Corporate Governance & Ethics - Study Notes

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ACCT19083 Corporate Governance & Ethics

Guidelines for Tutorial Review Questions

Module 1

Ferrell, Fraedrich & Ferrell 2015, Chapter 1

Answer the following questions:

- Recently, what type of unethical behaviour within business has resulted in a significant reduction of trust among the general public?: (p. 6) The trust in financial services is declining. Accounting fraud in companies may have caused a decline in confidence amongst the general puclic. The recent corporate scandals have resulted in public outrage about deception and fraud in business. This has resulted in a demand for improved business ethics and greater corporate responsibility.

- Define business ethics in simple terms: (p. 5) Business ethics comprises the principles and standards that guide behaviour in the world of business.

- When do an individual’s personal ethics play a major role in the evaluation of business decisions?: (p. 5) When their preferences or values influence their performance in the workplace. Business ethics is not merely an extension of your own personal ethics and your personal values and moral philosophies are only one factor in a business’ ethical decision making processes.

- What is social responsibility?: (p. 11) Social responsibility is an organization's obligation to maximise its positive effects and minimise its negative effects on stakeholders. Social responsibility consists of the following responsibilities: economic (satisfy investors); legal (obey the law); ethical (expected activities and behaviours); and philanthropic (desired activities and behaviours)

- Briefly outline the benefits of developing an organisation-wide ethical culture: (p.15) employee commitment to the organisation; increased customer satisfaction; increased revenues; increased dependability of investors

- Why is it important for businesspeople to study business ethics?: (p.8) There are a number of reasons, eg unethical activity has highlighted the need for better understanding of the factors contributing to both ethical and unethical decisions; an individuals personal ethics may not be sufficient to guide them in the business world; and studying business ethics assists people in identifying ethical issues and recognising available approaches for resolving them.

1 Module 1: The importance of business ethics

1.1 Introduction

Introduction

People often think of financial scandals as presenting a problem of trust. Can those who run the financial world (accountants and auditors, bankers and analysts, underwriters and actuaries) be trusted? Yet when the issue at stake is not one of blatant fraud, answering this question requires us to explore what exactly it is that we trust these individuals to do. We trust accountants, in particular, to construct the knowledge on which financial decisions are based (Gill 2009, p. 1).

Welcome to the study of business ethics. This course is of value to anyone interested in a career in business, not just accountants. However, accountants get a special mention in this course because they are not just the people who count the numbers: they are the people who provide the language and grammar of business. And therefore, accountants feature prominently in the central issues of truth and trust.

The concepts of truth and trust are critical to any understanding of business ethics. As you progress through this course, you will be become aware of how the various topics return to the central themes of truth and trust. Firms who are not truthful in their communications with stakeholders do not last long in business. Businesses who lose the trust of their customers will soon be broke. Ask yourself: would you buy a watch or a computer from a business you did not trust? Of course not.

When large businesses collapse, business ethics (or the lack of them) becomes a hot topic in the national media. But of course, good business ethics is an everyday concern. In this course, we will learn what business ethics are, and how they are different from personal ethics. The concept of corporate governance is central to business ethics: how the ethical tone is set from the very top of the organisation, and how governance mechanisms are used to ensure that an ethical culture is filtered down to all levels.

With corporate governance comes the concept of the stakeholder. In this course you will encounter stakeholders in terms of their relationship with the business and the board of directors, and also in terms of their role in determining what is right and what is wrong. Business ethics is the study of ethics at the organisational level. Yet the organisation is not a person: it has no morals or values on its own. Business organisations are just legal constructs. How can an organisation have ethics? This course will show you that organisations are made up of individuals (who most certainly have values and morals), and the challenge is to have ethical frameworks that guide all of those individuals into having an “ethical whole”. But stakeholders play a special role in this: it is the stakeholders that decide if a decision or action is ethical or not. This will be explored further in this course.

Objectives

On completion of this module, you should be able to:

- conceptualise business ethics from an organisational perspective

- understand why ethics is important in business life

- gain insight into the extent of ethical misconduct in the workplace and the pressures for unethical behaviour.

1 Module 1: The importance of business ethics

1.2 The importance of business ethics

The importance of business ethics

Business ethics considers whether business practices are acceptable or unacceptable. Identifying what is acceptable or not acceptable is not always straightforward. These practices, however, will ultimately be judged by stakeholders such as investors, employees, customers, interest groups and the community as right or wrong, ethical or unethical.

As discussed in Ferrell, Fraedrich and Ferrell (2013), there have been a number of high profile corporate collapses in recent years. The resultant enquiries into why these