Transcript Module 3
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.