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Etika Bisnis di Departemen-Departemen Pemerintahan
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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
Business & Professional Ethics 2011 4
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
Business & Professional Ethics 2011 5
Business & Professional Ethics 2011 6
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.
Business & Professional Ethics 2011 7
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
Business & Professional Ethics 2011 8
Business & Professional Ethics 2011 9
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.
Business & Professional Ethics 2011 9
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
Business & Professional Ethics 2011 10
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”
Business & Professional Ethics 2011 11
Business & Professional Ethics 2011 12
Rationalization Opportunity
Motive
Source: D.L. Crumbley et al, 2005, p. 3-131
THE FRAUD TRIANGLE
Business & Professional Ethics 2011 13
Physiological
Safety
Love, Affinity
Esteem,Respect
Self-actualization, Fulfillment Ego
Social
Physical
MASLOW’S HIERARCHY OF NEEDS
Business & Professional Ethics 2011 14
• 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
Business & Professional Ethics 2011 15
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
Business & Professional Ethics 2011 16
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
Business & Professional Ethics 2011 17
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
Business & Professional Ethics 2011 18
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
Business & Professional Ethics 2011 19
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
Business & Professional Ethics 2011 20
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.
Business & Professional Ethics 2011 21
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
Business & Professional Ethics 2011 22
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.
Business & Professional Ethics 2011 23
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.
Business & Professional Ethics 2011 24
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?
Business & Professional Ethics 2011 25
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.
Business & Professional Ethics 2011 26
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
Business & Professional Ethics 2011 27
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
Business & Professional Ethics 2011 28
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
Business & Professional Ethics 2011 29
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
Business & Professional Ethics 2011 30
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 & Professional Ethics 2011 31
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 & Professional Ethics 2011 32
Business Ethics Developments
• Global ethical developments increase ethical expectations
• Accountability to stakeholders• Business ethics value chain• Reputation matters• Whistleblowers matter• Culture of integrity required