE Whistleblower story:

• Boss & bosses’ boss overcharging Israel for jet fighter engines

• Gathered evidence for 4 years• Sued for $70 million - False Claims Act• US Government took case over• Whistleblower can get up to 25% under FCA• Settled for $59.5 + $9.5 mil.• How much would you give W/B? Why?

Whistleblowers to SEC recently got a raise 10% to 30% - July 21, 2010.


Establishing an Ethical Corporate Culture – The Leadership Component

Board of Directors,Governance Subcommittee,

& Chair

CEO ECC Champion

Ethics Committee

Ethics Officer/Ombudsperson

CFO, Other Executives,

Employees

Scandalized companies – unethical leadersWhat defines an ethical leader?What should an ethical leader do?


Executive Reputation & Ethical LeadershipM

OR

AL

MA

NA

GE

R

Weak Strong

Strong Hypocritical Ethical Leader

Weak Unethical Leader

Ethically Neutral Leader

MORAL PERSON

Source: “Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership”, L.K. Treviño et al, California Management Review, Vol. 42, No. 4, Summer 2000. Reprinted with permission.


Establishing an Ethical Corporate Culture – The Core Values & Issues Component

Core Values & IssuesIdentification & Articulation

Integration intoStrategic Objectives & Operational Goals

Communication

Reinforcement Mechanisms

Stakeholder InterestsAnalysis

Review of FrameworksReputation Factors

HypernormsEthical Decision Criteria

Values Desirability

Important Issues IdentificationStakeholder Analysis

Stakeholder ConsultationEthics Audit

Expectation Gap AnalysisIssue Ranking

Ethics Risk Assessment


STAKEHOLDER INTERESTS RANKING, RISK ASSESSMENT & USAGE

PUBLIC INTEREST

SHAREHOLDERS + OTHER STAKEHOLDERS

FeedbackGuidance

Accountability = Financial & Strategic including Ethical & Legal

All Interests

CORPORATE RISK ASSESSMENT

Prepared by management for Board review and approval

CORPORATE CULTURECreated by ManagementLeads to Corporate Actions

ValuesBeliefsMotivationActions

IntegrateInto CorporateValue System

& Actions

Assess & Rank All Interests

Identify AllStakeholders

Sets Vision, Mission,Strategy, Policies,Codes, Compliance,Feedback,Compensation

Appoints CEO, CFO

BOARD OF DIRECTORS


Guidance - Codes of Conduct/Ethics

• Primary guidance document• Choices:

– Imposed control vs. self-control– Organizing focus

• Stakeholder interests, strategic policies, issues• Title & depth of focus

– Credo, Code of Ethics/Conduct/Practice

Encouragement, commitment, monitoring


Measure Governance: Why Bother?

• If you can’t measure it, you can’t manage it• Ethics/Corp. Social Performance (CSP) feedback

– Company objectives– Personal objectives– Reinforcement decisions– Evaluation of management

• Compliance disclosures - environment, labor, ISO• Stakeholder interest• Creation of a competitive image• Website: www.globalreporting.org for GRI initiative

http://www.globalreporting.org/


Key Governance & Ethics Q’s

• What do Ethics & Governance mean? • Why are ethics and governance important? • To whom are corporations accountable? • Are Governance & Ethics related? Give examples of

unethical acts & of poor governance. • What are important governance mechanisms? • Who is responsible for what? • What role does corporate culture play?• What caused the recent reform of ethics & governance

expectations?

• What are roles can an accountant’s play?


Business Ethics & Professional Accountants

Business Ethics … the moral standards that apply to

business policies, institutions and business behaviour.

• Dealing with stakeholders– Identifying who, interests, priority– Corporate social contract– Stakeholder impact analysis


Business Ethics Developments

• Global ethical developments increase ethical expectations

• Accountability to stakeholders• Business ethics value chain• Reputation matters• Whistleblowers matter• Culture of integrity required

Documents

Etika Bisnis di Departemen Pemerintahan